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Executives

Erica Smith - Director, IR

Tom Ebling - President & CEO

Scott Dussault - EVP & CFO

Analysts

Greg Dunham - Goldman Sachs

Laura Lederman - William Blair

Tom Ernst (Stan) - Deutsche Bank

Richard Davis – Canaccord Genuity

Shyam Patil – Raymond James

Brian Schwartz – Oppenheimer

Craig Nankervis - First Analysis Corp.

Richard Davis – Canaccord Genuity

Shawn Milne – Janney Capital Markets

Demandware, Inc. (DWRE) Q3 2012 Earnings Call November 6, 2012 8:30 AM ET

Operator

Good morning, and welcome to the Demandware's third quarter financial results conference call. My name is Cheney and I'll be the operator for the operator for today's call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this call is being recorded.

I will now turn the call over to Erica Smith, Director of Investor Relations with Demandware.

Erica Smith – Director, IR

Thank you, Cheney. Good morning, and thank you for joining today's call to discuss our results for the third quarter. Here with me today are Tom Ebling, our CEO, and Scott Dussault, our CFO. Tom will provide highlights for the quarter and Scott will talk about the financials in more detail. Then we will open it up for questions.

Before we begin, let me remind you that during the call, we will discuss both GAAP and non-GAAP results to supplement investor understanding of the company's financials. A GAAP to non-GAAP reconciliation schedule was provided in the press release this morning.

Also, today's discussion contains forward-looking statements such as statements regarding the market acceptance of SaaS solutions, the growth of e-commerce, our business strategy, demand for our solutions, growth of our customer's e-commerce businesses, the seasonality of our business, our pipeline, and our projected financial results.

Forward-looking statements involve risks and uncertainties and our actual results could differ materially from those projected in our forward-looking statements. The company assumes no obligation to update the information provided during today's call. To revise any forward-looking statements or to update the reasons actual results could differ materially from those anticipated in forward-looking statements. The risks and uncertainties include risks relating to our ability to attract new customers, the extent to which customers grow their revenue and renew their contracts for our solutions as well as other risk factors that could affect our results, all included in our 10-Q and other filings with the SEC.

With that, I'm going to turn the call over to Tom.

Tom Ebling

Good morning. Thank you for joining us on today's call.

We were very pleased to post another quarter of strong financial results with Subscription revenue increasing 45% to $16.3 million. Our results were driven by the great success our customers are having on the Demandware Commerce platform. We have the right customers. They view digital commerce as strategic and we empower them to the grow their businesses.

With Demandware, our customers get to market faster, innovate more rapidly, and launch sites more quickly. They no longer have to worry about things like is my digital commerce up and running and do I have enough capacity for the holiday season. Our state-of-the-art cloud infrastructure takes those headaches away. In fact, during the third quarter, we achieved average uptime of 99.99%, which is well above industry averages.

We also give customers more control over their e-commerce operation than they had previously with homegrown solutions, traditional on-premise software, or outsourced models. With Demandware, our customers can focus in adding real value to their digital commerce business. They can market and merchandise to their consumers, creating unique seamless brand experiences across channels and geographies.

What does this mean? Our customers grow faster and because of our shared success model, we grow faster. For the nine months ended September 30th, 2012, Demandware comparable customers grew their gross merchandise value, or GMV, greater than 35%. This growth far exceeds e-commerce industry average growth rates published by ComSquare.

As a reminder, comparable customers are customers that operated on the Demandware Commerce platform for the full nine months ended September 30th in both 2012 and 2011.

Existing customers grow in a number of ways. Customers like Life is Good, Solstice Sunglasses, and OtterBox grow their e-commerce businesses through a single site while other customers like Crocs, Deckers, and Mother Care grow their initial Demandware site, but also by launching new sites for new brands or new geographies.

In the third quarter, we saw the largest number of new sites launched in our history with 72 net new sites bringing the total number of live sites to 517. The new site metric highlights a key benefit of our cloud-based model and is an important component of our land-and-expand growth strategy. Customers can launch sites quickly minimizing operational risks and costs. This is great for them, particularly with the holiday season right around the corner. It is also great for us because customers can launch sites with little to no involvement from, or cost to Demandware. If the site is successful, our customer’s revenue and our revenue both grow together.

This quarter, we saw a number of customers expand internationally including Butlers, a German retailer selling home accessories and furniture, who launched sites in the U.K. and in Spain. Starbucks, which expanded into France, Germany, and the U.K. and Canada. And we are very excited that Clarence launched a new site in China. Clarence is the first Demandware customer to run on our newly-deployed infrastructure in Hong Kong. We also had customers such as New Balance, Quicksilver, and Guthy Renker roll out new brands this quarter.

In terms of new live customers, we ended the quarter with 137, up from 124 last quarter, a 51% increase from September 30th, 2011.

I want to highlight a few of the leading retailers and brands that launched new initial sites in Demandware Commerce during the last quarter. Pier One Imports launched Pierone.com in Demandware during the quarter. Today through the power of Demandware commerce, brands and retailers like Pier One can capitalize on the vast multichannel opportunities created by the convergence of off-line and online retail; something that was only talked about just a few years ago. Pier One consumers can now buy online and pick up in the store, buy online and return to the store, and even shop online while in the store. We are looking forward to working with Pier One as they continue to execute their multichannel strategy.

Versace is a customer though our end-to-end partner, Natrada. This quarter, Versace launched sites in Germany, France, Italy, and the United Kingdom. We talk a lot about customers being able to launch sites quickly. Versace, a customer who is very conscious of their brand image, was up and running in Demandware Commerce with four sites in less than three months. This couldn’t be done with traditional e-commerce platforms.

Also in mid-October, Brooks Brothers moved their core site, Brooksbrothers.com onto Demandware's commerce platform. This was another great win for Demandware. According to Internet Retailer, Brooks Brothers generated more than $100 million online in 2011. We are delighted to have Brooks Brothers as a fourth quarter new live customer to our roster of large rapidly growing customers.

That roster of large customers is certainly expanding. We are pleased that through the first nine months of 2012, six customers have individually already generated more than $100 million in GMV on the Demandware Commerce platform.

We are currently on pace to have approximately a dozen customers generate more than $100 million in 2012, which compares to seven customers last year and one in 2009. This is a very significant accomplishment for Demandware as we work to expand in the larger brands and retailers. We are extremely pleased with our progress.

One of the large customers is Neckermann. As most of you know, at the end of the third quarter, Neckermann, our largest customer, announced that it was beginning the liquidation process. As a result, we terminated the MSA and shut down their website on October 1st. Scott will talk more about the financial impact of Neckermann later in the call, but I wanted to outline Neckermann's significant operational contributions to Demandware.

