SoundBite Communications, Inc.
Q2 2008 Earnings Call
August 6, 2008 5:00 pm ET
Executives
Lynn Ricci – Investor Relations Manager
Peter Shields – Chief Executive Officer
Robert Leahy – Chief Financial Officer
Analysts
Tom Roderick – Thomas Weisel Partners
Edward Jackson – Cantor Fitzgerald
David Hines – Needham & Company
Zack Lesko – Americas Growth Capital
Peter Goldmacher – Cohen and Company
[George McMillis – Alvin Fund]
Operator
I would like to welcome everyone one to SoundBite Communications second quarter 2008 financial results call. (Operator Instructions) I will now turn the call over to Lynn Ricci, Investor Relations Manager for SoundBite Communications.
Lynn Ricci
Here with me today is Peter Shields, CEO and Bob Leahy, CFO of SoundBite. A replay of this teleconference will be available approximately two hours after the call in completed through midnight on August 14, 2008. The web cast will also be archived through this date. To access the press release issued after the market closed today announcing our results which contains financial details, please visit our investor relations website at ir.soundbite.com. You can also access webcast and teleconference replay information via this site.
Please note that various remarks we make of future expectations, plans and prospects for the company 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 the risk factors in the quarterly report on Form 10-Q for the period ended March 31, 2008 and on Form 10-K for the period ended December 31, 2007 filed with the Securities and Exchange Commission.
In addition, these forward-looking statements represent the company's expectations only as of today. While the company may elect to update these forward-looking statements, it specifically disclaims any obligation to do so. Any forward-looking statements should not be relied upon as representing the company's estimates or views as of any dates subsequent to today.
In addition, during today's conference call we will be referencing both GAAP and non-GAAP financial measures. The non-GAAP measures are not in accordance with or an alternative for GAAP and may differ from measures used by other companies. Non-GAAP measures included in the release and mentioned during this conference call are not meant to be considered superior to or substitute for our results prepared in accordance to GAAP. Investors are encouraged to review the information on how to reconcile the non-GAAP financial measures to GAAP found in our press release as well as on our web site.
Now I would like to turn the call over to Peter Shields, CEO of SoundBite.
Peter Shields
On our call today I will discuss second quarter results and the current market dynamics in our industry as well as provide an operational update on our business and what we see going forward. After my remarks, Bob will review the financial details of the second quarter of 2008; give guidance for the third quarter and outlook for the remainder of the year. I will then give a few closing remarks before opening the call to Q&A.
Today we announced the financial results for the second quarter of 2008 with revenues of $11.3 million, up 21% in year over year. Non-GAAP operating loss for the second quarter of 2008 was $629,000 as compared to a gain of $177,000 in the year ago quarter. These results were within our previous issued guidance range.
Our GAAP earnings per share was $0.18 which included a one time gain as a result of the settlement with URS and legal expenses for the URS litigation versus the GAAP earning per share a year ago of $0.03 which included a one time benefit of $0.02 per share related to the re-valuation of the redeemable preferred stock warrants.
I would now like to now share a high level overview of where we see the business. As many of you are aware, we focus on two markets; third party and first party. Our third party is comprised on collection agencies, debt buyers and law firms. The first party includes Fortune 1000 companies in the financial services, telecommunications and media, utilities and retail verticals.
SoundBite initially focused on the third party market and over the years was very successful building market share. This market collects debt that has been charged off by the original credit grantors. The debt is either collected on a contingency basis or sold to a debt buyer. The primary application of our solution involves connecting the debtor or right party contact to an agent.
Over time, we've expanded our focus to include the first party market, primarily targeting early stage collections or pre charged off debt. In this market, credit grantors own the relationship with the consumer and are attempting to get a payment at the lowest possible cost while maintaining the customer relationship. Customer retention is a key consideration in this market.
More recently, we increased our focus within the first market to include other applications such as customer loyalty and have established some early success. As we look at our business today, we are in a transition period. Our first party market has not grown. Actually it has been relatively flat for the last couple of quarters. We are now forecasting it to decline for at least the next two quarters. At the same time however, our revenues from our first party market have been growing. In fact, in the second quarter, revenues grew 38% year over year.
