DemandTec, Inc. F2Q09 (Qtr End 08/31/08) Earnings Call Transcript

Oct. 2.08 | About: DemandTec, Inc. (DMAN)

DemandTec, Inc. (NASDAQ:DMAN)

F2Q09 Earnings Call

October 2, 2008 5:00 pm ET

Executives

Tim Shanahan - Senior Director of Investor Relations

Daniel R. Fishback - President and Chief Executive Officer

Mark Culhane - Chief Financial Officer

Analysts

Keith Weiss - Morgan Stanley

Tom Ernst - Deutsche Bank

Laura Lederman - William Blair

Bryan McGrath - Credit Suisse

Ariel Sokol - Wedbush Morgan

Nabil Elsheshai - Pacific Crest Securities

Pat Walravens - JMP Securities

Operator

Welcome to DemandTec’s second quarter and fiscal year 2009 earnings conference call. (Operator Instructions) At this time for opening remarks and introductions I would like to turn the call over to Tim Shanahan.

Tim Shanahan

This call can also be accessed in the Investor Relations section of our website at www.demandtec.com. With me today on the call are Dan Fishback, DemandTec’s President and Chief Executive Officer, and Mark Culhane, DemandTec’s Chief Financial Officer.

After the market closed today DemandTec issued a press release with results for its second quarter of fiscal 2009. A copy of this press release is available on our website. Please note that during this conference call we will be discussing non-GAAP results which excludes stock-based compensation and amortization of intangible assets. We refer you to our press release of today for a reconciliation of these non-GAAP amounts to their comparable GAAP amounts.

During the course of this conference call, DemandTec’s management may make forward-looking statements regarding financial projects, plans and objections for future operations and management’s beliefs about potential market size and growth as well as the company’s future performance, financial condition or results of operations. These forward-looking statements are not historical facts but rather reflect DemandTec’s current expectations and beliefs based on currently available information. We undertake no obligation to provide updates in the future. DemandTec’s actual results may differ materially from those projected. The risk factors section of our Form 10-Q on file with the SEC discloses risks that could cause these differences. Please note that any future product, feature, or specifications referenced in today’s call are informational only and are not commitments to deliver any technology or enhancement. DemandTec reserves the right to modify its future product plans at any time.

In terms of the structure of today’s call, Dan Fishback will begin with a brief summary of our financial results and an update of our achievements in the second quarter. Mark Culhane will then provide more details on our financial results, after which we will take your questions.

With that, I would like to turn the call over to DemandTec’s President and CEO, Dan Fishback.

Daniel R. Fishback

As you can see, in our press release issued earlier in the day, our results for the second quarter of fiscal 2009 shows evidence of our continued success in executing against our three-point growth strategy, as both revenues and non-GAAP profitability came in above targets we shared with you last quarter.

Revenue for the second quarter was $18.6 million, representing a 27% growth on a year-over-year basis. We had a non-GAAP net income of $1.2 million, or $0.04 a share, $0.01 better than our guidance. And we had another strong quarter of cash flow performance with $3.3 million of cash flow from operations.

From a high-level perspective, on recent calls we have discussed the macro economic environment and related challenges that retailers and CP companies are facing, including rising costs and a cautious consumer. The economic environment remains challenging in many markets around the globe. However, on the margin we have not seen any noticeable change in sales cycles or the level of scrutiny required getting customer agreements signed and closed.

Our expectation has been, for much of 2008 and continues to be so, that it will take longer to get deals closed in today’s economic environment. That said, our competitive win rates, our renewal rates and interest in our solutions from our customers and prospects remains high. So we remain cautiously optimistic with respect to the reception we are experiencing to our marketing message, which focuses on how retailers and CP companies can utilize consumer-demand management solutions to both survive and thrive in a difficult economic environment.

Please keep in mind that nearly 80% of our retail customers are fast-moving consumer goods, or FMCG retailers, of products described as everyday consumables. We do not sell to soft [audio break up] or apparel retailers or their trading partners. This economic environment can be an opportunity for FMCG retailers to better understand their customers and to gain a competitive advantage in the markets they serve.