Since becoming a customer in 2009, Neckermann's battle tested our platform and proved our infrastructure could scale. They helped us define what $1 billion general merchandiser with more than 1 million SKUs needs to manage and grow an online business of that magnitude. According to Internet Retailer's annual list, in 2011, Neckermann was the 18th largest company in Europe. If they were a U.S. company, Neckermann would have been the 20th largest company on the IR 500. In 2011, the company grew its online business 11% generating approximately $1.6 billion of GMV over a platform.

In '11, Neckermann processed more than 11 million orders representing approximately 35 million items and managed approximately 1.7 million SKUs. On their busiest day, our infrastructure supported 1.2 million visitors and processed approximately 83,000 with no performance degradation or downtime.

Because of Flash sales and various other promotional programs throughout a given year, other customers have processed even more orders and supported a greater influx of visitors in a single day, but the Neckermann metrics to demonstrate the scalability of our platform.

As Neckermann's e-commerce platform provider, we learned a lot and in the long run, the experience made Demandware a stronger company. We have proven that our infrastructure can scale to support today's largest, fastest-growing digital commerce businesses.

Because of our unique model, in any given quarter, our customer’s success is the primary driver of our growth. The engine behind our customers successes our technology platforms. Through the cloud, we provide a steady stream of new e-commerce features and functionality enabling customers to respond quickly to emerging trends and technologies, a benefit retailers and brands don't get with other e-commerce platform providers.

During the quarter, we did delivered the fifth platform enhancement of the year to all of our customers through the cloud. New functionality included enhancements to promotions, active merchandising, and search engine optimization. With the latest improvements, we now offer all of our customers Responsive Web Design. By building by using Responsive Web Design, the site automatically adapts the layout to the device. And if the consumer is on a PC, a tablet, or on a phone, the layout and design of the site automatically adjusts to optimize the consumer's shopping experience. Perry Ellis was our first customer to use this technology.

Another important technology achievement this quarter was Order Center going live in our production environment with an early adopter customer. We are still in very early weeks of the first Order Center deployment, but we are encouraged by the initial feedback. We believe managing the order natively in the commerce platform is critical to creating a unified consumer experience in the digital age. Today, Order Center brings the consumer order into the Demandware platform, which creates a more holistic view into the consumer's order management lifecycle, including returns, accommodations, as well as more robust service for the order. Given the breadth of what are management solutions available today, we are continuing to evaluate our go-to-market strategy for Order Center and are looking forward to receiving additional feedback from our early adopter.

We believe that our customer's success on the platform is our best advertisement and prospects have been taking notice. During the quarter, we continued to strengthen our presence in many verticals. We signed new sporting goods, home and garden, jewelry, and apparel customers and we expanded beyond our traditional verticals. In fact during the quarter, we signed Diagio, the world's largest producer of spirits and a major producer of beer and wine.

In the sporting goods vertical, we signed Black Diamond, the U.S. based manufacturer of equipment for climbing, skiing, and mountain sports. And American Golf, Europe's largest golf retailers with stores in the U.K. and Ireland.

Black Diamond's growth strategy includes a number of acquisitions and they find it to be extremely challenging to manage and integrate new assets and brands across international markets within their existing e-commerce platform. Black Diamond saw what other customers had done in Demandware commerce and they decided that our cloud-based platform, which supports their acquisitive international growth strategy and help them deliver a seamless brand experience to their consumers across channels.

American Golf is currently running their site in a highly-customized solution that is not meeting their needs. The biggest selling points for American Golf are the ease of our implementations to our partner, our shared success model, and our retail practice team. They were looking for a true business partner who would work with them to drive growth and they found that partner with Demandware.

We also strengthened our home and garden verticals signing Garden Consumer Solutions. Joining this individual sites are more than 12 brands like Sunbeam, Oster, and Crockpot. They were looking to leverage content and consumer information across each individually branded site to better scale their online business. (Jardine) recognized that for their digital commerce initiative to remain competitive, they needed a robust scalable platform that delivered the best experience to their consumers so they chose Demandware Commerce.

We also had another very important large customer win this quarter with a wholly-owned subsidiary of one of the world's most well-known designers and manufacturers of athletic footwear and apparel.

While we did have success signing new strategic customers including many with high GMV potential, overall third quarter was softer than we had hoped for customer acquisition. We mentioned in Q2 that we were seeing complexity in European sales cycles and we saw that complexity continuing in the third quarter with the volume of new logos acquired and total committed contract value below what we had planned. We believe new customer acquisition was further impacted by the typical seasonal summer slowdown experienced in most European countries.

New business in North America was solid. Though again, the volume in new acquired logos was softer than we had hoped as some deals pushed out beyond Q3. As we move into larger retailers and branded manufacturers, companies like Finish Line and Brooks Brothers, we are experiencing longer sales cycles and the timing of some of the larger deals can slip. We saw this happen in the third quarter with a large prospect in North America.

While the timing of deals is obviously [inaudible], it is also important to remind you that the pivotal time for Demandware is not when a customer signs, but when that customer goes live, which is when we start to generate revenue. As a result, we do not incentivize our sales people to close deals at quarter end. Given that we are high-dollar, low-volume business, we often experience inconsistent quarterly new customer acquisition and we expect that to continue. We do not see any material changes to the competitive landscapes and the majority of deals we saw in the third quarter, both in North America and in Europe, remain active in the pipeline.

While we're disappointed with the timing of deals closing this quarter, the fundamentals of our business are extremely strong. And we are seeing no change in significant market opportunities in front of us. In fact, our pipeline is as strong as it has ever been.

We have tremendous industry tailwinds supporting our growth. More and more consumers are shopping online looking for seamless brand experiences. As a result, digital commerce is at the forefront of every retailer and branded manufacturer's strategic planning. With our open cloud-based solution, we are helping our customers push the boundaries of digital commerce. They can create highly customized consumer experiences across channels and geographies. Our customers in both the U.S. and Europe continue to outperform and grow much faster than e-commerce industry in general. Given the strength of our pipeline and the market opportunities in front of us, we are continuing to invest in sales and marketing and our primary technology initiatives; the core Demandware Commerce platform, Open Commerce APIs, Commerce Center and Order Center.

With that, I’m going to turn the call over to Scott.