We are experiencing issues in the third party market for several reasons. There's increased competition from a number of new entrants driving prices lower. Unfortunately this increase in competition is coming at a time when the third party market is being significantly affected by the current consumer credit crisis.
While it is true that collection agencies have access to more accounts to collect from, there's more delinquent consumer debt outstanding, their ability to actually collect payment is significantly reduced because more and more debtors are simply unable to pay. The actual debtor does not have the resources available to make payments, thus resulting in agencies becoming more selective in their spending.
These challenges affecting our third party business contributed to our revaluation of guidance. From a business outlook, we are changing our guidance for the second half of the year for two reasons. First, our business from the third party market is forecasted to decline as previously discussed. Secondly, we have one large client in the first party market whose revenue is forecasted to be down considerably due to a change in strategy. This may be a temporary issue but at the same time, we do not feel comfortable forecasting that the business will return to normal levels. Bob will discuss guidance in further detail during his presentation.
Moving forward, we want to stabilize our third party business while continuing to focus the majority of our resources on growing our first party business. To that end, we are optimistic about continuing our success in the first party market and we are confident that our product strategy and current sales momentum will enable that to happen.
During our last call, we indicated that we were re-evaluating the metric used to discuss the revenue mix from first party and third party markets. To remind everyone, in our old classification, the third party market had a few accounts that had a mix of first party and third party revenue that were previously classified as third party only. We also had third party clients that we worked with to resell our solution to first party clients, primarily utilities.
We believe that by reclassifying this revenue into the appropriate market, we will provide investors a better understanding of our business and underlying trends. Under the new classification, 63% of our revenue in the second quarter came from the first party market versus 66% a year ago. Using the old classification, 46% of our revenue in the second quarter came from the first party market versus 46% a year ago. We will continue to provide both classification methods for the next two quarters.
During the quarter, we delivered the first release of our intelligent communications platform which enables our clients to deliver voice messages, text messages and email from one integrated platform. Customers can now manage multi-channel campaigns from one user interface and generate integrated reports allowing them to optimize their results and continually improve their success rates. Included in this release is the ability to deliver free to the end user text messages, and important capability for the first party collections.
The market for each of these communication channels is large and growing. The market for automated voice messaging is estimated to be $1.4 billion by 2010. The text messaging market is probably the fastest growing market with approximately 20 billion text messages per month being sent in the U.S. during 2007. Juniper Research estimates that email marketing will grow at an annual rate of 11% and be a $2.1 billion market in 2012.
In addition, as we look at the hosted contact center market [Frost & Solve] estimates it will reach $1.6 billion by 2013. We believe our offering provides a solution that overlays all these markets and we believe by providing an integrated offering, we will capture a significant share of the available opportunity.
I would now like to provide additional insight into the sales process for first party. The process is similar to a traditional enterprise software sales cycle. For us, a prospect must be educated on the potential value of using our service. Once this is done the prospect usually initiates a pilot to validate that the results can be realized. A full roll out takes place after the pilot data is analyzed and the client makes the appropriate business process changes.
In our model, the bulk of the revenues obtained after the application ramps to full deployment, thus the sales cycle for first party prospects contains a degree of timing uncertainty and is inherently lumpy up until the time the application is fully deployed, at which point the transaction revenue becomes more predictable.
At the same time, we are realizing that the expansion to include multiple communication channels requires a different sales approach. Our sales team had traditionally sold one product, automated voice messaging. However, it is now necessary to sell a more comprehensive solution that requires a more consultative client engagement process. We are in the midst of this transition.
In April, we hired a new V.P. of Sales, Jeff Struzenski and he is spearheading this effort. Jeff's background includes significant solutions sales experience at [Barring Point KPMG] and Wall Street Systems. I'm confident that this is the right approach and will begin to deliver benefits as we move into 2009.
While it is still early the feedback that we have received on our product strategy from clients and prospects is positive. We are at the beginning of a number of pilots and early on in a number of other significant opportunities. For example, we have signed agreements in place with eight of the top ten U.S. credit card issuers. Albeit early on in most of these opportunities, we expect this group of clients to provide a significant source of future revenue.
We are optimistic about the potential for our intelligent communications platform it offers us and our clients. As evidence, I would like to point to a recently held webinar entitled Maximizing Card Holder Response and Multi-Channel Communications. The webinar generated over 150 participants. It was presented in partnership with [Macader Advisory Group] and focused on our financial services vertical.
