甲骨文 (ORCL) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Responsys second-quarter 2012 earnings call. At this time, all participants are in a listen-only mode. Later, we will conducted question-and-answer session and instructions will be given at that time.

(Operator Instructions)

As a reminder, this program is being recorded. I would now like to introduce your host for today's program, Ms. Carla Cooper, Director of Planning and Analysis. Please go ahead, ma'am.

Great. Thank you, and thank you for joining us today to discuss Responsys' results for the second quarter ended June 30, 2012. Participating in today's call will be Dan Springer, Chairman and Chief Executive Officer, and Chris Paul, Chief Financial Officer. I will cover the Safe Harbor statement, then turn the call over to Dan.

The primary purpose of today's call is to discuss our second-quarter performance. Some of our discussion will contain forward-looking statements, which may include projected financial results or operating metrics, business strategies, anticipated future products or services, anticipated market demand or opportunities, and other forward-looking topics. These statements are subject to risks, uncertainties and assumptions. Accordingly, actual results could differ materially.

For a listing of the risks that could cause this, please see our most recent Form 10-Q filed with the SEC, as well as the factors identified in today's press release. During the course of this call, we will also be discussing certain non-GAAP financial results. We direct your attention to our reconciliations between GAAP and non-GAAP measures, which can be found in the Company's earnings release, which is posted on the Investor Relations portion of our website. Dan?

Thank you, Carla. Good afternoon to everyone on the call. I will make some brief remarks about the quarter and the longer-term growth factors we see driving our continued success, before turning the call to Chris for a review of the financials. Then, we will take your questions. As you can see from our press release, we had a solid quarter, with revenue of $39.5 million, which was the top end of our guidance. Earnings per share was $0.03, which met our guidance as well.

Heading into the second half of the year, we are pleased with our business momentum and the increased traction we are seeing from the investments we are making in sales and marketing. As we have indicated the past couple of quarters, we expect revenue growth to increase in the second half of the year and this is reflected in our reaffirmed second half guidance, which anticipates 23% growth.

We are seeing increased traction from our leading suite of cross-channel marketing solutions and our ability to meet the needs of the most demanding marketing organizations across all the major online channels, e-mail, mobile, social, display, and the web.

So let me highlight a couple of items from the second quarter. First, our user conferences. Many of you came to San Francisco in May to our Responsys Interact conference, which drew over 1,000 attendees. In June, we hosted Interact EMEA in London, which drew record attendance of over 300 attendees.

We believe this is indicative of strong interest levels from European marketers in response to the digital marketing solution. I continue to be excited about the high level of marketing success that our customers are achieving, as well as the very strong customer interest to expand that success into the emerging digital marketing channels.

Second, our Interact Summer '12 release went live in June. This release includes major extensions to the Responsys Interact suite, including advanced targeting capabilities for display advertising and for social marketing, with enhanced features for social amplification and measurement. Our new social capabilities enable marketers to build even deeper one-to-one relationships with customers by using social and web data to create highly personalized cross-channel marketing campaigns.

One of the early adopters of our social marketing solution is Philosophy, a leading skin care, bath, and body retailer. Through the Interact social data cloud, Philosophy is able to tap into information that people choose to share through Facebook, so they can send highly personalized e-mail messages and connect more deeply with their customers. In turn, Philosophy customers receive more relevant and more personalized emails from a brand they know and trust.

We are innovating to allow marketers to be more effective in leveraging the next wave of technology, around e-mail, mobile, social, display, and the web. In the latest Forester Wave report that was published in January, Forester Research noted that Responsys' technology platform is 18 months ahead of competitors. This gives us enormous leverage with prospects and clients who are competing for their customers every day, and we believe the social data cloud is one more demonstration of this technological lead.

Supporting our social strategy, we are pleased to announce in May that we have hired Michael Della Penna as Senior Vice President of Emerging Channels. Michael has fantastic experience in the space. He founded Conversa, a social CRM company which he sold to StrongMail; and before that, he was the Chief Marketing Officer at Epsilon, playing an integral role in the company's strategic marketing and positioning. We are very pleased to bring Michael on board to enhance our leadership as the market's integrated cross-channel digital provider.

The third point I want to highlight from the quarter is our Gartner ranking in their report, Magic Quadrant for CRM Multi-Channel Campaign Management, which was published in May. In testament to our cross-channel leadership, Gartner positioned Responsys in the visionary quadrant. No other company from the traditional e-mail marketing world is included in this report, underscoring how our multi-channel capabilities are placing us in the broader discussion of multi-channel campaign management.

Also notable is that all of the other high-scoring companies in the report are much larger companies with traditional on-premise solutions. So we are the leading SAS provider in this important field. This puts Responsys in a unique position, offering the leading software as a service solution for the many marketers who are embracing cross-channel marketing. You can see this leadership position and superior capability reflected in the higher ASPs that Responsys earns, relative to our competition.