Scott Dussault – EVP, CFO

Thanks Tom, and thank you to everyone for joining today’s call. You saw the highlights – financial highlights in our press release. Our total revenue for the quarter increased 39% to 18.7 million. We recognized 1.7 million or 9% of total revenue from Neckermann in the third quarter. No other customer contributed 5% or more to total revenue. Our total revenue – of our total revenue this quarter 55% was generated from North America, and 45% was International.

We were extremely pleased to have another quarter 40-plus percent growth in subscription revenue, which reflects our compelling value proposition and the growth driver of our business Demandware Commerce. In the third quarter subscription revenue increased 45% year-over-year to 16.3 million from 11.2 million last year. Neckermann contributed 1.2 million or 7.6% of subscription revenue. On a constant currency basis, our subscription revenue increased 49% during the third quarter over last year. During the third quarter, new customers on the platform contributed 4 million to the 5 million increase in our subscription revenue, or 80% of our subscription revenue growth.

While existing customers on the platform contributed 1 million to the increase, more than 70% of our total subscription revenue in the third quarter was generated from existing customers. Any customer going live on the platform after July 1st, 2011 is considered a new customer for the quarter ended September 20th, 2012.

And so as a reminder, our subscription revenue has two components, base and overage. Our customers commit to a minimum subscription level that is typically invoiced monthly in advanced, and that is the base subscription. When they exceed their minimum commitment levels, we invoice overage fees in the period they are processed and earned. For the third quarter, overage fees were 4.4 million or 27% of subscription revenue, compared to 3.3 million which represented 29% of subscription revenue in the third quarter of 2011. Overage fees are not punitive, they’re invoiced at the same rate as the minimum subscription.

Our total subscription fees are based on a percentage of GMV our customer’s process on the platform. The mix of base and overage is typically dependent on where the customer is in the contract cycle. Customers in the first contract year tend to generate the majority of their revenue in the base subscription, while customers in the third year of the contract tend to ramp beyond the base subscription and generate more meaningful overage fees. Our typical contract is three years, and upon contract renewal, the base risk overage mix tends to shift back towards the base subscription as many customers renew at a higher base subscription in order to align their renewal with their GMV growth. As a result, looking at the growth and overage fees year-over-year is a misleading metric.

Our average annualized revenue per customer excluding Neckermann, was approximately $468,000 for the trailing four quarters, and that’s up from approximately $435,000 in the third quarter of last year, and approximately $465,000 in the second quarter.

The increase in ARPU is predominantly the result of the execution our land and expand strategy. As customers growing in the platform through their initial site, and also by launching new sites for new brands or new geographies.

Expansion within our existing customer base is also very important because it produces leverage in our business. Typically leverage is most pronounced in the fourth quarter, which I will talk about a little bit later.

The execution of our land and expand strategy was demonstrated by the strongest quarter even for new site launches. We ended the quarter with 517 live revenue generating sites in the platform. That’s up 61% from 321 a year ago, and up a strong 16% sequentially from 445 sites at the end of the second quarter. The third quarter is typically a very strong quarter for new site launches as customers prepare for the holiday season. As of September 30th, 2012, our customers are operating 3.8 sites on average, which is an increase from 3.5 sites a year ago. Approximately 75% of the new sites were launched from existing customers who expanded their digital channels with sites in new geographies or from new brands. And about 25% of the new site launches were from new customers launching on Demandware Commerce in the third quarter, with some new customers such as Versace and WL Gore launching multiple sites right out of the gate.

The site metric is a very important – is very important for us because it is a leading indicator for potential future growth. However, when modeling the business, it is still best to use a number of live customers and the average revenue per customer versus the number of live sites.

We’re also pleased to have one of our strongest quarters ever for customers launching on the platform. As Tom mentioned, at quarter-end we had 137 live customers, up 51% from 91 a year ago and up 10% from 124 last quarter. As a reminder we generate revenue when a customer’s initial site goes live on the Demandware Commerce platform, so obviously customer goal lives are extremely important metric in our business. On average, it takes approximately six months to implement a customer after signing a contract.

Services revenue in the third quarter was 2.5 million, a slight increase from 2.3 million from the third quarter of last year. Services are an enabler of our subscription revenue, and we anticipate it will become a smaller and smaller percentage of our total revenue going forward. More than 80% of current [inaudible] implementations were performed by our partner Eco System. Early on we recognized that implementations could become a bottleneck to growth, so we are extremely pleased that this trend, and our ability to train and expand our group of partners.

Moving down the income statement, our total gross margin for the second quarter was 65% compared to 60% last year. The improvement in total gross margin primarily resulted from the continued shift in our revenue mix towards subscription revenue, as well as the overall scalability of our infrastructure. Subscription gross margin was 79%, an improvement from 78% a year ago, and down from 80% in the second quarter of this year. As we talked about last quarter, we deploy infrastructure in the second and third quarters of the year to support the anticipated increase in business during the holiday season. The new infrastructure resulted in the expected [inaudible] to the client or gross margin this year, but we expect to see our gross margins expand again in the fourth quarter.

Our total operating expenses increased 65% to 15.8 million from 9.5 million a year ago. Stock base compensation within operating expenses was 1.9 million in the third quarter of 2012, an increase from 256,000 a year ago. Therefore excluding stock based compensation, our operating expenses increased 50% year-over-year. The increase in year-over-year total operating expenses was primarily related to headcount to grow the business. As of September 30th, of 2012, we had 288 employees up 41% increase from 204 a year ago, and a 4% increase sequentially. We increased headcount in sales and marketing from 71 in September 30th last year to 115 on September 30th this year, and that’s an increase of 62%.

The sequential decline in operating expenses was due in large part to lower variable compensation expense incurred as a result of the timing and the signing of new customer contracts that Tom talked about earlier in the call.

In addition during the third quarter of this year, there were some delays in hiring and engineering, as well as in sales and marketing. We anticipate some of these employees to be hired in the fourth quarter of this year, and also early in 2013. Contributing to the sequential decline in operating expenses to a lesser extent was lower total marketing program cost. As a reminded in the second quarter we conducted our annual customer conference, which is a single largest marketing program cost we’ll have in 2012.

Operationally, our average revenue per employee for the rolling four quarters remains strong at approximately $280,000. That’s our 10th consecutive quarter of greater than $250,000 in revenue per employee. This metric demonstrate a strong leverage inherit in our multi-tenant SaaS infrastructure.

Our GAAP operating loss for the year was 3.6 million, which compares to GAAP operating loss of 1.5 million last year. And also on a GAAP bases our net loss for the third quarter of 2012 was 3.5 million or $0.12 per share attributable to common stockholders compared to 2.1 million or $.80 per share attributable to common stockholders in the third quarter of 2011.

