LivePerson Inc (LPSN) 2010 Q2 法說會逐字稿

Good evening, my name is Jerry and I will be your conference operator today. At this time I would like to welcome everyone to the LivePerson second quarter review conference call. (Operator Instructions). Thank you. Mr. Tim Bixby, President and Chief Financial Officer, you may begin your conference.

Okay, thanks very much. Before we begin I would like to remind listeners that during the conference call, comments that we make regarding LivePerson that are not historical facts are forward-looking statements and are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The internal projections and beliefs upon which we base our expectations today may change overtime and we undertake no obligation to inform you if they do.

The results that we report today should not be considered as indication of future performance. Changes in economic, business, competitive, technology, regulatory and other factors could cause LivePerson's actual result to differ materially from those expressed or implied by the projections or forward-looking statements made today. For more detailed information about these factors and other risks that may affect our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission. Also please note that on the call today we will discuss some non-GAAP financial measures when talking about the Company's financial performance. We report our GAAP results as well as provide a reconciliation of these non-GAAP measures to GAAP financial measures in our earnings release. You can obtain a copy of our earnings release by visiting the investor relations section of our web site. Now I would like to turn the call over to LivePerson 's Chief Executive Officer, Robert LoCascio.

Thanks Tim. Good afternoon, everyone, and thank you for joining us as we review our second quarter business. We had another solid quarter of line growth as revenue increased 29% year-over-year to $26.4 million. This represents 4% sequential growth over Q1.

We also had near record bookings and record new names within the quarter indicating that there are plenty of untapped opportunities for our core offerings. In fact the recent Forrester study on proactive chat indicated that only 5% of online retailers are using such a service today, but that 21% intend to implement a proactive chat program within a year. In addition, the research firm found that 44% of online consumers say that having questions answered in real-time while in the middle of an online purchase is one of the most important features a website can offer. We think this study is a positive indicator of further market opportunity for our business.

EBITDA per share in the quarter was $0.10, in line with our guidance for the quarter of $0.10 to $0.11 per share. EPS for Q2 was $0.03, also in line with our guidance of $0.02 to $0.03 per share. Tim will provide more detail on this shortly.

Our B to B business performed well this quarter generating $23 million of revenue in Q2 which represents a 29% year-over-year increase. The enterprise group grew 6% sequentially and the mix of customers remains a balance of telecom, banking, retail, high tech, travel and health care providers.

Activity in Europe continues to expand with the majority of business still coming out of the UK. We have also started to invest in resources that will focus on countries where we show opportunity including France and Germany. During the quarter we saw 18 new enterprise customers including Vitamin Shop, Toshiba America Information Systems, and the pipeline looks strong as we head into Q3.

While some of the vendors may include chat as part of a larger E-commerce solution, customers prefer to (inaudible) LivePerson because of our ability to deliver real-time business results. Just this quarter we announced an expansion with Omni Hotels whereby they deployed proactive chat in the Meetings and Events section of their website to help improve the RFP process. Meetings and events comprises 45% of their business. It to date Omni has achieved more than 16,000 conversions from their click-to-chat program with a conversion rate of 18.5% for chatters compared to 4.5% for non chatters. These conversions are leading to increased revenue opportunities for the luxury hotel brand.

Results like the ones achieved by Omni indicate that chat is a critical communication channel for online businesses and that the ability to make real-time connections with customers and prospects delivers positive business results. We also began taking more aggressive steps to expand into the Asia-Pacific region during Q2. We see significant opportunity in the region, particularly within our traditional verticals of telecom (inaudible) so we expect to see continued expansion in the region. Tim will provide more details on our Asia-Pacific expansion shortly.

Our small business group had a solid quarter, achieving 3% sequential growth on a quarter-over-quarter. While much of the growth in this area of the business comes from new accounts, we are seeing opportunities to expand and grow existing accounts. This is due to the fact that we added additional resources to the team in the first half of the year. These resources are now [fully focused] on up selling customers to a more comprehensive multi-channel suite that includes chat, email, voice and knowledge base.

The new midmarket team that's led by Kevin Kohn, who is was head of marketing, now he moved into run that group, had a really good quarter. They grew 6% sequentially quarter-over-quarter. Whereas in Q1 we were ramping the team, in Q2 the team was able to focus on signing up new customers as well as growing existing accounts including Steve Madden and Forex Capital Markets. These results indicate that our investments in this new area of business as well as the product offering are a solid fit for this market segment.