In past periods of economic slowdowns many FMCG retailers and their CP companies have benefited from discretionary consumer spending shifting to FMCG products. We believe gaining a better understanding of consumer behavior and demand, particularly around localized assortment and price, is one of the main priorities and a key opportunity for our retail customers and prospects.

CP companies that supply the FMCG retailers also look to better price and promote their products as they are spending an increasing amount of time and effort to ensure the effectiveness of their trade promotion dollars, as defined as dollars paid to the retailer by the CP company to promote their products in the retailer’s store. For the average CP company, trade promotion dollars paid to the FMCG retailer can routinely exceed 15% of the CP company’s revenue.

Next I would like to provide an update regarding our three-point growth strategy. The first component to our growth strategy is to continue to extend our industry leadership position with the world’s leading retailers. For example, during the second quarter CNS Wholesale Grocers, the nation’s second largest supermarket wholesaler with annual revenues of approximately $20.0 billion, entered into an agreement to subscribe to DemandTec’s Deal Management service in order to help automate its vendor deal management process, enhance its relationship with supplier, and improve service levels to the retailers it supplies.

CNS previously used an internal developed application to collaborate with suppliers on trade deals, a system that required significant resources to operate and maintain, as well as provide little benefit and scale to their trading partners. Now using DemandTec’s Deal Management software, CNS will be able to provide vendor compliance on trade deals and reduce the administrative costs of processing supplier deal sheets.

DemandTec retail customers include 79 unique banners of some of the largest and most respected companies in the world, with over some 40,000 unique stores world-wide.

The second part of our growth strategy is to deliver measureable business results to our current customers in order to drive renewals as well as the adoption of our full suite of other solutions. During the second quarter we had successful renewals with many of our customers, including such as Giant Eagle, with over $6.0 billion annual revenues and operates approximately 160 stores in Western Pennsylvania, Ohio, and North Central West Virginia. Giant Eagle renewed their everyday Price Management relationship and expanded their relationship with us by adding our Deal Management software product.

Giant Eagle is a terrific example of a customer that initially subscribed to our flagship everyday price optimization service and then at renewal added additional software services to their DemandTec platform.

During the second quarter we expanded our relationships with Best Buy and Walmart, as well, and others as they came to additional add-on products such as Deal Management and/or analytical services such as merchandising decomposition analysis.

And finally, the third part of our growth strategy, to leverage our success with retailers to provide our software services to CP companies. We continue to see strong renewals in our CP customer base with customers such as Proctor & Gamble, General Mills, and food brokers such as Acosta, Advantage, and Cross Mark, renewing their relationships with us for advanced deal management and/or trade planning optimization software services.

The combination of these services connected via the DemandTec TradePoint Network, or DTN, enables a unique opportunity for our retail and CP customers to collaborate on win-win plans and greatly enhance the end-to-end promotion management process from both a financial effectiveness and process efficiency standpoint. Nearly 1.75 million trade promotion deals have been collaborated and negotiated on the DTN since its inception, and currently driven by a community of more than 6,500 end users.

DemandTec is trusted by the leading retailers and CP companies for mission-critical trade spend collaboration. In turn, we are committed to seeing the DTN continue to grow with each new retailer, additional CP company that is invited by retailers to participate, and with additional network services for collaboration and trade spend optimization to both trading partners.

We continue to see a network effect that is driven by measureable benefits to both retailers and CP companies alike. In order to continue our success in delivering on our growth strategy, I am pleased to announce that Michael Bromme has been promoted to Senior Vice President of Worldwide Retail Sales. Michael has been instrumental in building DemandTec’s current customer base of North and South American retail customers. He now also assumes responsibility for retail sales in Asia Pacific and EMEA markets.

Michael joined DemandTec in December 2004 and is a proven DemandTec sales leader with a proven track record of success, not just at DemandTec but throughout his career. He previously held retail technology sales executive positions with Retek, now Oracle retail, Micro Strategy, and Tandem, now a part of HP. Michael has built a world-class sales team in his previous role as VP of Sales for the Americas during the last four years and demonstrated the experience, dedication, and professionalism to lead our world-wide retail team.