On a non-GAAP basis, our net loss is 1.3 million or $0.04 per share for the third quarter compared to non-GAAP net loss of 1.8 million or $.042 per share in the same period in 2011. Non-GAAP results exclude expenses related to stock based compensation.

Now I would like to turn to forward-looking guidance, which as Erica outlined fall under the Safe Harbor provisions. We are increasing the full year guidance that we provided on the second quarter call. For the year ending December 31st, 2012, we expect total revenue to be in the range of 75.5 million to 76.5 million, or 34% increase year-over-year. And subscription revenue to be in a range of 64.5 million to 65.5 million, or growth of 38% from 2011. As a reminder, the full year guidance we provided on the second quarter call included 1.75 million in revenue from Neckermann for the fourth quarter, of which 1.32 million was subscription revenue and 430,000 was for services revenue. Because Neckermann is not a customer in the fourth quarter, all of the approximately 1.1 million of deferred services revenue on the balance sheet at the end of the third quarter will be accelerated and recognized as services revenue in the fourth quarter, and is included in our guidance for the full year. We don’t expect the loss of fourth quarter revenue from Neckermann to materially impact our gross margins for the year, because we experienced stronger than planned revenue from our customers during the third quarter, which made up entirely for the loss of revenue from Neckermann in the fourth quarter, and this is a good demonstration of the leverage in our model. Because their infrastructure is generally fixed going into a quarter, when our customer’s revenue growth is better than we planned, the incremental revenue we recognize drops right to our margins.

I also want to level set everyone on comparable growth. We generated approximately 9 million of revenue from Neckermann in 2011 and that was comprised of about 7 million of subscription revenue and about 2 million of services revenue. And we expect to generate approximately 7 million of revenue from Neckermann in 2012, and that will be comprised of about 4.5 million of subscription revenue and about 2.5 million of services revenue. Therefore, is we exclude Neckermann from our 2011 revenue, and our 2012 guidance we would be guiding to year-over-year subscription, and total revenue growth of 51% and 46% respectively.

For the fourth quarter we expect GAAP net loss to be in the range of 1.25 million to 1.75 million or $0.04 to $0.06 per share. And our non-GAAP net income for the fourth quarter to be in a range of 500,000 to a million, or $0.02 to $0.03 per common share. We anticipate our weighted average fully diluted shares outstanding will be approximately 33 million shares, and our basic shares will be approximately 30 million shares. Our anticipated non-GAAP fourth quarter profit is driven in part by the leverage inherent in our business. Because of our multi-tenant cloud based delivery, as our customer’s growth accelerates in the fourth quarter the incremental revenue is reflected in our profitability.

As I mentioned earlier, there were delays in some of the hiring that was expected in the third quarter, and that will pick up in the fourth quarter and early in 2013. However, going forward, we anticipate headcount in services to begin to level out as more and more of our implementations continue to be performed by partners. As a result, growth in that expense should moderate.

We expect our GAAP net loss for the year to be approximately 12.5 million to 13.5 million, or $0.49 to $0.53 per share. And our non-GAAP net loss to be in the range of 5.5 million to 6.5 million, or $0.22 to $0.26 per share. Our loss is driven predominantly by increase investments in sales and marketing in Europe, in North America, and to a lesser degree Asia Pacific. We anticipate our weighted average basic and fully diluted shares outstanding will be approximately 25.3 million shares.

While we are not prepared to provide complete financial guidance for 2013 in advance of the fourth quarter, I want to address the impact in loss of Neckermann on how we are currently viewing 2013 subscription revenue. It’s worth reminding everyone that the Neckermann contract ran through June of 2013. Had Neckermann remained in business, in each of the first two quarters of 2013, we would have recognized revenue from Neckermann of approximately 1.5 million in base subscription, and $400,000 in services revenue. With the services revenue rolling off the third revenue from the balance sheet. Even though we are losing Neckermann for all of 2013, we believe subscription revenue will still grow approximately 35% next year over our 2012 subscription revenue guidance.

I also wanted to touch upon services revenue going forward given that we had some

non-recurring services revenue in 2012. In the second quarter of 2012 we recognized $600,000 of non-recurring revenue related to our customer conference. And in Q4 we expect to accelerate and recognize approximately 1.1 million of non-recurring revenue related to Neckermann. Excluding these non-recurrent services revenue items, services revenue range between 2.3 million and 2.5 million per quarter since the beginning of 2011. We anticipate that services revenue will flatten out to a run-rate of approximately 2 million per quarter beginning in 2013. The services revenue run-rate reflects three things. First, we recognize the revenue from initial customer implementations over the average life of the customer relationships. Second, more and more of our implementation work is being done by partners today. As I mentioned, more than 80% of our third quarter 2012 implementations were done by partners. And finally, no future services revenue will be recognized from Neckermann beyond Q4 of 2012.

Given that Neckermann is going – also going to be in our churn numbers for 2012, I want to provide a preview for the churn and renewals metric that we’ll talk more about after year-end. Including Neckermann in customer churn, and in our dollar renewal rate calculations, we still expect churn to be less than 5% for the year, and our dollar renewal rate to continue to be greater than 100%.

We are very pleased to post another quarter of 40-plus percent subscription revenue growth. Our customers continue to perform well and we believe we are making the right investments for future growth.

With that, I would like to turn the call back over to Tom.

Tom Ebling – President & CEO

Thank you Scott. We are the industry’s leading cloud base e-Commerce platform. We believe the fundamentals of our business are as strong as they’ve ever been. The secular trend toward online is providing us with significant growth opportunities. The success our customers are having and attraction we are getting with larger retailers and branded manufacturers demonstrates that our cloud-based solution is the best alternative for today’s fastest growing digital commerce businesses. To capitalize on these opportunities, we are committed to increasing our market share, and as a result we plan to continue investing in our business.

With that, I would like to open up the call for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). Your first question comes from the line of Greg Dunham with Goldman Sachs, please proceed.

Greg Dunham - Goldman Sachs

Hi, yes, thanks for taking my question. First question for you Scott, I just wanted to clarify the numbers on ex-Neckermann. I think you mentioned that growth would have been 51% embedded in guidance – is that for total revenues for the next one?

Scott Dussault – EVP, CFO

Yes.

Greg Dunham - Goldman Sachs

Okay.

Scott Dussault – EVP, CFO

Yes, Greg, it’s 51% for total revenue and 46% - I’m sorry, 51% for subscription revenue, and 46% for total.

Greg Dunham - Goldman Sachs

46% for total, oh, okay, and what was the actual Neckermann contribution in 3Q with services in total revenues?