The pipeline looks strong as the team heads into the second half of the year and we have a good balance between both and -- new and existing accounts. The consumer group generated $3.4 million which represents a 19% increase as it compares to the prior year. We saw some more of the normal seasonality in the quarter making Q2 slightly down from Q1, but things are coming be back nicely so far in Q3.

A new billing promotional system rolled out at the end of the quarter which will enable us to deploy more targeted retention efforts to existing customers and to new customers. As mentioned in the previous quarters, we have been hiring in the areas of sales and marketing and R&D to support future growth initiatives. Earlier today we announced the addition of several new members to our Executive Team, each of whom will focus on key innovative initiatives. Expanding our team with these new hires as management members and talent to help us accelerate the launch our product initiatives as well as the deployment of our core values.

We're also pleased with our Company's ability to attract top talent from industry leaders. Steve Douty has joined us from nGenera to our marketing business development initiatives. Steve has nearly 30 years of experience in growing B2B software and internet-based products, and we believe he will help us accelerate the launch of new offerings to the marketplace.

Peter Phillips joins us from WeightWatchers.com where he managed a $200 million P&L as well as the Company's global website in consumer products. Peter has nearly 20 years of experience delivering web-based consumer solutions to the market. He will focus on delivering new analytics-driven products to the market and oversee the day to day operations of the consumer business.

Steven Schloss comes from Time Warner where he served as Vice President of Human Resources. He has more than 25 years of experience in global human resources and talent management. Steve is going to lead our human resources initiative as we develop a culture around our core values.

As we mentioned on the last call we have two core values which is be an owner, and help others. The goal of the core values is to drive innovation, ownership and decision making in the entire organization.

And finally Mark Trang joined us from Salesforce.com where he led global partner programs and AppExchange marketing initiatives. He will serve as our Vice President of Platform Technologies and Ecosystem. During his tenure at Salesforce.com, Mark launched the Force.com (inaudible) platform, AppExchange marketplace, and grew their ecosystem to more than 3,000 partners, 250,000 developers and 1,000 app solutions. Mark will apply his experience to build and grow our platform business an ecosystem. These new additions will join our existing management team to lead a period of innovation for LivePerson, where we intend to drive wider brand awareness, elevate our value proposition, introduce new products and expand our technology footprint through our partner ecosystem.

In addition, we've expanded our Board of Directors with the addition of Peter Block. Peter is a (inaudible) leader in organizational development whose recent best selling book "Community - the Structure of Belonging" inspired much of the core values work we are doing internally at LivePerson. Peter is also a well known management consultant who has worked with companies such as Mars and Harley-Davidson to drive innovation, growth and profitability by transforming their corporate cultures. Peter Block's input and direction on the Board of Directors and Steve Schloss's appointment within the organization will help to accelerate the deployment of our core values so that we have the foundation in place for our organization to realize its full potential.

In May we began transforming the way we bring applications to the market and our [naino] software release. Transitioning to an open platform architecture which is currently in its Beta. The goal of our open platform initiative is to drive expanded usage in differentiation of our core technology via new applications. During the quarter we began the process of recruiting third party developers and customers to build applications with our platform APIs and have rolled out a few applications to date. There's about a dozen applications right now that are created on the open platform.

We see customers, partners and developers using our open platform to grow the volume of interaction, enrich the [aging] experience, and harness the real-time intelligence of our platform. One example application is the SMS mobile application from Air2Web called AirCARE Mobile Assist. SMS or text messaging is the most widely used mobile service today and represents a tremendous opportunity for our customers to extend and enhance engagements with their customers.

Several of our existing clients are interested in integrating this mobile application into their online and mobile strategies and a few of have already taken to testing the application. Other customers have taken our mobile API to their internal developers and are now building custom apps for SMS, their mobile website or their own Mobile Apps.

As the world moves beyond desktops and traditional websites to smart phones and Mobile Apps we believe this is one category within our application marketplace that has significant potential. And the initial goal of the open platform is really to drive more chat interactions So we really want to get our customers to get more of their customers to use it on mobile embedded applications and other areas besides just the website.