Participating in the webinar was the senior director of customer support strategy and operations of Barclay Car U.S.A., a new client and one of the fastest credit card issuers in the U.S. During the seminar, he offered his insights on taking a multi-channel approach, experiences, results and the long term vision for card holder communications.
Now we'd like to share with you the progress we made during the quarter in a number of other areas. During the second quarter we continued to make progress rolling out our VOIP network. We ended the quarter with 55% of our physical infrastructure and 60% of our traffic running on VOIP. We hope to have the conversion completed in the third quarter and then begin to start seeing the benefits of this investment.
Potential benefits should be realized in several areas including a reduction in the complexity of managing our network, speed in rolling out new product features, increased capacity utilization as well as lower telephony costs. Many of our next generation capabilities are enabled by VOIP. Over the longer term, VOIP will create some exciting opportunities for us on the international front. Today, we have several clients interested in expanding usage overseas. Our objective is to service those clients' needs from one integrated platform.
Also during the quarter we settled two law suits involving the universal recovery systems. SoundBite received a cash payment of $4.6 million as well as certain intellectual property rights. We are pleased with the outcome and to have this source of uncertainty surrounding the issue fully resolved. Bob will provide more details later during the call.
I would like to cover one more recent event. In May of 2008 a Federal District Court in Northern California overturned the FCC's long standing interpretation of the Prior Expressed Consent required under the law for auto dialed and pre-recorded calls. Under an FCC interpretation of this requirement adopted in 1992, and reaffirmed by the commission earlier this year, a person who provides his or her cell phone to a company is considered to have given prior expressed consent to be called on their cell phone.
The court ruled in May that specific language in required in the application or other document type that consumers thereby inform that by providing his or her cell phone number to the company, he or she could expect to receive auto dialed or pre-recorded calls to their cell phone. This ruling applies only in California. The FCC rule still applies everywhere else.
As a practical matter, companies may have some exposure if they make auto dial or pre-recorded calls to cell phones outside of California because it's difficult to identify just cell phones being used in California. The ruling does not affect wireless telecom companies calling their own subscribers' cell phones.
At this time we are unclear on the potential impact it may have on our business. On a revenue basis, excluding our wireless telecom clients, roughly one quarter of our total calling revenue during the first half of 2008 was associated with wireless calls. However, on a call attempt basis, excluding wireless carriers, roughly 2% of our total call attempts with the cell phones registered in California. This was during the month of June.
To address this issue, our solution has been enhanced to filter and suppress cell phone numbers by area code and we are working with our clients to see how we can best meet their needs. In addition, we believe that industry groups are focused on the issue and are working to clarify and resolve the situation. That said, since it is not possible to know if there will be a significant impact, we have only factored this California ruling into our guidance to a limited extent. I felt it responsible to discuss on this call.
In closing, we have strategies in place to address our changing environment. To address our growth plan in the first party and the stabilization of third party, we will continue the alignment already under way in our sales force and our focus on and grow our key verticals. In addition as we move forward, we will be introducing additional features that will further differentiate our offering and enable us to alleviate some of the competitive pressures in our third party business.
This should put us in a stronger position to capture additional business when the economy recovers. We believe we will continue to see good growth in our first party business, although it may be lumpy as mentioned earlier. We believe we have the right offering for the first party space and integrated multi-channel communication solution is what is needed in the market place and it will create a sustainable, competitive advantage for us.
We are confident that we are ahead of our competition with our multi-channel communications platform and plan to maintain that lead by continuing to invest in our offering for future growth.
I will now turn the call over to Bob to discuss our second quarter financial results.
Robert Leahy
I'd now like to discuss the details of our second quarter 2008 financial results and then give guidance for the third quarter and full year 2008.
Second quarter revenues were $11.3 million, an increase of approximately 21% from the same period last year. This revenue was in the range of guidance we previously provided. Using the revised method that Peter described earlier, first party revenue was $7.1 million in the second quarter, reflecting 38% growth compared to the year ago quarter. Third party revenue was $4.2 million, essentially flat for the same quarter of last year. On a consecutive basis, first party revenue grew 9% while third party revenue grew approximately 3%.