Scott Dussault – EVP, CFO

So, it was exactly what we talked about in the call, it was about 1.3 million in total.

Greg Dunham - Goldman Sachs

1.3, okay, so…

Scott Dussault – EVP, CFO

Services are about [inaudible] from that.

Greg Dunham - Goldman Sachs

Yes, roughly 54% ex-Neckermann just this quarter as well, okay. And we should think about that as 35% of it is existing customers and the balance new, is that, kind of, how you think about that?

Scott Dussault – EVP, CFO

For a…

Greg Dunham - Goldman Sachs

For a contribution standpoint?

Scott Dussault – EVP, CFO

For contributions to revenue growth, or…

Greg Dunham - Goldman Sachs

Well, just – I mean, the existing basis is growing roughly 35%, and the balance being from new.

Scott Dussault – EVP, CFO

Right, yes – I mean, our existing customers are growing north of 35% their GMV, and that’s resulting in, you know, for our growth in the high 20% range. So for revenue growth, the majority of revenue growth is coming from new customers, but the majority of our base revenue is coming from existing customers.

Greg Dunham - Goldman Sachs

Okay, and then I wanted to switch gears to making a commentary on deal closings. What – how – what is a typical Q3 like, relative in terms of ACV bookings? I – you know, I would imagine that, you know, there isn’t as much motivation this quarter given you can’t grow out ahead of the holiday season, but can you talk about, you know, what the – you know, what the overall mix of bookings typically happens in a September quarter for a year, and you know, can you talk about, kind of, some of the deals what the confidence level in terms of closing those deals that you get for Q4, and then the beginning of next year? Thanks.

Tom Ebling – President, CEO

There is a sort of a cycle, which I think your question gets at, which is that many customers make decisions in the first half of the year with the idea that they are going to go live by the holiday, and that’s a compelling event for them. So that sort of forces an urgency that are contraction negotiations in signing, that’s certainly the case. And then once you move past the time where customers recognize they can go live by the holiday, which is some time in the spring depending on the size of their implementation, then depending on the unique customer situation, sometimes there isn’t a compelling event. So, you know, It’s up to the customer, or a demand rep respective, whether the deal gets signed in one day or a week later might not matter a lot to either party. So that’s sort of the phenomenon we’ve seen before. I don’t think we have enough history with large enough numbers of data to kind of give a pattern for Q3 versus Q4, other than just noting what I just noted, that there is a sense of urgency in the first half of the year, which is often not present in the second half of the year in terms of customer decision cycles.

Greg Dunham - Goldman Sachs

All right, thank you, I will pass it on.

Operator

Your next question comes from the line of Laura Lederman with William Blair, please proceed.

Laura Lederman - William Blair

Yes, thank you for taking my question. Following up on Greg’s question, can you talk a little bit about when you’ve seen deals with the store, why you think this happened, was there any concentration of types of customer, delayed that apparel versus jewelry, versus whatever. So, if you could give a little bit of color what happened there, and then I will come back with another question.

Tom Ebling – President, CEO

Yes, the – I mean, the reason deals flip, really, is a fraction of the fact – well, I think there is a couple of reasons. I mean, in many cases, as you approach the end of a quarter, you know, the end of the quarter doesn’t matter to the customer, and frankly doesn’t even matter to us. We don’t incentivize their sales people to close deals in a quarter because we are so focused on customer go-lives, versus new acquisition. So sort of no one is, you know, terribly motivated by the difference between September 30th and October 1st, generally. Now, the other phenomena that does occur sometimes, which is one of the reasons we do not incentivize our sales people to close deals in a quarter, is software vendors in general, have trained customers that they could hold up a deal at the end of the quarter and demand concessions because many software vendors are desperate to get a deal signed on a particular day, and we don’t play that game, and we tell customers we don’t play that game, but customers don’t always know we don’t play that game because they see so many others do it. So sometimes a customer will come up to you at the end of a quarter and ask for a concession we haven’t agreed to, and we will say, well, no, we will wait a week to get the deal. I mean, so, I think both those reasons are reasons they slipped. There weren’t any, because the other part of your question, Laura, there weren’t any patterns in terms of particular verticals, geographies, or anything – well, we did mention Europe, where we certainly had – we didn’t close as much as we sought, but there weren’t any general patterns in terms of those kinds of movements that I would point to.

Laura Lederman - William Blair

How much business – and I realize we’re not that far in November, but it’s been a month and a week since the end of the September quarter, does business feel normal again, and annualized deal growth at the end of the quarter, but have any of the deals that looks closed? Can you give us a sense of getting things back to normal?

Tom Ebling – President, CEO

Yes, you know, we don’t want to get too far talking about Q4 deals at this point, but we certainly – you know, there’s deals I’m eluding to that we’re actively working them, some of them are closed – I mean, the pipeline is certainly very busy, the contractual software is very busy. So we don’t see reason for concern about the overall level of sales activity and the negotiations and those kind of things.

Laura Lederman - William Blair

I have a question for Scott, and then I will pass it on – thank you for taking the question. Can you talk a little bit about the profitability you would expect next year? I mean, would you expect improvements flat? Just very high level, you talked about what you expect for curve revenue, and for services revenue, but the profits be flat, slightly up or just rough view.

Scott Dussault – EVP, CFO

Yes, Laura, we’ll – we’re going to – we’ll definitely get into, you know, more of what our planning is for next year on a Q1 call. We haven’t – we’re working through that right now in terms of the investments that we’re going to make. You know, we’re not in an environment yet, we think that the business has slowed down, it’s certainly not the message that we’re trying to convey, so we don’t feel it as though we’re ready to stop the growth, it’s still strong, and we need to work through what we are planning to do next year before we get into profitability, and that sort of things. So I want to just by the little bit of high-level thinking about 2013 as related to revenue, given the fact that there is a lot of noise around Neckermann – you know, what happened in there, just to give some feeling for that, but we’re not ready to give full guidance on ’13 yet.

Laura Lederman - William Blair

Okay, and actually, I’m going to ask one more question, just to make sure it gets asked on the call. Next we talked a lot about this e-commerce, did you see them at all in the quarter, are any of the deals flipped competitive versus next week?

Tom Ebling – President, CEO

Yes, I – the competitive landscape really hasn’t changed. The situation we encounter almost all of the time is when it comes down to two choices the other one is a licensed software provider, and that’s still what we’re dealing with, and in almost all of the situations.

Laura Lederman - William Blair

Thanks you.

Operator

Your next question comes from the line of Tom Ernst with Deutsche Bank, please proceed.