These market-leading solutions are allowing Responsys to serve many of the best brands in the world. Let me name just a few of the new wins we had in the quarter. First, Comcast has selected Responsys to drive their online marketing communications after a comprehensive and thorough review. Comcast is one of the world's leading media, entertainment and communication companies, and we are excited to be working with this world-class brand. Given the significant size of their customer base, we expect them to be quite a significant customer.

National Geographic, a venerable institution which has been inspiring people to care about the planet since 1888, selected Responsys to help them drive highly relevant and personalized messages to their consumers. Foreign language software leader Rosetta Stone also signed with Responsys to enable them to engage consumers in communications that are highly personalized and relevant. And this is only possible through Responsys Interact program, which automates creation and delivery of individualized messages to each consumer.

Leading Canadian footwear brand Aldo Group will integrate Responsys Interact with their web analytics. This will give Aldo the ability to tailor their communications to drive engagement. They will also leverage Interact to dynamically test messages for success, using our winner selection feature.

Among our general business wins was Strava, the online company that turned fitness social, allowing avid runners and cyclists to share, compete and compare their training regimens and performance achievements. Strava's goal with their communications is to keep their customers highly engaged by delivering the right message at the right time. For this early-stage growth company, Responsys demonstrated that Strava's staff can easily create personalized messages and sophisticated campaigns around their newsletters and important automated programs.

In each of these wins, you can see what Responsys enables marketers to do. To manage millions of consumer relationships through the most effective marketing cloud. Responsys' platform provides marketers with the tools to seamlessly plan and execute campaigns across e-mail, mobile, social, display and the web to get closer to the customers.

For marketers, the challenge is to evolve their strategies in a world where digital is the new normal. E-mail, mobile, social and display technologies abound, but many marketers are still experimenting and learning how to integrate them all to run an effective cross-channel marketing program. Through our advanced SAS platform, we offer the solution for marketers to develop effective cross-channel communications for this new digital age. Serving this market as it develops should allow us to generate significant growth for years to come.

And with that, I'm going to turn the call over to Chris Paul, our Chief Financial Officer, to discuss the financial details of our second quarter. Chris?

Thank you, Dan. As Dan mentioned earlier, we had a solid second quarter. I'll first review the results and then discuss our guidance. Total revenue for the quarter was $39.5 million, up $5.5 million over Q2 a year ago. Subscription revenue, including overage, was $27.5 million, or 69% of total revenue.

Overage was $5.7 million, or 21% of total subscription revenue. Our overage revenue was in line with our expectations and in line with historical trends, although it is down from our usually strong Q1, which benefited from the timing of contracts with annually based overage's and from overall strong volumes in the post-holiday period. Professional services revenue was $12.1 million in the second quarter, up 12.8% year-over-year.

Our customer count at June 30, 2012 was 353. This compares to 315 at March 31, 2011,and 346 at March 31, 2012. Our dollar retention rate was over 100%, consistent with past quarters. Expansion of business with existing customers remains a key contributor to our overall growth.

As I move to expenses, please note that I will be discussing non-GAAP expenses and income measures that exclude amortization of stock compensation and amortization of intangibles. Subscription gross margins were 71% and professional services gross margin was 14%, for a total gross margin of 54%. This compares to 53% in the second quarter of 2011. We are on course to achieving our 2012 gross margin target of 54% to 55%.

Operating expenses in the quarter were $19.3 million, up by $6.9 million, or 56% from the year-ago period. The largest increase was in sales and marketing expense, which, at $11.6 million, was up 63% year-over-year. This expense was significantly impacted by the timing of our annual user conference, which happened in the second quarter of 2012, but in the first quarter of 2011, as well as by increased headcount in sales and marketing.

Operating margin in the second quarter of 2012 was 5%, compared to 16% in the second quarter of 2011. The decrease is primarily a result of the user conference in the period and sales team expansion, and secondarily from higher research and development and general and administrative costs in the second quarter of 2012, compared to a year ago.

Our cash flow from operations in Q2 was $4.3 million. Free cash flow was $1.7 million. Free cash flow in the quarter benefited from the timing of vendor payments for our user conference, as well as timing of vendor payments of our office build-out. We noted the CapEx for our office build-out, about $3 million, on our first quarter call. We did not receive invoices for most costs until July. As a result, we expect to pay them in Q3 rather than Q2. Given this, we expect third quarter CapEx of approximately $5 million, including the build-out costs. Cash equivalents and short-term investments were $100.1 million at the end of the quarter.