In the second quarter, we had 193 active clients, an increase of 8% from 178 during the prior year quarter. Existing clients accounted for 96% of total revenue while new clients contributed 4%. Clients, who are in the top 50 accounts in the first quarter of 2008, generated 90% of our revenue in the second quarter of 2008.
As you know, we have a certain level of client concentration that we believe will be reduced over time given our revenue growth, particularly with first party clients in a number of vertical markets. During the second quarter we had two greater than 10% clients. One was 15% of our revenue and the other was 12%. Our top 20 clients accounted for 78% of total revenue.
Now turning to gross margin, gross margin for the second quarter was 61.8% versus 60.4% in the second quarter of 2007. After gross margin came in with the range of 61% to 63% to which we had guided earlier. When actual gross margins compared to the second quarter of last year, gross margin increased primarily due to a depreciation expense being lower as a percentage of revenue.
As Peter mentioned earlier, we continue to experience some [inaudible] in the collections industry. I'll remind you that our cost of goods sold consists primarily of telephony expense, or transaction costs, depreciation of the infrastructure that hosts our solution and network operation costs. In general gross margins were affected by this and other factors.
Operating expenses were $8.9 million in the quarter and as a percentage of sales was 78.7% versus 58.5% in the year earlier period. This increase in operating expenses was largely attributable to hiring of new personnel in R&D, sales and marketing. Also included in operating expenses were approximately $1.1 million for legal expenses related to the [Eurorest] litigation and $43,000 was related to amortization of intangible assets associated with the mobile collect purchase price allocation?
Head count at the end of the quarter was $159, versus 151 at the end of the first quarter. While we anticipate that the long term trend of our operating expenses is to grow slower than revenue, as Peter mentioned, in the short term we are continuing with our hiring plan, albeit at a slower rate in accordance with our growth strategy.
Operating expenses for the quarter also included [inudible] 123 hour expense for stock based compensation of approximately $220,000 versus approximately $85,000 in the second quarter of 2007. We provided a detailed breakdown by line item of these compensation expenses in the table of our press release.
At the end of June, we announced that we had settled two law suits involving Universal Recovery Systems. SoundBite received a cash payment of $4.6 million on June 30 and has been granted a world wide perpetual non exclusive license to the universal recovery systems patents and pending patent involved in the two law suits.
To quickly summarize, the first law suit brought by SoundBite against URS involved a letter that we received just prior to a pricing of our IPO in October of 2007. The second suit brough by URS against SoundBite was based on allegations of patent infringement and misrepresentation. We're pleased with the favorable outcome and believe that this resolution removes all uncertainties with respect to the litigation and allows us to concentrate on growing our on-demand communications business.
For the second quarter we recorded no charges or benefits from the revaluation of our redeemable preferred stock warrants versus a benefit related to these warrants of $251,000 in the year ago quarter. As of the closing date of the company's initial public offering, these preferred stock warrants automatically became exercisable for common stock and are not subject to further revaluation.
GAAP net income for the quarter was approximately $2.9 million versus a GAAP net income of approximately $428,000 in the second quarter of 2007. GAAP earnings per share was $0.18 versus $0.03 in the year ago quarter which included the $251,000 benefit or $0.02 per share for the revaluation of our warrants.
On a pro forma basis, excluding the effects in the second quarter of 2008 of the URS litigation expense and settlement gain, non-GAAP net loss was $629,000 or $0.04 per share as reported in our press release earlier today. When you exclude stock based compensation and amortization of intangibles, non-GAAP net loss was $366,000 or $0.02 per share.
On a pro forma basis excluding the effects in the second quarter of 2007 of the non cash benefit from revaluation of the redeemable preferred stock warrants, non-GAAP net income was $177,000 or $0.01 per share, again as we reported in our press release. When you exclude stock based compensation expense and the amortization of intangibles non-GAAP net income was $262,000 or $0.02 per share in the year ago quarter.
Cash flow from operations for the second quarter was $3.2 million and approximately $879,000 in the year ago quarter. The $3.2 million includes a $4.6 million payment we received from URS. During this quarter, capital expenditure was approximately $421,000. Capital expenditures included platform infrastructure expansion as well as IT network related spending. We'll continue to build our capacity as needed.