Tom Ernst (Stan)- Deutsche Bank

Hi guys, can you hear me?

Tom Ebling – President, CEO

Yep.

Tom Ernst (Stan)- Deutsche Bank

It’s Stan [inaudible] sitting in for Tom Ernst. Thank you for taking my question. So some of the talk that’s been going around is Sandy is going to heavily impact the Northeast, the supply chain, and the 4Q shopping season – just looking at numbers, it looks like overages is supposed to be a – they’re modeling is pretty conservative, but how much of your – if you have insight to that – how much of the customer base is impacted by Sandy, and it’s leverage to the Northeast?

Tom Ebling – President, CEO

Yes, well, I think there – you know, there’s many of our customers are headquartered in New York, but that’s not where the – you know, obviously, the advantage of online, of course, is the orders are coming from all over the place, and the fulfillment is usually not there in New York City. So – or Northern New Jersey for most of our customers. So, you know, it’s hard to anticipate the impact of Sandy. I’ve seen people writing that it’s going to depress online sales, and I’ve seen people writing saying that it’s going to increase online sales. You know, so far what we’ve seen in terms of a flow of our quarterly numbers is that there’s no changes from what we were expecting, and you know, I think people were expecting a strong Q4 in terms of customer revenue growth.

Tom Ernst (Stan) - Deutsche Bank

Okay, and on the ordering management system that you guys just put out, it’s great to see you guys already in the beta process, and I know it’s really a lot, and it’s really early still in the process, but any initial feedback, are there customers that are waiting for this first initial pilot to be successful in and launch it as well?

Tom Ebling – President, CEO

There is certainly – you know, there is certainly other folks who want to engage with us on our order center – you know, our – the big thing we’re determining is where is the best fit in the market, and we want to make sure we get enough feedback from this customer about what – where it works and what it does before we sort of commit to the next couple of customers in terms of who we’re going to rule out.

Tom Ernst (Stan)- Deutsche Bank

Okay, thank you.

Operator

Your next question comes from the line of Richard Davis with Canaccord. Please proceed.

Richard Davis – Canaccord Genuity

Okay, thanks. Kind of two questions. One tactical and one more strategic. So the tactical one, you added a lot of new sites. Is the driver of that more an organic event, in other words, decided by your customer or do you have salespeople that can propel this growth? I mean, obviously they can call them, but is there a way to modulate that and to move it forward?

Tom Ebling – President, CEO

Yeah, I would say it’s primarily driven, to use the terminology you’re using, Richard, by the organic growth of our customers. Our salespeople, using that term, salespeople, don’t actually get involved with our customers. We have this retail practice team, which is more e-commerce partitioners, more like account management and they’ll certainly help a customer understand how they’re going to achieve their objectives. Maybe they influence it if the customer is saying I’m considering it and then we’ll go out and say, well, gee, we have all these other customers that have done it and we have a toolkit that helps you and we can give you some education about that, but we’re not pushing them to do that. That’s sort of something that they’re viewing as strategic themselves and they’re ready to do that initiative and we’re sort of enabling them or assisting them in doing that.

Scott Dussault – EVP, CFO

Richard, just a follow-up on that too, about 3/4s of the site launches that we had in the third quarter came from existing customers launching sites and that was – we started seeing uptick last year in the third quarter as well and I think it’s because customers are getting ready and want to launch sites for the holiday season and it’s important that, to your point, there’s no sales compensation tied to that at all, even with today’s retail practice that Tom mentioned. There’s no – when customers launch sites on their own like that, that’s part of this, you know, land and expand strategy where an initial customer launches a site and then grows on its own. It’s a really important, you know, leverage driver in the business.

Richard Davis – Canaccord Genuity

Got it. And then so you guys, in my opinion, what I would argue, best in class e-commerce functionality as you’re kind of the middle of the pipe, the conversion of customers revenue. So you know, you have the order management business but – and I know you have your app stores and things like that, but how, I guess, Tom, do you think about Demandware either moving up or down that kind of pipe, either, you know, the top or the bottom, you know, of the marketing funnel? In other words, would you think about going into helping your customers get more inbound marketing or would you do – go down market? Down is not the right word, but you know, customer care, those kinds of thing? In other words, how do you think about expanding the functionality footprint over time?

Tom Ebling – President, CEO

Well, I think about it in two ways. There’s sort of, in any – in any area, for instance, helping customers get new consumers, for instance, right. There’s things we do in the platform, things our customers ask for and things we see that we can do to help make us more effective at that, a search engine [inaudible] and things like that. Right? So the platform is continually being stretched and deepened in terms of its ability to cross almost all areas, so that’s one way. And that will probably go on forever, or whatever close to forever is.

Then the other thing that could happen in the longer run is there’s – there’s obviously an ecosystem of other vendors around us with full products that help people do that, not just extension of the platform, but full product areas. And that’s something I would see as a longer-run goal for Demandware to get in some of those product areas. Our focus right now is really on, you know, market share in the e-commerce platform because we think there’s such an opportunity, we’re trying to remain very focused on that and we think someday later will come where we may be adding other product that we sell separately to help do some of these things when it’s something we want to do.

Richard Davis – Canaccord Genuity

Got it. Thanks very much.

Operator

Your next question comes from the line of Shyam Patil with Raymond James. Please proceed.

Shyam Patil – Raymond James

Hi. Thank you. Just a few questions. The first one is around sales force productivity. Could you talk a little bit about how you look at productivity of your sales force, maybe from the inside, what metrics do you use to measure that? And then related to that, what metric ratios would you point us to to look at from the outside to evaluate that as well?

Tom Ebling – President, CEO

The – well, from the inside, what we’re looking at is really relatively simple. We look at, you know, for each sales rep, particularly those that have been past the ramp-up period, we’re looking at how much ACV they bring in, right. So a sales rep that brings in $3 million in annual contract value is more effective than one that bring in 1.5 million, right. So we’re really looking at performance. And you have to look at it over a rolling 12-month type of period because any given sales rep will have zeros in one quarter and then great quarters and that’s sort of normal, but if you look at it over the proper time perspective, that’s really the right way to evaluate individual sales reps and sales managers and that type of thing.

From the outside, I think the things we’ll be talking about on an annual basis are the backlog and the number of customers in implementation, which will give you a flavor for sort of the new customers that we’ve signed on during a year.

Shyam Patil – Raymond James

Got it. And has anything changed in terms of your sales, direct sales, hiring plans, not necessarily just for this year, but for whatever forecast period you guys currently use?