In summary, in the face of challenging macro economic environment our second quarter financial results were better than our guidance as a result of continued execution on our three-point growth strategy, as well as the continued interest, by retailers and CP companies alike, to understand their customers as they balance consumer uncertainty and increasing wholesale prices. We continue to believe that life-cycle pricing is one of the key levers for their success.

DemandTec is the clear market leader in the consumer demand management market and we are highly differentiated by our comprehensive suite of advanced analytics, talented employees that bring proven domain experience and optimization services to integrate pricing promotion, mark down, assortment, space planning, and loyalty marketing via a software as a service network platform.

With that, let me turn it over to Mark to go through the second quarter financial results.

Mark Culhane

I will provide more details on our second quarter operating results followed by financial guidance for the third quarter and our full-year fiscal 2009 before opening the call for questions.

Let me begin with our second quarter revenues. Total revenue for the second quarter was $18.6 million, better than our guidance of $18.3 million to $18.5 million, and an increase of 27% over the comparable period last year, and 3% sequentially over our first quarter of fiscal 2009. The majority of our revenue is generated from our retail customers where agreements generally are multi-year and multi-million dollar contracts. An increasing percentage of our business is related to CP companies where agreements are typically one year and range from tens of thousands to multi-million dollar contracts.

During the second quarter we generated 85% of revenues from our retail customers and 15% of our revenues from our CP customers. This compares to 93% and 7% respectively for the comparable quarter last year.

We generated $16.0 million, or 86% of total revenue, in the quarter from the United States compared to $13.0 million, or 89% of total revenue, for the same period last year.

Revenue from international operations was $2.6 million, or 14% of our total revenue, compared to $1.7 million, or 11% of total revenue, for the same period last year.

Turning to cost and profitability for our second quarter, we will be discussing our results on both a GAAP and non-GAAP basis. Please be sure to look at our press release for a reconciliation of non-GAAP to GAAP amounts.

I will begin with a summary of our non-GAAP results, which exclude non-cash expenses associated with stock-based compensation and amortization of intangible assets. Non-GAAP gross profit, excluding $153,000 of amortization of intangibles, and $465,000 of stock-based compensation, was $13.4 million in the second quarter, representing a year-over-year increase of 34%. Non-GAAP gross margin was 71.9% compared to 68.2% for the same period last year and an increase of 20 basis points over last quarter’s 71.7%.

We expect non-GAAP gross margin to stabilize in this range for the remainder of this fiscal year.

Turning to non-GAAP operating expenses for the second quarter, non-GAAP R&D expense, excluding $580,000 of stock-based compensation, was $6.0 million, a 23% increase year-over-year and represented 32% of total revenues. Over the long term we expect our R&D expense to decline as a percentage of revenue, even as it grows in absolute dollars, as we continue to invest in both science and software development to extend our value proposition.

Non-GAAP sales and marketing expense, excluding $771,000 of stock-based compensation, was $4.5 million during the second quarter, a 19% increase year-over-year and represented 24% of total revenues. Non-GAAP G&A expense, excluding $430,000 of stock-based compensation, was $2.1 million, a 76% increase year-over-year, primarily related to the first year cost associated becoming a public company, particularly Sarbannes-Oxley compliance costs. G&A expense represented 11% of total revenues.

Our non-GAAP operating income in the second quarter came in above our guidance at $839,000 compared to $204,000 in the year-ago quarter, primarily as a result of being behind our plan on head count in the quarter, which however has recently caught up to plan. Non-GAAP operating income excludes $2.2 million of stock-based compensation expense and $484,000 of amortization of purchased intangibles.

Total other income was $335,000 during the second quarter as compared to other expense of $339,000 in the year-ago quarter and $585,000 in other income last quarter. The quarter-over-quarter decrease was primarily due to lower interest rates and the conservative investment policy, which has served us well given the events in the capital markets these past few weeks. We do not hold any significant investments in financial institutions or troubled financial agencies.

Going forward we believe it is prudent to continue to be conservative with our investments and we currently expect a 2% rate of return on our invested cash and investment portfolio.