Turning to the balance sheet, cash at the end of the quarter was $38.9 million. Accounts receivable was $7.3 million dollars reflecting DSO's for the second quarter at 61 days in line with our historical DSO's. We have no debt.
Now I'd like to provide guidance for the third quarter and the full year of 2008. As our revenue is transaction based, and our usage is success based, these recurring transactions generally offer us good visibility during the quarter and visibility into our next quarter. However, as you saw over the last two quarters, despite this, trends can emerge during the quarter that may dampen the growth of our transactions.
We expect a current weaker economy, a tougher competitive environment and some of the characteristics associated with the first party space to have some impact on our business. As Peter mentioned we have one large client in the first party market whose revenue is forecast to be down considerably due to a change in strategy.
Also as Peter mentioned earlier in the call, we are lowering our revenue forecast. Given some pressure on our gross margin and our anticipated operating expenses, this results in a lower EPS forecast as well. For the third quarter of 2008 we currently project revenues in the range of $10.1 million to $11.4 million. We would expect gross margin to be in the range of $59% to 61% for the third quarter of 2008. This gross margin guidance anticipates continued pricing pressure.
We also expect an operating loss of $1.1 million to $1.8 million and interest income of approximately $200,000. This guidance does not include stock based compensation of approximately $240,000 and amortization of intangibles of $45,000.
The basic weighted average share count is expected to be approximately 15.5 million shares. We would expect capital expenditures to be approximately $750,000 and depreciation expense to be approximately $900,000.
For the full year 2008 we're projecting revenues to be in the range of $43 million to $45 million. We are anticipating gross margin percent in the range of 60% to 62%. We would expect an operating loss of $3.2 million to $4.7 million in interest income of approximately $975,000. This guidance does not include approximately $1.9 million actual legal expenses associated with the URS matter, stock based compensation of $900,000 and amortization of intangibles of $145,000.
We expect a basic weighted average share count to be approximately 15.5 million shares for the full year 2008. We would anticipate capital spending for the year to be approximately $2.6 million.
In the past we have discussed the company's long term model. That model provides for gross margins in the 62% to 65% range, total operating expenses in the 49% to 55% range and operating income in the range of 13% to 15%. I'm pleased to point our anticipated revenue growth in investments, we would anticipate being in our long term model, by 2011. If revenue growth accelerates we would anticipate to be in model sooner.
Now I'd like to turn the call back over to Peter for his closing remarks.
Peter Shields
In closing, we're disappointed to lower guidance again. The issues affecting our third party business were deeper and more pronounced that we previously anticipated. Nevertheless, we remain optimistic about our prospects moving forward, especially in the first party market where we have and will continue to invest a significant percentage of our resources.
Lastly, I'd like to thank all the SoundBite employees who have worked long hours to provide our clients with a superior product and customer experience. Thank you for your interest in SoundBite and participating in the call today. This concludes our prepared remarks. I will turn it over to the operator to open it up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first call comes from Tom Roderick – Thomas Weisel Partners.
Tom Roderick – Thomas Weisel Partners
It looks like you're still driving some nice growth in the first party side of the business. The third party is getting a little bit more challenging and it seems like the visibility on third party is getting more challenging. Can you confirm that the challenge that's taking place on the third party side are not in fact share losses at big customers but rather just a function of transaction volumes? Any other details you can offer there around what's limiting the third party visibility? That would be helpful.
Peter Shields
I think that there may be one or two customers where there are share losses in some of those customers, where they've entertained a two vendor strategy. Sometimes that does take place in some of these accounts, so if there's a viable second vendor, they might be giving share to that vendor. Some of that has taken place in one or two customers. But most of our bigger customers are still customers.
Tom Roderick – Thomas Weisel Partners
So when you speak about your bigger customers, your 10% plus customers, those are in fact still customers, but in some cases they may be evaluation a two vendor strategy to potentially apply some pricing pressure out there?
Peter Shields
Correct.
Tom Roderick – Thomas Weisel Partners
The customer that you reference where you're going to be expecting some transaction declines, revenue declines due to a strategy shift, can you clarify, and was that a first party customer?
Peter Shields
First party customer.
Tom Roderick – Thomas Weisel Partners
And is that currently a 10% or has that been a 10% customer in the past?
Peter Shields
No, it has not.