Tom Ebling – President, CEO

No, we’re still recruiting salespeople, still adding them, we’re still feeling like there’s more – like we’re not at the saturation point in terms of our coverage of our major market. In the U.S., where we’ve existed the longest, we still have more room to grow and certainly in the case of the European countries, we’ve got a lot more room to grow. So we’re still actively doing sales recruiting and ramping.

Scott Dussault – EVP, CFO

One thing, Shyam is that, you know, we did defer some hiring decisions in sales management and sales operations in Q3, which was some of the hiring stuff that we talked about as we focused on deal flow and getting the folks we had productive. We’ve actually increased headcount sales more than 60% year over year. So this is a significant amount of hiring we’ve already done there as well.

Shyam Patil – Raymond James

Got it. And just one last one, on this slippage, is there any way you can give us a sense as to the – kind of the magnitude of the slippage, perhaps, you know, how many deals total slipped versus expectation? I know you talked about a large one in North America and some in Europe, but any kind of addition color there?

Tom Ebling – President, CEO

No, I mean, I don’t think we probably want to get into that kind of detail. I mean, I’ve – as we said in the – when we were – in the prepared remarks, the key thing for us is the customers who go live, when they go live and we’re feeling very good about that trend and you know, when we look at the overall sales performance taking a longer length than one quarter, either backwards or forwards, we’re feeling very good about the growth. So I don’t think we want to get into the details in the particular deals or quota.

Scott Dussault – EVP, CFO

Shyam, that’s one of the reasons why we gave some of the high-level guidance too on revenue for next year, you know, and we talked about, you know, the Neckermann issue, you know, and we want to make sure we provided some guidance as to what we were thinking about for revenue and I think, you know, for 2012, we guided to subscription revenue growth of 38% year over year and that includes three quarters with Neckermann and about four and a half (break in audio) and that includes all the sales activity we had through Q3. You had asked about the impact, so…

Shyam Patil – Raymond James

Great, thank you. That’s very helpful.

Operator

Your next question comes from the line of Craig Nankervis with First Analysis. Please proceed.

Craig Nankervis - First Analysis Corp.

Thanks. Good morning. Nice quarter. I have three quick questions. One is about the selling dynamics. As you focus moving – increasingly focus moving up market, do you expect that sort of the net of that would be closing fewer deals overall, but of course, their value being much greater, or do you think that your expansion at sort of the core midmarket where you’ve been continues at the pace it’s been, but it’s sort of net additive in terms of your up market in terms of deals you’re landing? Is there any way you can sort of talk to that dynamic as you focus more moving up market?

Tom Ebling – President, CEO

Yeah, I would say the major thing that will happen as we do this move up market will be that the percentage of new contracts, or value if you will, your ACV, coming from large customers will grow. I don’t expect a number of new customers to decrease in any way and hopefully that will go up but I do think the number – the percentage of the revenue coming from large customers will grow because every one of them is so impactful. I think that will be the dynamic we see.

Craig Nankervis - First Analysis Corp.

Sure, so – but those are longer sales cycles and maybe some are more complex deals, so sales person focus on the larger deals is not going to be tracked from sort of the bread-and-butter business at the midmarket that you’ve, you know, that you’ve done – you’ve provided to be very proficient at landing. You don’t see a tradeoff there, it sounds like?

Tom Ebling – President, CEO

No, we don’t see a tradeoff. We don’t see it both in the sense that the sales reps have conversation that’s affected by the number of deals they’ve closed as well as the total AVC, so they’re going to be motivated to make sure they close regular business. We also will have in place special resources in the sales organization, the system that assigns large accounts, which will mean that they don’t have to carry all that burden themselves, so they can balance the two. And not every sales rep will have large accounts, that will be something that some of the sales reps have and others don’t.

So yeah, that’s something we’re very conscious about in how we structure sales force and sale compensation.

Craig Nankervis - First Analysis Corp.

Okay, thank you. Secondly, the 80-percent-plus of current [inaudible] implementations being performed by the partner, I think it was 80% or more in Q2 or in the first half or whatever this year. Is that ahead of maybe where you might have thought it would be when you started the year? Is there something happening that’s causing …

Tom Ebling – President, CEO

Yeah, I think that, you know, we expected to get to this point as a goal. We got there faster than we thought, which is a good thing and we did that because the partner’s responsiveness to wanting to be part of the Demandware ecosystem, you know, I think maybe part of that had to do with the IPO or just the general traction we have in the market but compared to 12 to 18 months ago, you know, we’re a little more arm twisting in our part to get a partner to commit resources to Demandware. Now we’re more having to be a little more selective about who we train and who we get certified. So yes, so we probably got there a bit faster than we anticipated, but that’s consistent with our long-term goals so we’re happy about that.

Craig Nankervis - First Analysis Corp.

And lastly, Scott, to me, if I calculated it correctly, CapEx was, I don’t know, notably lighter than I would have expected. I might have miscalculated, but if I’m correct, can you just shed a little light on the CapEx in the quarter?

Scott Dussault – EVP, CFO

Yes, I mean effectively, the CapEx number that we've got through Q3 is what we're going to have for the holiday season. So hopefully, we'll see – we talked about CapEx being somewhere between 5% and 10% of revenue in a given year. And I think that will likely be the case maybe on the low end this year.

We got some efficiencies out of what we put out on the grid last year. I think last year was on a little bit higher end of that 5% to 10%. This year, it should be a little bit lower. I think with more as well with the scalability infrastructure, we continue to do well there.

But we don’t need to make any more CapEx purchases for the holiday season.

Craig Nankervis – First Analysis Corp.

Thank you.

Operator

(Operator Instructions).

Your next question comes from the line of Shawn Milne with Janney Capital Markets. Please proceed.

Shawn Milne – Janney Capital Markets

Thanks, good morning. Just a couple of questions. Scott, I wondered if you could just go back to your expense commentary around the fourth quarter. And guiding to a profit in the fourth quarter, axe Neckermann, just walk through how you're sort of covering some of those fixed costs that you had in the system for Neckermann. And maybe a little bit more color around the full Neckermann impact on profitability next year. And one quick follow-up. Thanks.

Scott Dussault – EVP, CFO

Sure, so Shawn, I think there's really not a long of hangover from Neckermann. I mean at the end of the day as I mentioned on the call, because we exceeded our expectations of revenue in Q3, subscription revenue in Q3 from our existing customers outside of Neckermann, we don’t think we'll have any impact on gross margin. The infrastructure that’s there can be re-deployed and used in our grid. And we're going to do that with the existing customers we have. So I don't think that there is – from a guidance perspective on Q4, effectively, the only piece of Neckermann that's really in there is the $1.1 million of services revenue that we're going to accelerate and recognize, which effectively has no corresponding cost of sales in the fourth quarter.