Non-GAAP net income was $1.2 million, or non-GAAP earnings per share of $0.04, based on 31.9 million fully diluted weighted average shares outstanding compared to a non-GAAP loss per share of $0.02 in the year-ago quarter.

Looking at our results for the second quarter on a GAAP basis, including stock-based compensation expense and amortization of intangibles, our GAAP gross profit was $12.8 million, our operating loss was $1.9 million, our net loss was $1.6 million, and our GAAP loss per share was $0.06 based on 27.2 million weighted average shares outstanding. This compares to a GAAP loss per share of $0.10 in the year-ago quarter.

Turning to our balance sheet, we had $83.5 million in cash and marketable securities at the end of the second quarter of fiscal 2009, an increase of $3.1 million when compared to $80.4 million at the end of the previous quarter, primarily as a result of cash flow from operations.

Our accounts receivables balance at the end of the second quarter was $12.2 million, representing an adjusted DSO of 65 days taking into consideration the change in deferred revenue given our subscription-based business model. This compares to 80 days at the end of the first quarter.

We entered the second quarter with short-term deferred revenue of $45.2 million, a 35% year-over-year increase and a 3% increase over the previous quarter. As expected, and mentioned in prior calls, our long-term deferred revenues decreased, coming in at $4.9 million, about $2.7 million less than the previous quarter.

As a reminder, our multi-year, multi-million dollar retail customers are billed on an annual basis. In the past, we would bill certain of our retail customers for the entire multi-year contract value upon signing, resulting in long-term deferred revenues. Going forward, as we continue to bill our retail customers on an annual basis, long-term deferred revenues will continue to decrease to zero.

Finally, looking at our cash flow, for the second quarter of fiscal 2009 we generated $3.3 million in positive cash flow from operations and used $401,000 on capital expenditures, resulting in $2.9 million of free cash flow for the quarter, compared to the year-ago period where we generated $2.5 million in cash from operations and used $859,000 on capital expenditures, resulting in $1.6 million of free cash flow.

For the first six months of fiscal 2009 DemandTec has generated $7.7 million in cash from operations and used $1.5 million on capital expenditures, resulting in $6.2 million in free cash flow, or 16.8% on a percentage of revenue basis. This compares to the 6 month year-ago period where we generated $5.7 million in cash from operations and used $2.3 million on capital expenditures, resulting in $3.4 million of free cash flow, or 12.1% on a percentage of revenue basis.

Before turning the call over to questions, I will finish by providing guidance for the third quarter and review our fiscal year 2009 guidance. The operating income and earnings per share guidance I am going to give are non-GAAP and exclude stock-based compensation expense and amortization of intangibles.

From a high-level perspective, we continue to expect a challenging macro economic environment and no improvement in sales cycles or approval levels required to sign and close transactions. Recent events in the financial sector have increased uncertainty in the overall macro environment and as a result we continue to believe it is prudent to take a cautious outlook to our business.

With that as our operating assumptions, we expect our third quarter revenue to be in the range of $18.7 million to $18.8 million, our non-GAAP operating income to be in a range of $600,000 to $750,000, and our non-GAAP net earnings per share to be $0.03, based on fully diluted weighted average shares outstanding of approximately 33.6 million.

For fiscal 2009 we reaffirm our prior revenue guidance, which we expect to be in the range of $74.5 million to $75.5 million. We are raising our non-GAAP operating income range to $2.6 million to $2.9 million, which raises the mid-point of our range by $150,000.

As previously mentioned, we are now forecasting approximately a 2% rate of return on our invested cash and investment balances and we continue to forecast minimal tax expense. As a result, we expect our non-GAAP net earnings per share to be in a range of $0.12 to $0.13. This assumes fully diluted weighted average shares outstanding for the year of approximately 32.8 million. To be clear, the $0.01 net difference between our updated fiscal 2009 non-GAAP EPS guidance compared to last quarter is due to lower interest income expectations, which more than offset the increase in our non-GAAP operating income guidance.