Tom Roderick – Thomas Weisel Partners
You made this acquisition of Mobil Connect a couple of quarters ago. Can you give us an update on that and should we expect any impairment to their business or the potential growth for Mobile Connect with respect to the new statute changes in California looking at cell phones.
Peter Shields
So far the results from the Mobil Connect acquisition has exceeded our expectations and have gone very well. In fact, we believe that some of our success you're going to see in the future in our first party business is because of having this multi-channel approach. So when you talk to our sales people, they're really excited about being able to sell multiple channels into customers.
Unfortunately it's early and some of these customers – but the Mobile Collect offering has got us into a significant number of customers that are in early test pilots which will then lead to early pilots of other applications like email and voice for some of these customers, and then use the capabilities delivered by the integrated platform. So we're really excited about that acquisition. We believe we're ahead of where we thought we'd be from a revenue perspective and even actually further ahead from a momentum standpoint in several large accounts.
Tom Roderick – Thomas Weisel Partners
The second part of my questions was asking about some of the legal changes that are taking place in the State of California. Any reason to think that text messaging is inclusive in those changes taking place and any reason to think this growth strategy gets impaired by these changes?
Peter Shields
It's unclear. The text messaging in the 1992 FCC ruling and reaffirmed this year includes text messaging, but the California ruling did not specifically address text messaging.
Operator
Your next call comes from Edward Jackson – Cantor Fitzgerald.
Edward Jackson – Cantor Fitzgerald
I missed what you said for FY '08 the projected operating loss was going to be?
Peter Shields
$3.2 million to $4.7 million.
Edward Jackson – Cantor Fitzgerald
When you said you had eight out of ten card issuers as customers, were you talking about Mobile Collect or were you talking about the new software release?
Peter Shields
I think I said we had contracts with eight out of ten. And so it's some combination of all three products.
Edward Jackson – Cantor Fitzgerald
Could you name off the FCC litigant?
Peter Shields
I don't know if we named it but it was in 1992 and reaffirmed this year. We could get that to you, the actual rule. But it was expressed prior consent.
Robert Leahy
We'll be happy to get the particulars in terms of the '92 ruling as well as what we know on the California ruling.
Edward Jackson – Cantor Fitzgerald
Could you give us some numbers in terms of the number of Mobile Collect customers and the number of hosted contact customers at this point?
Robert Leahy
As we said on the call, we had 193 active customers. As Peter has mentioned, we are still in the early stages of Mobile Collection so the number of clients are relatively small. The revenue that we're generating is relatively small, but I think the thing that is more important as a leading indicator is that the number of our pricing agreements, our contracts that either we have signed or are working on I think is a better indicator. As of the end of the second quarter, we had somewhere in the order of about 25.
Peter Shields
Let me give you an example. It would be one big, very large credit issuer is piloting the Mobile Collect platform and had some really early success. And part of the delay in the ramp is associated with now getting data in a more efficient manner. So when you're using it in a smaller scale, there's manual ways to get data to us to be able to make those text messages. But to do it in any kind of volume takes some work on their end which could take anywhere from several months to six months depending on IT priorities.
But once that pipe between the two companies is established, then the pilot could accelerate and they could view the results of making more and sending more text messages. But until that pip is in place it's difficult for them to get us the quantities that they want to get and give it to us.
Edward Jackson – Cantor Fitzgerald
Did you say that the two products together that there's roughly about 25 customers?
Robert Leahy
A combination of text message and voice message. And there are some where it's just straight text message pricing agreements.
Edward Jackson – Cantor Fitzgerald
Going into the competitive situation and two related questions to it. You've talked about having some competition at both the hosted and premise level. Are you seeing more competition coming from premise or hosted or the other way around, and as you view that pricing situation as becoming more tense over the last three months or is it just a continuation of the same?
Peter Shields
The competition is different from both. It's very price related so it depends on what somebody's going to sell and upgrade to the box for to somebody to make those on premise calls and that is extremely competitive. Other hosted vendors, in a customer base that's under economic pressure, we've heard stories where people at one point got a 31% pay out on certain types of debt down to 13%, 10%, the same type of debt. So when you have a market like that and you try to sell product into those customers, it puts a lot of pressure on that.