Turning to our updated guidance for 2012, we are maintaining our annual guidance in the range of $163 million to $165 million, and our non-GAAP net income guidance at $11 million to $12 million, and $0.21 to $0.23 per share. For the quarter, we are introducing revenue guidance of $40.5 million to $41.5 million, and earnings per share guidance of $0.05 to $0.06 per share. We continue to forecast that our sales and marketing expense will grow about 30% this year. Incorporated into our guidance is a 40% non-GAAP tax rate and 53.6 million shares outstanding for the year.

In summary, we are pleased with our first half results, and excited to show further growth in the second half. We'll now open the line for questions. Operator?

(Operator Instructions)

Jennifer Swanson Lowe, Morgan Stanley.

Thank you. I wanted to start off talking about the environment at large and what you're seeing there. I know there's been some questions around demand environment in Europe and potentially the US. I'm curious if you are seeing anything different, either from a demand perspective or from a pricing competitive perspective?

Hello, Jen. It's Dan. We haven't really seen that. It's obviously a competitive marketplace, but we are not seeing any discernible changes on either of those fronts, in terms of the overall competitive space or in the market demand space. I mentioned about the very large turnout we had at the EMEA event in June. We had 180 people the year before, and we had over 300 people this year. So we are seeing a lot of interest from marketers in Europe, where I know has been a lot of concern, to try to take their program to a more advanced marketing program. So at this point, we are pleased to tell you we have not seen any weakening there.

Great. Looking at the ramp in sales and marketing capacity, and I know coming into the year, you talked about a 40% ramp. Are you getting the resources you need? What's it been like on the hiring side, and how quickly are those reps becoming productive? Is it tracking where you expected it to?

The sales side is right on track. As you know, in previous quarters, we had had some challenges finding the right people, and we've told you how we were behind on our spending. Even though we intended to increase it more rapidly, we feel really good. I think this is reflected on the expense line. You can see that we have been able to put those dollars to work and bring in really high-quality sales and marketing team. So we feel very excited about that being right on track.

Great. One last tactical one for me. Chris, were there any impacts that we should be thinking about in terms of currency in the quarter?

There was, actually. If you look at the year-over-year, so if you look at Q2 last year to Q2 this year, there was certainly an impact from the fluctuation in exchange rates. So effectively, the revenue hit would be probably close to $0.5 million difference year-over-year. This quarter, we booked about $150,000 ForEx expense, which we did not really have last year. So we are feeling some of it. Remember, about 20% of our businesses is international. And if you look at the non-denominated -- non-dollar denominated currency, it's about 18% of our total revenue base.

Thank you.

Laura Lederman, William Blair.

Thank you so much for taking my questions. Can you talk a little bit about the success in the middle market and how much that contributed to the quarter, or you expect it to contribute in the second half of the year to the acceleration? Or is all of the accelerated really just your normal enterprise business? I'm just trying to better understand the middle market and your efforts there, and also the acceleration in the second half of the year.

Absolutely, Laura, I would say a part of the acceleration is the continued success of the mid market. As we mentioned before, we really created a dedicated sales effort to go after the mid-market opportunity, as we saw at the very end of last year that it was a viable market for us to go after aggressively. And we have been pleased with that. We are scaling that organization even faster than we scaled the enterprise organization, and we are seeing that in the bookings to date. So I would say, it is fair to say of that growing growth rate that we are talking about in second half, it is slightly disproportionate moving towards the mid market. We are quite pleased with the success there.

Can you talk a little bit about pricing in the mid market and is the growth there coming, to some extent, is the expense a little bit of margins versus the enterprise business, or is it coming out roughly the same? I'm trying to understand the profitability there.

It's actually interesting. For us, the pricing in the mid market is actually higher. If you think about our price curve, which is volume based, so as someone has a higher and higher volume, the price gets lower and lower. So when you go to the mid market, which usually starts off at lower volumes, the actual messaging pricing is, in fact, at a higher level. To your profitability question, it's a more complex question. But at this point, we don't believe the profitability is lower in the mid market. So we are not looking at that as a long-term degradation in our profitability.

Shifting gears a little bit, can you give us a sense of mobile and social, is it still, if you combine those two, less than 10% of revenue or less than 5% of revenue? Not the exact number, just can you give us a feel?

Sure. You know, as we've talked about in the past, the traditional challenge is, we don't break out the revenue, not just from a disclosure standpoint, but so many of the purchases that people make cut across, so it is very hard to do that allocation. But I think it's representative, as you said. It's not a significant portion of the revenue today. And I characterize the state of the state this way. We are seeing really great interest -- and I mentioned this at the conferences, both in Europe and in the US -- the sold out, standing room only sessions were the ones for the emerging channels. So we continue to see very strong interest from our customers at that level. In terms of the number of customers doing significant business with us across the mobile, social and display side, I think it is good. Particularly in display, we've seen a significant increase from the beginning of the year in the number of customers signing up for display. So that is exciting. But in terms of driving a significant incremental revenue contribution, I think you would say, that is not dramatic yet. We haven't yet been able to say -- look at very significant new dollars coming in from those channels on a stand-alone basis. But that is a big part of the reason we brought in Michael Della Penna. As I mentioned on the call, we believe he is going to be a catalyst for us to take all of that customer interest we described and turn it into a growing business.