On a free cash flow basis, we are raising our annual free cash flow margin target to approximately $10.0 million, or 13% of revenue, from the previous target of $9.0 million, or 12% of revenue.

While we focus our guidance on non-GAAP metrics because we believe that it is the most helpful to investors in evaluating our financial performance, and it is how we measure ourselves internally, I would like to provide some perspective on the two expenses we currently exclude from our non-GAAP results for those analysts modeling our business on both a GAAP and non-GAAP basis.

First, we expect total amortization of intangible expense in each of the remaining quarters in fiscal 2009 to approximate $480,000 with $150,000 in cost of revenue and $330,000 in operating expense as a result of our acquisition of rights related to the Cannondale’s Rich Mix Assortment technologies.

Second, we currently expect our stock-based compensation expense to run at approximately $2.5 million in each of the remaining quarters this fiscal year.

In summary, our second quarter results were strong and we remain focused on delivering solid revenue growth and strong cash flows during fiscal 2009, while expanding our market leadership to drive enhanced growth and margin expansion when the economic environment improves.

We believe continued execution on our three-point growth strategy will enable us to achieve these goals and ultimately deliver significant value to our shareholders. With that, we will now open the call up for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Keith Weiss – Morgan Stanley.

Keith Weiss - Morgan Stanley

How are you guys doing against your annual target, which I believe was 10 to 12 new retail customers, on the optimization side of the business?

Mark Culhane

Our target for the full year is 8 to 12. We are tracking towards that. We are very comfortable that we will achieve that goal this fiscal year.

Keith Weiss - Morgan Stanley

On the southern marketing side, that was down quarter-over-quarter if you look at it on a non-GAAP basis. Is that where you were behind on your head count? And can you give us an update of where you are as far as quota-carrying sales reps? And have those plans coming for the rest of the year.

Mark Culhane

First on the first part of the question on the sales and marketing. I think it’s largely Q1 was a little bit probably larger than normal just given the departure of John Crouch, our head of sales, so all of those costs were accrued in our first quarter.

Second, on a head count basis we’ve got about 17 folks, pretty consistent with where we thought we would be. And then from a head count perspective being behind plan, largely I would say in the development area, and somewhat in professional services, which has largely been caught back up.

Keith Weiss - Morgan Stanley

Oracle recently announced the acquisition of Advance Visual Technology, which I believe was in the space planning. Did that increase their competitiveness with you and maybe you could just segue into how the competitive environment is looking out there.

Daniel R. Fishback

Certainly we looked at AVT and there’s other companies out there in that space as well, generally described as what they call [math] assortment, how do I lay out my store and visually look at that. No applied math of any real merit in there. We, candidly, don’t see that as an important part of our portfolio and subsequently passed. I mean, we see no definitive change in the competitive landscape today. I mean, I continue to be surprised by the lack of execution that both Oracle and SAT have in our space and their ability to do applied applications. And I think certainly the AVT thing, candidly, is just graphical. Think of it as kind of CAD/CAM software for the visual layout of the store.

Our customers are more concerned around what I would say I put in the specific store that meet the localized needs of those consumers, given the current economic environment.

Operator

Your next question comes from Tom Ernst – Deutsche Bank.

Tom Ernst - Deutsche Bank

You had several renewals this quarter versus just three last quarter. What did you find was the net effect on pricing? Is there any incremental pressure versus last year?

Daniel R. Fishback

No, not at all. We continue to see consistent metrics on an annualized basis for our average sales price, for both retail and CPG today.

Tom Ernst - Deutsche Bank

One thing stands out to me. You said you were behind on head count at the close of the quarter but it has since caught up. That means you accelerated hiring here in September, which I guess would surprise people. And I think we look at all of your comments taken in total. It sounds like pipeline development has been normal, customer behavior has been normal, you had the confidence to go out and hire some more. Is there anything we’re missing? To me it sounds like the business has steadily improved since you started out the year with a little bit of a reset on your outlook.

Daniel R. Fishback

Yes, candidly I would paraphrase my perspective, it’s more of the same. You know, we’ve been very consistent, in my opinion, on our message into the Street on our expectations for our products in the markets that we serve and I guess if I looked at it, you know, we’re pretty bullish. We think we understand the markets we serve and the right message.