So we have pressure from both places. And one is more of a capital expense, and one is more of a straight expense line item like our service.
Edward Jackson – Cantor Fitzgerald
You're going to have this larger first priority customer changing its strategic direction. Will that result in first party being down on a sequential basis.
Robert Leahy
Our expectation is that the first priority space will grow on a quarter to quarter basis. That customer is still a customer and we're still in good standing with that customer and we're still a good vendor in their eyes and hopefully as things work their way through this process, we hope to win them back to normal levels.
Edward Jackson – Cantor Fitzgerald
You said you're classifying first to third party given this period as well as the prior year period. Do you have the last four to six quarter so that people could update their models? I think most people are probably using that as a drive on your revenue.
Robert Leahy
What I can do is as we look at Q2 2007, first priority was 56%. Third party was 44%. For Q3 2007, first party was 59%. Third party was 41%. Q4 '07, first party was 61%. Third party was 39%. Q1 '08 first party was 62%, third party, 38%.
Edward Jackson – Cantor Fitzgerald
You wouldn't have first quarter of '07 would you?
Robert Leahy
I do not.
Operator
Your next question comes from David Hines – Needham & Company.
David Hines – Needham & Company
Did you say what depreciation expense was in the quarter?
Robert Leahy
It was roughly $885,000.
David Hines – Needham & Company
How many new first party customers did you sign in the quarter.
Robert Leahy
We have not been providing the number of first party clients and third party clients. The more important thing on the first party side we can sign an agreement, but that doesn't mean they're going to generate revenue, so I think the more important thing is the number of trials we're working on. As Peter had mentioned in his comments earlier, we're having some pretty good success in a number of first party clients.
David Hines – Needham & Company
Do you have any metrics around the conversion rate from the pilot phase to full deployment within your first party customers?
Peter Shields
I don't know if we have any metrics but extremely high. I can't think of a first party in awhile that hasn't done a pilot that's been successful. It just takes time in some of these bigger accounts and it's tough to predict the time sometimes.
David Hines – Needham & Company
We recently have taken some calls inquiring about sequential dialing I think because its a term that's been littered across some of the message boards. Can you talk exactly about what sequential dialing is, whether SoundBite has a functionality and whether its really relevant to your core business?
Robert Leahy
I'm not sure what sequential dialing is.
David Hines – Needham & Company
It automatic call installation.
Robert Leahy
It's actually a feature that's used widely so if we call somebody on their home phone and they don't pick up, we automatically call their cell phone.
Peter Shields
And the same things could take place with our new integrated platform. It could be across all channels. Somebody doesn't respond to a call, we might send a text message. But we have that capability in our product. I think with the multi-channel approach it will be increasing more important as we move forward and move to new applications in the first party space.
Operator
Your next call comes from Zack Lesko – Americas Growth Capital.
Zack Lesko – Americas Growth Capital
I was hoping you could talk a little bit more about the pipeline of new features. I heard you said you intend to introduce new features that will differentiate your offering. Could you talk about what you're looking at and what the time line is for some of these?
Peter Shields
For example, and extension of our product to include what you'd call an ancient portal feature. These features will be available over the course of the next four months. There's a bunch of small features that will help us on an international basis. That will be introduced to the product. There's also a number of potential prospects who actually want to partner with us to use our system for them to make calls, so we're extending our API capabilities to set up those types of relationships.
So a lot will revolve around enhancing our text messaging capabilities, providing more contacts in our applications like our virtual agent, agent portal capability. And a little further out, things like call recording or call monitoring. So those are some of the key features.
Zack Lesko – Americas Growth Capital
And some of the new programs that you've introduced like the customer loyalty program, how would you characterize the traction that you're seeing in general from those kind of programs?
Peter Shields
The traction has been from a customer acquisition standpoint, we're very early on. We just started focusing on that six months, maybe five months ago and we've generated with a few early customer a decent amount of revenue. Going forward we're in kind of legal contract processes with a number of clients and that space that will hopefully be signed soon and we'll be in trials.
Everybody that's used it has been successful with that type of application. But it's working its way through the legal process, getting contracts signed by these Fortune 100 customers to then pilot. So the traction's good. We're early on in a lot of these processes, and we hope to see successful pilots launched in the back half of this year and early into next year which will lead to ongoing, sustainable relationships.