In closing we had another quarter of solid top line growth and bottom line results. Looking ahead to Q3 the pipeline for B2B looks very strong. We're excited about the opportunities we see in the Asia-Pacific region and look forward to the contributions of our newest executive team members as they work to drive and accelerate our strategic initiatives. Thanks for your time and now I would like to turn the call over to Tim. Tim?

Thanks, Rob. We're really pleased that the strength of the results of the first half the year enable to us reiterate our full year guidance. Guidance that if achieved continues to puts our revenue growth rate and our operating margins at the top end of the range of public SaaS players that are leaders in each of their respective markets. With a nearly 30% annual growth rate and a 25% EBITDA margin our financial performance and expectations continue to speak for themselves.

I will now provide a bit more detail on our quarterly results and some of the key operating milestones that we've achieved. Second quarter revenue increased 4% sequentially to $26.4 million. That was an increase of 29% as compared to the prior year.

EBITDA per share for the second quarter as was $0.10. That's up from $0.09 per share and right in line with our guidance range of $0.10 to $0.11 per share. Second quarter GAAP EPS was $0.03 per share, also right within our guidance range of between $0.02 and $0.03 per share.

Revenue from our business operations as opposed to our consumer operations for the second quarter was $23 million. This was a full 30% increase as compared to the second quarter of 2009 a year ago and a 5% sequential increase as compared to the first quarter of 2010. So we're seeing a nice pickup in sequential growth in that group. Revenue from consumer operations for the second quarter was $3.4 million. And this is a 19% increase year-over-year versus the prior year from $2.8 million and it's down slightly from $3.5 million in the first quarter of this year.

As Rob mentioned we had really strong bookings. We 18 new large clients in the second quarter, and this is up from ten on that same metric in the first quarter. We signed 65 total large deals in the quarter in our enterprise group, up from 55 in the first quarter. Top line growth within our business operations for the quarter was again driven by both a combination of both new customers signing on and existing customer expansions and renewals.

Our pay-for-performance sector of our enterprise group continued to be a solid contributor to revenue in the quarter and continued to generate about 16% of our total enterprise revenue. In terms of our average deal sizes, we'll share the usual metrics that we speak about. Overall the average size for the -- booked in the quarter was $67,000.

For new customers it was very similar at $69,000, for existing customers in the same range, $66,000. Our proactive sales deals, which tend to be priced a fair bit higher, averaged $90,000, and customer service deals came in higher than they have in the past at about $55,000.

The breakdown of enterprise bookings and revenue terms can also be broken down as follows. Between new customers and existing customer expansions we saw about 30% of the bookings in the quarter coming from new customers with the remaining 70% coming from existing customer expansions. And in terms of the breakdown between sales -- primarily sales focused versus service focused, we saw about a 50/50 split in the quarter and that is a shift towards sales -- of much stronger sales -- or sorry service focused booking rate in the quarter as compared to the prior quarter. This is a real -- it's a meaningful shift and we're seeing deals at lower price that are service focused. This is really driven by our increased focus on the midmarket and the type of deals that this group focuses on.

Overall we're seeing higher bookings with the creation of this group with the added bookings of a greater proportion of service focus than larger enterprise deals. These deals have also come at the expense of some of our midmarket and small business competitors have not had to deal with our increased level of focus until now.

Enterprise attrition for the second quarter was unchanged from the first quarter at about 1.6% monthly, small business attrition increased slightly to 2.7% from 2.4% in the first quarter and this is still about a 20% improvement as compared to the rate in the same period a year ago.

Our split of revenue coming from outside the US, primarily in the UK, currently is about 23% of revenue with the UK portion of that strengthening slightly to about 13%.

Our breakdown of revenue between our primary verticals was pretty much unchanged as compared to the first quarter with financial services at 23%, telecommunications at 30%, both retail and technology at about 15% and all other making up the remaining 17%.

In terms of our customer revenue breakdown we saw 15 customers now over $1 million in annualized revenue. This is up from 11 in the first quarter. 28 customers above $500,00 per year is up from 26. We have one customer now above $3 million, one above $4 million and one customer as well, well above the $5 million per year mark at this point.