So leverage really in the fourth quarter comes from the 23% or so sequential increase in revenue we're looking at for Q4. That's a result of the holiday season, the uptick in the holiday season. So that revenue, as customers do well in the platform and continue to grow the infrastructure that's on the floors, it's fixed. I mean the costs are there. They're there in Q3. They're going to be there in Q4. We won't as revenue grows incur any incremental costs on that. And that's where a lot of that leverage comes from in the fourth quarter.

For next year, I think again, we're haven't completed our plans in order to provide formal financial guidance for 2013. But again from a carryover perspective, we're not a body shop, so there weren't people individually that were just dedicated to Neckermann that we have find something for them to do. And the infrastructure can be redeployed. We'll do that. We've got infrastructure there that will utilize for the customer base that's launching for the busy time next year. And we'll continue to do that. So we don’t see it really being all that impactful.

Shawn Milne – Janney Capital Markets

Great, and just a quick – I don’t know if you can say this or not, but the one slippage was the large customer in North America. Is there contracts still ongoing or is this something that's moved away?

Tom Ebling – President, CEO

I don’t think we want to get into discussing specific situations. We're feeling we've got a lot of contractual activity going in through Q4. Some of them are with larger customers. A good chunk of it with larger customers, so we're happy about the level of activity.

Shawn Milne – Janney Capital Markets

And lastly, I mean you know you could take [inaudible] of what you're saying in terms of maybe a little bit lower CapEx, a little bit lower sales, hiring, and then kind of maybe relate that to fiscal '13 subscription growth comments. One potential conclusion would be a little bit slower growth, but I really don’t believe that's what you're trying to say given the fact that you continue to see at least from – again, I'm coming more from the e-commerce landscape, just tremendous activity from retailers and brands that spend in this space. So would that be a correct conclusion that these are more timing issues than a longer term sort of slowdown comment?

Scott Dussault – EVP, CFO

Yes, and Shawn, again that's one of the reasons why we wanted to provide some – Q4 is a huge quarter for us as everybody knows. We see significant of annual revenue coming in the fourth quarter. And ordinarily, we wouldn’t have guided or provided any outlook on 2013 before the quarter ended. But we knew specifically because of the Neckermann noise and because we're in a business where we don’t focus on quarterly results from an acquisition perspective, we wanted to provide some color on that. So the guidance on '13, we said 35% growth in 2013 for subscription revenue. And again, if you carve Neckermann or if you put Neckermann in as a flat number, the impact of Neckermann's loss that we're actually guiding to 41% on top of 38%. So I think that is what it is. And that includes these sales activities that we saw in the third quarter. So we wanted to make sure that was clear.

Shawn Milne – Janney Capital Markets

Great, thank you very much.

Operator

Your next question comes from the line of Brian Schwartz with Oppenheimer. Please proceed.

Brian Schwartz – Oppenheimer & Co.

Hi, thank you for taking my questions this morning. Just two quick ones, first Scott, you referenced the sales hirings up I believe 60% year today. You even mentioned in the press release that you've expanded your global sales team. Just wondered if you could talk about where the majority of those new hires are going. And then your expectations over the next 6 to 12 months on where you'll be at in sales capacity.

Scott Dussault – EVP, CFO

The hires, the 60% number was an increase over last year. And it was not all sales. Primarily, it's in the places that we've talked about. We continue to expand North America because we've done really well there and have had expansion as a result more and more account folks are seeing.

But also expansion in Europe. We talked about how we're expanding deeper into the U.K., deeper into France, deeper into Germany, deeper into the [inaudible] region. And these are regions that we only started to really start to service in the second half of last year.

So that's where most of the expansion has come from. I imagine again, we haven't gotten into the full 2013 plan and discussion yet. We'll do that next quarter. But most of those regions we think are still very fertile. And I think that's likely where most of the hiring will continue to come. And I think Asia Pac, we'll probably see a little bit more next year as well.

Brian Schwartz – Oppenheimer & Co.

Great, thank you for the color on that. And then, one for Tom here, just if possible especially since we've been talking a lot about the sales process here this morning. Can you give us any visibility or insight into the pipeline here on the compensation? I think you described it as very active earlier in the call. But when you do look at your pipeline in terms of the size of the prospects in it now compared say 6 or 12 months ago, are you starting to see larger and larger companies going up in that funnel or essentially the same size compared to recent past? Thanks.

Tom Ebling – President, CEO

Yes, I do think we are seeing – we're happy with the level of the pipeline. And it is increasing in terms – it's increasing particularly in alignment with the number of sales reps that are fully ramped up and fully affected once they get through their initial period. And we are seeing current – the second aspect of your question, we are seeing more large prospects. I mean we're also just at the beginning phases of making a very conscious effort to drive more large prospects. But we are sort of seeing that natural trend anyway with more large prospects engaging with us.

Brian Schwartz – Oppenheimer & Co.

Thank you for taking my questions.

Operator

You have a follow-up question from the Laura Lederman. Please proceed.

Laura Lederman - William Blair

Yes, thank you for taking my follow-up question. When you talk about the 35% license growth for next year, you mentioned a few times that that includes the deals or customers closed in Q3. Does it also include from the assumption of customers closed in Q4 and during the year next year? Or is that 35% just existing customers and what you think they're going to do?

Scott Dussault – EVP, CFO

It includes an assumption that we'll continue to close deals in Q4. But I think as you know as we get further and further into the year, the impact that deals that close in Q4 and into Q3 don’t have as much impact on next year. Customers take a six month implementation cycle, so there is a ramp up time. And then there's a period of time where customers go from base to overage. So we talked about in the past how these if I were to look out on January 1st of any given year and provided our outlook for revenue, it would include 90% to 95% of that outlook would come from existing customers. Contracts are already signed. So it does include Q4. But again in 2013, the customers that are driving most of that growth that we acquired in 2012 are in the first half of the year.

Laura Lederman - William Blair

Does that assume a very strong addition of new customers in Q4 or a little bit conservative or conservative given what you saw in Q3?

Scott Dussault – EVP, CFO

I like to think we're always relatively conservative, Laura.

Laura Lederman - William Blair

Okay, thank you so much for taking my follow-up question.

Operator

I will now like to turn the call over to Tom Ebling, CEO for closing remarks.

Tom Ebling – President, CEO

Thank you very much for your interest in Demandware. We look forward to seeing you at upcoming conferences and investor meetings.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may not disconnect. Have a great day.

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