Zack Lesko – Americas Growth Capital
Given the shifting pricing out there, how would you characterize the pricing of your product versus your competitors right now.
Peter Shields
In the first party world, I believe most of the pricing is fairly close to each other, and in the third party world we tend to be a little more expensive than our competitors.
Operator
Your next question comes from Peter Goldmacher – Cohen and Company.
Peter Goldmacher – Cohen and Company
I just wanted to know what the contribution was of the third party pricing pressures to your lower guidance versus the shortcomings from the first party realignment strategy, and also how long you expect these conditions to continue. Is it going to be like the next four quarters?
Peter Shields
I would say if you put it in percentages, the third party pricing pressure would probably be around 70% of the changing guidance and how long that lasts in the third party space, I think there's two combinations here. There's our execution and delivery of these new functionalities and new features that we expect to take place over the next several months combined with the economy change which I can't predict.
Operator
You have a follow up from Edward Jackson – Cantor Fitzgerald.
Edward Jackson – Cantor Fitzgerald
What was the interest income number you gave out FY '08?
Robert Leahy
$975,000
Operator
Your next call comes from [George McMillis – Alvin Fund]
[George McMillis – Alvin Fund]
The difference between the old classification and the new classification, can you go into a little bit more detail on that? And do you go to market through third parties to reach first parties?
Peter Shields
There's a few third parties who we work with who have a mix of businesses, first party business where they provide agents and we've entered into partnerships to go to market with them to offer a combined solution which their agents and our technology. They own the relationship in a sense that they have the contract and they have the agents and they have the customers. And we work with them and we provide the solution.
It's more like a bar relationship, and it's mostly centered around utilities but there are some retail customers and one or two financial service customers in the mix. And we do that with a couple of these agencies. And it's something that might be a bigger opportunity as we move forward. But so far it's been successful with a few.
[George McMillis – Alvin Fund]
And you've seen some pricing pressure as well or is that a stable part of it.
Peter Shields
It's slightly more stable because we're servicing first party customers and we're providing – applications are much more specific. Any time you're touching somebody's end customer, there's a lot more sensitivity to the solution. When you're trying to touch a debtor or somebody where the product has already been charged off, there's a lot less sensitivity. The applications are a lot simpler. You're just trying to connect the right party.
But when you're dealing with utilities customer, a bank's customer, the sophistication of the solution, the care and feeding of the application and the data and the end links that you work with with that customer are very important, and that relationship is very important. So it's just much more value that we provide in that application.
[George McMillis – Alvin Fund]
And those revenues are not classified as revenue associated with your top two customers, is that correct?
Peter Shields
Correct.
[George McMillis – Alvin Fund]
I think you do that work I think you said just a handful of third party collectors. Is some of that revenue included in the revenue that you say is connected with one of your top two customers which is a third party agency.
Peter Shields
Yes, that's correct.
[George McMillis – Alvin Fund]
Can you talk a little bit more about the sales force realignment? I understand that the sales process is more complex. Maybe you have people helping your sales people, but can you give some color on that?
Peter Shields
When we approach a customer we have three different ways they can communicate with their end client. They can email, text or voice. And instead of focusing our solution like we did in the past around just voice, and the added value of how to use voice correctly, now we need to work with them to provide a more complete solution on how they're going to contact their customer.
What's going to be the most appropriate mechanism to contact that customer based on geography, credit score of that customer, and so what we need to do now is really do more sophisticated, what I call solution selling with that customer, more white boarding. Another term, communication process and come up with recommendations that we can offer them that they can then go in and test and measure those results in the different segments of their population.
I call it a more formal engagement process on our side, where our product is the solution, but our sales people and our account managers are more consultants helping them optimize the use of our product to give them the most beneficial results.
[George McMillis – Alvin Fund]
And is the sales force organized by vertical?
Peter Shields
We're actually in a transition point right now where we're going to organize our sales force by vertical. Correct. As a matter of fact, the first thing we did was realign a segment of our sales force just focused on third party collections and broke that out as a separate business. And moving forward, we're going to be more vertically focused with our sales force.
Operator
There are no further questions at this time.
Peter Shields
I'd like to thank everybody for listening to the call and if anybody wants to contact Bob or myself, feel free to give us a call.
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