We’re making significant investments not only in head count, but specifically, we’re going to still commit the 34% of revenue on R&D, and making infrastructure decisions, significant investments, everything from micro strategy to IBM’s data storage product to the investment in Cannondale’s Rich Mix, as well as investment in our people and process around some agile developments.

So certainly Mark and I and the rest of the leadership team are cognizant of what’s going on in the market today but we think pricing, given this environment, and for particularly the fast-moving consumer goods segment of retail, is priority number one today.

Tom Ernst - Deutsche Bank

If we’re wrong and new demand dries up, I know you don’t break this out, but maybe you can give us a sense, just because of the uncertain environment today, how much of the subscription and services business is non-recurring services revenue? Even if just roughly, for a sense.

Mark Culhane

Generally we don’t break that number that out. What we have said in the past is generally on a typical type of transaction, the services component that is largely field-related could be as high as 20% of an overall contract value. But that generally we find that throughout that first two to three year term, particularly on our retail customer side, we’re selling them more analytical services along the way that generally are recurring like our merchandising decomposition analysis or other type of story elasticity analyses and those types of things.

Daniel R. Fishback

I would just add that a little bit a higher level, if you look at our customer base today, approximately 80%+ of it is fast-moving consumer goods. And not all these companies are our customers, but they were in the newspaper this morning. Companies like Rite-Aid or CVS or Walgreens or Walmart, all showed same-store sales increases in the month of September. So we believe that’s a telling sign.

Particularly in light of an environment where the best car manufacturer sales in September were minus 16%, General Motors. So there are clear segments of opportunities. I certainly am pleased as the CEO of a company today that we sell into fast-moving goods, not apparel, fashion and markets like that.

Operator

Your next question comes from Laura Lederman – William Blair.

Laura Lederman - William Blair

Your quarter ended in August and the month of September, especially the last day, was strange with the market down as much as it was and so I was wondering in the conversations you’ve had with your customers or prospects over the last week or so or even longer, have they let the gyrations in the market maybe impact how they might spend going forward? So I realize the current quarter was good, but just a sense of how they feel and any shocks to the system in terms of any of the customers you have talked to and their thoughts going forward.

Daniel R. Fishback

Yes, I mean from my perspective, again, more is the same, even in the month of September. I just concluded, last Friday, an around the world trip where I visited with our employees in DemandTec offices around the globe, our customers, our prospects, and certainly our partners. And one take-away I get of something that has changed in kind of over the last 15 to 18 months it seems like the international markets have been a bit immune to some of the issues we are addressing here in the States, and that’s consistent I think across a lot of technology businesses.

Interestingly enough, as I traveled around the globe and visited with those constituents, I did take away that they are dealing with many of the same issues that we are here in the States. Increasing wholesale prices, inflation, that are really hard to manage, and a consumer in their unique markets that is more and more conservative or cautious.

So given that we have got experience on how to package our offering and articulate that to the market, I feel really good, generally, about the constituencies of partners and customers and prospects that I personally have visited with in the entire month of September.

That being said, I do think that on the low end of the market, the access to capital to fund inventories are going to affect the weaker companies. And we have a great customer list. If you look at our customers, they are the premier banners, the biggest and the most well-respected retailers and manufacturers around the globe and I don’t believe that they are impacted by the macro economic environment today. Or at least they are not articulating that to me in any case.

Laura Lederman - William Blair

Obviously the renewals are doing quite well, the existing customers truly understand the value that you can bring to their business in terms of driving sales. When you talk to prospects that are currently not customers, does that business feel like there is any risk there, or are they sort of on board with understanding what this can do for them? I guess I’m trying to break the business into two pieces, renewals and new customers.

Daniel R. Fishback

Again, I would say it’s more of the same, consistent with the way we’ve looked at the market, really kind of since March/April time frame, is that those new customers that don’t know DemandTec, in many cases it’s taken a little bit longer to get deals done. And that’s consistent with the messaging we’ve given to the Street for the last six to nine months.