The consumer group continued to generate positive cash flow this quarter. Revenue for the second quarter was $3.4 million, a 19% increase as compared to the second quarter of 2009. Revenue is down slightly compared to the first quarter. This is driven primarily by a slightly lower volume of interactions. Our fees per minute increased by about 5% and commission rates remained unchanged versus the first quarter.

Consumer revenue overall continues to be on track for very close to the overall plan for the year, between 95% and 100% of our plan for the year. 100% still being reachable, but there is a greater change of sequential growth each quarter in the consumer business than we typically see on the B2B side.

We also, as Rob mentioned, successfully implemented an upgraded billing system during the quarter, right on plan, and this system now enables us to test and implement some more flexible and strategic billing approaches than in the past.

Overall for the business our gross margin was 73%, down a little bit from 74% in the prior quarter but also in line with our plan.

Our cost of goods increased in line with our plan as we expanded our production team and some of that spending to support our hosting efforts primarily to expand our hosting capacity both in the US and the UK. This type of increase usually has a greater impact on gross margin in the first half of the year due to seasonally slower sequential revenue growth than we would typically see in the second half of the year.

Operating expenses in the second quarter were in line with our plan and guidance as investment primarily related to more aggressive headcount additions continued in line with our plan.

Total company headcount increased from 437 at the end of March to 452 as of the end of June, and we expect that to end the year right around the 500 mark. Our enterprise sales team headcount is currently at 22. This increased by two, by about 10% from the prior quarter, and that's booked to support growth opportunities we see in both the US and in Western Europe. And as Rob mention we have taken steps to expand more broadly into the Asia-Pacific region. We've been interested in this part of the world for some time now and focused on it.

During the quarter, Jim Dicso, our head of sales and service; myself; and our lead sales rep for Asia had an opportunity to travel extensively through the region to meet with prospective customers and partners there. It was a very successful trip, we learned a lot about the region and how best to market and sell our services in each of the countries we visited. We currently have two partnerships in the region and intend to initially sell our services through these channel partners.

We also have a good amount of existing business comprised of the first deployment through these partners as well as business in the region through local deployments of several global corporations with which we do business in the United States.

Sales efforts will initially focus in this region on English speaking territories including New Zealand, Australia, Singapore and others and that will be followed by the non-English speaking territories. We have also established a strong pipeline with one of our partners and expect to see revenue coming from the region in the second half of the year.

Overall the opportunities here look promising for LivePerson. We're excited to continue our enterprise expansion beyond North America and Europe. Our new midmarket sales group was fully ramped within the quarter and began generating revenue for the business.

We've hired five sales reps in this group. To date they plan to hire -- add at least one more to that team, potentially more as we get closer to year end. The first two hires in this group, the folks who have been on staff the longest, have ramped up really nicely and definitely are on target to hit or exceed their quota for the year. This group is focused on deals between $30,000 and $60,000 as we said and most of the deals have come in and shown the potential to be right in that range or perhaps near the higher end of that range.

We ended the quarter with a cash balance of $52.8 million, up $2 million from the prior quarter. Our accounts receivable was unchanged. Resulting in a slightly improved DSO or Days Sales Outstanding metric of about 43 days.

We also implemented during the quarter a share repurchase program which enables us to purchase up to $10 million worth of our own shares and since this plan was put in place over the past several weeks we've already purchased just over $1 million worth at prices in the range of -- the $6.00 range.

In the second quarter we continued an aggressive hiring plan and Rob really highlighted those key hires but there's also a pretty strong team behind them that we brought on board to expand our existing team.

Now I would like to talk a little bit about our first guidance for the third quarter, first view of that guidance, and then reiterate our full year guidance. So in the third quarter we expect revenue of between $28.0 and $28.4 million. We expect EBITDA of between $0.13 and $0.14 per share, we expect adjusted net income between $0.07 and $0.08 per share.

Our GAAP EPS expectation is between $0.03 and $0.04 and a fair assumption for our fully diluted share count is $53.5 million. For the full year our guidance is essentially unchanged with one small exception. We've tightened up our revenue range a little bit by bringing up the low end so we currently expect revenue between $108 million and $109 million for the year. And in terms of the bottom line we still expect EBITDA between $0.52 -- excuse me, $0.50 and $0.52 per share. Adjusted net income between $0.30 and $0.32 per share and GAAP EPS between $0.16 and $0.18 for the year.