We are getting those deals done, but in many cases what took three signatures to get a million dollar new customer relationship, is taking more lawyering hours and seven signatures. And that just takes time. So I would say that’s just consistent with what we’ve seen.

My optimism at this point is that we understand the market we serve, we have a leadership position and this is front-of-mind, candidly, for the retail industry today, given, again, how do you arbitrage price increases across a customer base in such a way that you move your franchise ahead. We provide the unique answer to do that.

But it is consistent with the messaging that we’ve been giving all year, is that deals do take longer.

Laura Lederman - William Blair

Up to new 8 to 12 deals you expect to do this year, what percentage of them is there a competitor and who is that competitor more often than not?

Daniel R. Fishback

Oh, it’s a litany of competitors. Specifically Oracle and the saps will be there. We enjoy competing against them because they clearly don’t have the domain expertise or the product or the reputation in this base that we have.

On occasion there is a one-off consulting or build-it-yourself kind of project to summarize the issue. I still find the most significant competitor is the lack of willingness sometimes for a decision maker to make a decision, but I see no change in our competitors, this week, if you will.

Laura Lederman - William Blair

But in each of those 8 to 12 customers that you think you will get this year, there is a competitor bidding for the business?

Daniel R. Fishback

I would say maybe two-thirds of them. Keep in mind, retailers first and foremost, are really good buyers. So they can create a competitor and they’re good at doing that. So whether or not that’s a real option or not, many cases we have got to gauge that in the sales cycle.

Operator

Your next question comes from Bryan McGrath - Credit Suisse.

Bryan McGrath - Credit Suisse

Dan, let’s talk about Long’s Drugs. I know Long’s is one of your customers, I think they’ve recently renewed, or you recently renewed your contract with them. And I don’t think I remember seeing CVS or Walgreens on your customer list, but I’m not sure about that. But could you give us an eye level on what this acquisition means for you guys and whether it’s an opportunity?

Daniel R. Fishback

It would be a great opportunity. Both CVS and Walgreens are not customers today and those are two of the best retailers, certainly in North America if not the world. So any opportunity to leverage our success at Long’s into that environment would be great. And we’re working on that and have ongoing conversations with both of those entities.

And I think that’s a great segment of retail to be in today. Again, as I mentioned earlier, those companies are doing well in light of everything going on and we have efforts underway to hopefully get them as customers and make an announcement some day in the future.

Bryan McGrath - Credit Suisse

There’s nothing in the contract that would allow them to, whoever the acquirer is, to cancel on the event of an acquisition, right?

Daniel R. Fishback

Correct.

Bryan McGrath - Credit Suisse

Okay, Mark, I know you haven’t guidance and talked much about 2010 but I want to ask a quick question about it anyway. As you kind of look at your internal budget for revenue and whatever that may be, I assume you have a high probability range in where it’s going to fall. Can you maybe just give us an idea of where your priorities are at if that number should fall towards the low end of your range? Would it be to maintain margins at a level consistent with 2009, or do you think you would continue to invest heavily into the business and would you allow margins to go down?

Mark Culhane

Yes. First of all, we haven’t commented on our fiscal 2010 guidance and we won’t do so until our fourth quarter call, when we put that out there. We’ve been consistent saying, from a revenue perspective, in this type of an economic environment, it’s 20% to 25% type of revenue growth and I think we’ve been consistent with that for the past six to nine months saying that that’s probably what we would see. Obviously we will see how the rest of the economy develops and transpires.

We have also been consistently, I think, on record saying that we will continue to try to show operating margin expansion into our business as we continue to grow. Obviously we are investing this year because we feel we have the ability to further differentiate us from the rest of the competition out there and obviously we want to be opportunistic, around opportunities that might arise in that next fiscal year. But I think we’re committed to continuing to drive scalability into our business and continue to expand that operating margin versus let it decline or keep it flat.

Operator

Your next question comes from Ariel Sokol- Wedbush Morgan.

Ariel Sokol - Wedbush Morgan

I was hoping you could speak a bit about upcoming contract renewals. How many would you say you have coming up over the next year, if you could quantify that?

Mark Culhane

Every quarter there are renewals. I think we have said throughout the rest of this fiscal year and probably through early to mid next year we have no significant customer renewals, from a percentage of revenue basis. But we have renewals every quarter on both the retail side of our business and the CP side of our business. And we continue to enjoy strong renewal success in the mid-90s in each of those areas.

Ariel Sokol - Wedbush Morgan

And if you could just speak to the pipeline as it relates to the assortment optimization product, how are your existing customers thinking about the product?

Daniel R. Fishback

We continue to be optimistic about the pipeline and the opportunity around assortment, so nothing has changed since our last earnings call when we made that announcement. If anything, it was certainly worth making the investment to try to get it to market sooner, given the reception of the product. So I think that I’m all thumbs up, given what we’ve seen so far.

Operator

Your next question comes from Nabil Elsheshai - Pacific Crest Securities.

Nabil Elsheshai - Pacific Crest Securities

Just a follow-up on the assortment, I think previously you said a release kind of end of this year, potential [inaudible] next year. Is that still correct, is that still your thinking?

Daniel R. Fishback

Yes, we feel like we can generate revenue in sales and potential into the back end of this year. The release schedule is going to be in phases, as you are aware, we’re software as a service and we do an agile program release where we do a release kind of four to six a year. So I would anticipate that sometime in that first half of next fiscal year, the lion’s share of that technology begins to moved into our platform and we’ll figure it out as we go. But I see it being a significant contributor in our FY2010 plan.

Nabil Elsheshai - Pacific Crest Securities

And do you have beta customers lined up, or alpha?

Daniel R. Fishback

We have a group and we’re not in a position where we can make those announcements today, but I would imagine we will in this fiscal year.

Nabil Elsheshai - Pacific Crest Securities

And then on the competitive front, I know that SaaS has been making significant investments in price optimization as a whole and in various spaces. I was wondering if you had come across them competitively and if you have any thoughts on them as a competitor.

Daniel R. Fishback

Well, if they’re making investments, we’re not seeing it in retail. They claim one retail customer that I’m aware of and we have, I would venture to say that I have not been involved or reviewed a sales cycle where SaaS has been a competitor, in 24 months.

Operator

Your next question comes from Pat Walravens – JMP Securities.

Pat Walravens - JMP Securities

I liked the General Mills a lot last quarter. What are the prospects for another one like that?

Daniel R. Fishback

They’re good.

Pat Walravens - JMP Securities

Can you talk just a little bit about what they were looking for and what other kinds of companies are in sort of the same position?

Daniel R. Fishback

That’s a good question, Pat. Keep in mind that as retailers adapt and adopt our technology they begin making pricing promotion and markdown and an assortment of decisions based on their unique consumer, or customer, insight based on our product. And their trading partner, the General Mills or the Proctor & Gamble or whatever, is at a disadvantage in negotiating mutual, I guess, favorable terms when they negotiate with that retailer.

So what we see, and this has been our plan for some years, is as we have continued more and more success, 79 banners today with some 40,000 stores, retailers, use our product every single day for pricing, more and more CP companies want to have that insight so they can speak to the retailer about a deal, or a trade promotion deal, in terms that they understand, or the common denomination of demand tech.

So we believe if we can leverage our software as a service in our network, to capitalize on that leverage, we are going to be able to sell more and more analytics to the CP companies and have deals like General Mills in the future, going forward.

Pat Walravens - JMP Securities

Would you be disappointed if we didn’t get one more this fiscal year?

Daniel R. Fishback

Yes, I’m always disappointed if we don’t close a General Mills-like company.

Operator

That concludes our question and answer questions.

Daniel R. Fishback

Thank you again for joining us today. In summary, our results for the first half of the year have been at the high end or above our guidance. I believe we are well positioned to leverage our investments in our one-of-a-kind science-based solutions to deliver solid revenue growth and strong free cash flow for the remainder of fiscal 2009. From a longer perspective, we are confident in our three-point growth strategy, strong competitive position and value proposition. We look forward to updating you on our next quarter’s conference call.

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