Fully diluted share count for the year should come in right around $53 million depending on the -- any market value shifts. A couple of other assumptions that will be helpful as you analyze the Company and look forward. An effective tax rate of approximately 40% is still appropriate. The cash tax rate of approximately 35% as well. Our GAAP gross margin we expect in the range of right around 73% which gives us a cash gross margin, eliminating noncash charges, of about 77%. Sales and marketing we expect to run at approximately 30% of revenue.

G&A expenses at approximately 16% of revenue. R&D expenses approximately 15% of revenue. Depreciation about $5.5 million for the full year. Amortization of intangibles, about $1.5 million for the full year. And noncash stock compensation expense about $5 million for the full year. And that covers the operational revenue highlights and now we would be happy to take any questions and if the operator could rejoin the call and give instructions we'll move to that phase.

(Operator Instructions). And your first question comes from the line of [Jeff VanLee.]

Hey guys can you hear me?

Yes.

Okay. Great. Several questions. Maybe you could just start -- just in terms of the guidance implicit in there is also a look at Q4 and it seems as though it implies exceptionally small sequential growth. I understand conservatism but just give your thoughts if there's any message in there. Is there anything suggested in terms of what you're seeing in pipeline or activity levels in terms of sessions that are being delivered that would suggest that to be the likely outcome for Q4?

No. I think we see as we typically do at Q4 that it is in line with Q3. Sometimes a little lighter, sometimes a little stronger but definitely the second half coming in stronger than the first half. So I think we're certainly not signaling that there is any deteriorating trend. So I think hopefully that covers that.

Okay. And then, it does, and if you would also then just touch on new products. I think one of the things that really stood out about last quarter's call was just the depth and breadth of the products you had coming down the pipeline. Can you just give us an update in particular about the analytics product and also along those lines about there is any revenue built into this guidance from those products?

Yes. For this year there's no revenue built in the guidance for these products so the things that we're looking at delivering are really a 2011, and so no, everything we're forecasting now is just off the core businesses.

Okay. And update on the analytics, just your sense of -- I think you were going to try to go to market mid-year here and get some initial reaction and then you might have additional color on when that might go generally able available?

Yes. We're still looking at -- we're actually doing some testing with the data and data analytic stuff that -- the data we collect. We have some products around helping marketers better convert their customers using our behavioral targeting engine and our rules engine and that's what we're basically focused on right now just doing a lot of testing and Beta testing and then we're looking at really first half of 2011 is bringing those products to market.

Okay. All right. Then just two very brief ones then. Just any thoughts around pay-for-performance in particular, pipeline around new deals and then also intraquarter any additional color you could give about kind of the tone of business as the quarter played out, starting strong, ending strong. Any trends intraquarter would be helpful as well. Thanks.

On the first one on pay-for-performance we're definitely seeing a couple things. One is a fairly steady growth in line with the overall B2B growth. So as the B2B sequential growth increases in the second half which is kind of in line with what our expectations for the year have been for quite some time and what we have seen in the past we see a similar -- we see pay-for-performance sort of keeping pace. We did see in Q4 last year, a nice surge in pay-for-performance in line with higher consumer traffic and just a lot more transactions than we saw or kind of expected going into the quarter.

So that certainly -- we saw a consistent trend this year in terms of consumer activity. There's some upside there. The second thing we're seeing on PFP is continued interest from retailers. Initially it's really been a telco driven area for us because it's very easy to define the value of an incremental sale in the telco industry and so retail has been one where it's appropriate where there is an easily definable order value we're definitely getting some interest and have more business coming from that sector. So in general, going pretty well.

Okay. And then any color on intraquarter trends?

I don't think there's much. I mean that's pretty granular month to month. I don't think there's anything that dramatically changed. It's a fairly steady pipeline and because we ramp up partners as part of it it's -- we sort of have a longer view and a more stable view of the pipeline on that. So I wouldn't see huge month to month fluctuations.

Although I think one of the changes that we keep seeing and we started seeing it last year was chat is becoming much more of a -- we're getting a lot more RFPs now and it used to be that we were more out there doing the education because we're the leaders in the market by factors of ten and so we would go in educate and explain why chat is really important and then explain why proactive chat is really important. Now we're actually getting RFPs that s that say we want proactive chat or we want chat for our web site. So that's a big shift. So I think the market is -- the market adoption has definitely shifted in some way where the heads of marketing, the heads of the websites are now like "I've got to have this" and then they're doing RFP processes.

Great. Thank you.

And your next question comes from Brad Whitt with Gleacher & Company.

Hi guys. Thanks for taking my questions. Congratulations on the new hires. I wonder, Rob, if you can kind of characterize the pipeline heading into the third quarter compared to what you have seen in the last couple quarters where you have had very strong bookings.

The pipeline right now is very strong. So obviously bookings were very strong for the quarter. And so, we can basically see for the rest of this year we feel pretty bullish on the business and feel that there's just a lot of demand for our product lines.

Okay. And the 18 large customers, great number there. How do these customers normally -- do they normally start off small and when do they normally come back potentially for additional products and have you started recognizing revenue from these customers or is that still in future quarters?

So the typical flow of a deal that's booked in, say, second quarter in this case, some of them are live now but most go live over the next couple of months. So usual within 60 to 90 days of the end of the quarter in which they're booked. So a subset of those 18 are live now but most go live over the rest of this quarter and we are seeing the typical pattern where customers will start in one business unit or at a relatively smaller revenue run rate and then grow. We're also seeing that in our new midmarket group where we've had a couple of larger small business deals that we handed over to that group that they've already been able to up sell just in their first three or four months of selling. So we're seeing that continue.

Okay. Great. Just one final question. Maybe, Rob, if you could help us understand a little bit -- I know it's still very early, but what what's your monetization plan for the platform and how soon could we possibly see revenue contributions from that?

The real focus right now is just we're going to basically drive -- for every chat that we do basically get $1 when you look at every chat that's created we're getting almost $1 for that chat and so what we want to do is just drive more chats and more interaction. So really -- the first goal is not to sell anything off the application marketplace but really to drive more usage of chats. The real goal of the platform, too, and I think even a bigger goal is now that we have over 8,000 customers it makes it very hard for our development team to develop for every one of those 8,000 customers.

So we tend to develop for the high-end and what we want to do is really have the flexibility for our customers and other third party developers to basically have developed for every one of our customers. So if there's some small guy who wants to do something with chat transcripts and SEO fine, they can get access to chat transcripts and publish them for SEO. So there is a lot of reasons we want to do it because I think take the pressure off of development, get more innovation and then drive more usage of our (inaudible).

Great. Thanks for taking my questions, guys.

Okay.

And your next question comes from the line of Mike Latimore.

Good evening. Just on the demand -- hi. On the demand, by the vertical I mean, it sounds like it's been pretty consistent among the various verticals. I guess as you look at the pipeline is there any one vertical that seems to be getting more pronounced or less pronounced?

The big four we call them have been pretty static so the primary four verticals. In the All Other category, and I think we have spoken about this on the last couple calls, we've continued to see more traction in the sort of broader health care, pharmaceutical, medical information kind of category, which is obviously made up of several different categories. But there's so much activity there in terms of people wanting not only commerce information because they're buying a product but just pure information. And so we had an interesting case of a new customer, more of a pharmaceutical type company, where they're actually not selling any products directly online but they're going to be using chat through LivePerson to reach out to medical doctors so that they can provide marketing information in real-time, something that would typically happen either not at all or would happen over the telephone through multiple traded phone calls which is obviously not very efficient for anybody. And so we're definitely seeing more of that where it's both marketing and information flow related to health care, medicine and those areas.

Okay. And then it sounds like Europe was good in the quarter. I guess any color on just European buying pattern?

Continuing to see benefit from the -- where we have human resources so we have a person on the ground now in France, we have support through a partner in Scandinavia and Germany, and we're looking at people on the ground in those territories as well so the deals tend to follow those resource investments. UK continues to be very strong. Pricing is holding quite strong in terms of average deal sizes tend to be higher even with the currency fluctuation which can cause a little bit of movement. We're still seeing higher average prices typically out of the UK. So those are all continuing good trends.

This last question around cost of goods. You know you're building up some data centers in different regions and some going into Japan a little more aggressively, or Asia more aggressively. When will the kind of investment in data centers and cost of goods start to slow? It sounds like you're expanding pretty rapidly in that regard.

Yes. I mean the nature of our hosting cost is that the investments can be chunky, meaning it's not always a straight line, and so what we saw historically in -- when we made the transition in our US hosting facility from co-location to our own -- or from managed services to our own co-location facility, we saw gross margins drop in the 72% to 73% range and then as we continued to grow, move back up in the mid and higher 70% range. We're seeing that phenomenon again now as we made two major investments, one expanding the data warehouse last year, two, moving to co-location in our UK -- our European facility.

So the good news is that those investments were roughly the same magnitude of cost and our revenue base is obviously quite a bit higher so we would expect that same phenomenon where gross margins can move a little bit between call it 72% and 76%. So when we see stronger growth as we expect in the second half and then into next year, you should expect the movement back towards the mid 70%s.

Okay. Thanks a lot.

And your next question comes from Craig Nankervis with First Analysis.

Yes. Thanks very much and good afternoon. Maybe first of all on the new customer -- I mean there was a few new dynamics in the metrics that you typically report, that the new customer pricing at $69,000 was an all time low as far as I can tell and because of the midmarket initiative do you expect (inaudible) performance to be in sort of this new range or do you think it could just as readily fluctuate back up to the $100,000 level that we've been seeing?

Well, obviously it really depends on how the midmarket team does. So far they are doing quite well and we would expect that they'll continue to perform well and the result of that is a higher number of deals, higher bookings, but the average deal size because of their target focus area would come down.

So it's kind of in synch with our plan and our strategy and the real good news is that if you backed out those sales that the midmarket group had you have a higher average price, but you also have some deals that would be out there in the hands of potentially some of our small and mid sized competitors. They're not getting those deals now and we are so that's sort of fulfilling our strategy with that group.

And so do you think the main difference then, Tim, between the 18 new customers added in Q2 and the ten in Q1 is the midmarket initiative? Is that -- you had significant sequential increase in midmarket adds because they were just getting started in Q1? Is that the way to look at that?

It's certainly a part of it. It's not 100% but it's definitely the stronger contributor. We did also have more activity in sales -- sorry, service focused deals, which tends to be at a lower price initially. So that was also part of the phenomenon and some of those deals were in the enterprise group sales force and not the midmarket group.

Okay and that would sort of get into my next question. That 50/50 split between proactive sales and customer service. Partly a midmarket phenomenon but apparently partly not, so you wouldn't be necessarily surprised for going forward that split to be more like what we're seeing in Q2 or do you think that would relax again some?

I think it's -- this is probably the lower end of the range that we have seen, that 50/50 range. So I think historically we've been anywhere from 50/50 to 80/20 or even 85/15, you know, weighted towards sales. So I think we're probably at the low end of that range and we do see it swing back and forth just depending on the nature of the types of companies that come in in a given quarter.

I also wanted to ask about your hiring rate. Dramatically different in Q2 than in Q1. What, 48 adds in Q1 or something like that and low double digits in Q2 I think. Yet it sounds like you're keeping your full year head count at goal unchanged. Did I hear that part right?

Yes. That's correct. About -- that's correct.

So any particular reason for -- my understanding was most of the hires were going to be first half weighted. Has there been sort of a deliberate change in the pace of hiring for any particular reason or is it going to be all done in Q3? Just how are you looking at that at this point?

I would say that there maybe a little bit more spacing out over the course of the year. Our initial plan was weighted a little more heavily to the first half, but we are spacing out a little more over the course of the year. There is a decent number of hires that we expect to come in, July, August, just over the change in the quarter so that's part of it.

Sure. Okay. And then I guess just lastly on the consumer side how are you assessing what's going on there with the drop in volume? I don't think that you saw that in Q2 in the previous couple years and is there some new dynamic at work or what do you feel -- what's your gut feeling on what was driving that?

It was -- it's was just a little bit more seasonality. Q2 was a normally a little bit slower. Kids are no longer in school. And during (interim) we do have the tutoring business so that just was a little bit more than normal and then Q3 looks pretty good. So things are bouncing back nicely and even a little bit better than last year. So it's (inaudible) little fluctuations and so -- but it's not trends or anything because right now the daily numbers look really good.

Thank you.

Thank you very much.

(Operator Instructions). Your next question comes from the line of Nathan Schneiderman at Roth Capital.

Hi Rob and Tim, thanks for taking my question. Rob, you mentioned that the quarter had near record bookings. I was hoping you could share with us that number. I think last quarter it was $4 million.

It's right around $4.4 million.

$4.4 million.

Yes

Okay. Great. And hey, can you clarify on that. When you report a bookings number, is that a 12 month duration or is it something different than that?

Yes. It's an annualized monthly run rate. So we take the monthly run rate of the deal, multiply by 12 and that's the -- total those up, and that gives you the booking.

Okay. So when we look at the bookings this year versus last everything is apples-to-apples then?

Yes.

So it's an annual contract thing. Okay. Great. I was curious on the Q3 revenue guidance if we look at that, it implies much more -- I mean you delivered fairly in line kind of quarter for revenue and yet your forward rev guide for the Q3 is a good bit above consensus so you're going to experience a lot more sequential growth and I was wondering what's really driving that. Is that just the strong bookings you've had over the last few quarters, is it the acceleration on customer adds? What would drive that Q3 acceleration?

Well, it's really tied to the bookings from Q2 primarily. There can be a small impact from Q1 in terms of a deal that goes live later than is typical, but most of it is Q2 bookings and other expansions that are already scheduled. So it's not radically different than our original plan for the year internally, but since we don't give quarterly guidance initially for the year you don't necessarily have that visibility outside the Company so as we saw last year in the second half quite a bit stronger than in the first half, we're seeing that phenomenon again this year. Definitely driven by the bookings.

Got it. And normally you have pretty good sequentials Q3 to Q4 and you had mentioned last year you got some P to P benefit. I imagine you get some of that this year. So is there, just in helping us understand the implied Q4 sequentials on your guidance, is there any -- I understand you like to be conservative here, but is there anything in the Q3 revenue that we should consider very one time in nature?

No. I think, you know, we're real confident with the full year numbers that we have out there and we obviously have good visibility into Q3 so by default you can get a little bit of anomaly in Q4 that [implies] and maybe it's not as strong as Q3 but we just can't always know the timing between what hits in Q3 and Q4.

Okay but there's no real revenue Q3 that just kind of disappears that's sort of a one time.

Nothing unique. And I think in Q4 we usually see a good jump in -- especially on the PFP side because of the holiday season.

Right.

So it's a little hard to calculate -- is this year going to be a great holiday season, a wonderful, a low. So we kind of -- we know it'll be what is, but usually when we see that real jump it's we get a lot of drive off the holiday season. So we try to be conservative because who knows what the holiday will be this year.

Okay then just a couple other quick ones. The sales in marketing, the big jump sequentially was there anything -- was that just hiring and kind of ongoing spending? Was there anything that is fairly one time in nature there that -- or maybe another way to ask it is where do you think that number goes in Q3 just on the sales and marketing because it was such a fairly large sequential increase in Q2?

Yes. I think it definitely was an increase. There are a couple of things that happened in Q2 that don't happen again. In all of the lines but certainly in sales and marking we do salary reviews and that impacts once a year so we -- that's a piece of the shift in Q2 that you will not see again in Q3. Second thing is bookings were quite strong as compared to Q1 obviously so that has some commission impact in the quarter. That was a good portion, did some new hiring as well and then the other data point I can give is I think we'll see sales and marketing as a percent of revenue come in closer to 30% for the remainder of the year and the full year and that's a little bit lower and a little bit better than what we saw in Q2.

Got. It and my final question for you the 18 new customers, new large customers, that looked like a pretty good number there. I was thinking given that they are large customers they weren't necessarily midmarket customers but it sounds like maybe there were some of those. How many of those 18 were midmarket?

That does include midmarket, we're not breaking them down exactly because there's going to be some overlap between those two groups. But some of them were midmarket, but not the whole difference so Q1 we had I think ten, this quarter we had 18. Let's say about half of those were midmarket, half were enterprise, roughly.

Great. Thanks very much. Nice job guys. Bye.

There are no more questions at this time.

Okay. We want to thank everybody. (inaudible - technical difficulty)

Thank you and then we'll have our YouTube video out in the next couple of days so check it out. Bye.

This concludes today's conference. You may now disconnect.