One final question for me which relates to what you just said is display retargeting. I know there were a bunch of customers in the pipeline for that. Can you give me a sense of how much of that is converted, or is that still a big pipeline going forward, or now is the display retargeting customers for other things as well? Are they bringing in net new customers?

Yes, on the display side, the nature of -- to answer your second question first. It's retargeting around the relationship marketing. So we're not out selling that as an independent product. It's for people that are already doing direct marketing through interactive channels, like e-mail. And then to the first part of your question, we have had very good success, as I said, with converting some of that pipeline into new customers, but the pipeline is still robust, in that we are out talking to our existing customers, and quite a few of them are expressing interest. So it feels like we've got a good number of customers signing up, and a good pipeline, as well.

I guess what I was asking was a little different, not if there were net new customers, but if having that display retargeting seemed to make a difference on you winning versus an ExactTarget or whomever, or an Epsilon, or -- ?

Good question. Sorry, I misunderstood you.

I didn't articulate it well. Sorry.

We can share responsibility. But I would say that the answer is absolutely yes, to that question, Laura. We have seen a number of cases where the differentiation of having a strong display retargeting offer, we believe is a factor, for sure, in people saying Responsys is the right choice for a partner.

Thank you.

Brendan Barnicle, Pacific Crest Securities.

Thank you much, guys. I wanted to follow-up on some of the pricing questions that Laura and Jen have been getting at, to close off the loop there. Any change in the pricing in the enterprise market at all?

So in general, the answer is no. And in fact, Chris actually recently did a study, I'll let him share with you, about our pricing and how it has changed, or in this case, not changed, over the last couple of years. Chris, would you like to give them the details on that?

We look at pricing fairly regularly, and looked at -- in the last couple of weeks or so -- on going back a few years and looking what the overall price curve is across our customer base. And we really saw no significant change in the pricing across those time frames. So if you look at the volume to volume comparisons and the rate those generate, it has been very much in line with what we've experienced the last couple of years and haven't seen a change in that.

Great. Then you mentioned on the sales headcount that you had had a little more of a challenge in Q1, at least, finding folks. Are you back on pace to where you thought you would be? And where we now, and where should we expect to end the year?

I think the answer is absolutely yes. We are now on track. And we feel like the spend expectation and the headcount expectation are completely on track for our 2012 plan.

Great. Thanks. That's all for me.

Patrick Walravens, JMP Securities.

Great. Thank you, guys, and congratulations. I guess what I would start with is, Chris, how should we -- or what assumptions do you have for overage in Q3?

Q2 and Q3 is kind of the mid part of the year. It's not really holiday season yet, the big retail season. So we see that percentage as typically in line year-over-year. And if you think about the high teens to 20% range, if you look at where you were in Q2, it was right around 20%, 21%. In prior years, I think you'll see about the same number fluctuation. It all depends on what is on the retailers -- for example, we've got the back-to-school season coming up. So there will be some uptick in volume. But overall, Q2 to Q3 is fairly consistently in the range, year-over-year.

So 20%, 21%-ish is the right area?

High teens, 20%, 21%. Somewhere in that range.

Then, one of the things that we are noticing is starting to really affect the low end of the e-mail business is the freemium model, and in particular, Mail Chimp. And I am assuming you guys are insulated from that, residing comfortably up in the enterprise. But I did want to ask. Are you seeing any impact from freemium?

We have not, to my knowledge, ever seen one of our prospects or customers talk about freemium. So we are not seeing that. But to the general question, we believe, if you think about the thoughtful questions previously around pricing, we believe that in some cases our premium may be increasing because people see the value. We add a lot more for our customers. We help them make significantly more money than they can on other platforms. So Responsys has been insulated from what might have been other price competition that you're seeing with other players. We tend to see less of that, because of that differentiation.

Great. And then last question. What are you seeing in terms of what your customers are doing with your platform for analytics? And does that present you with any opportunities in the future?

When you talk about analytics, do you mean integrating with web analytics platforms, or do you mean the analytics they are doing on their programs and -- ?

No, I mean them doing analytics on all the data that is sitting in your system.

Absolutely. I think the biggest piece around that comes back to testing, Pat. So we have found -- some of the things we have, of course, tried to automate, like with Winner Selection, that I talked about earlier on the call. We are seeing that our customers are putting more and more focus on the testing of everything. Testing on steroids, leveraging the power of our data to -- everything from subject line testing to content testing, sequence of their programs, to do everything they can to get a little better performance. The other big area around analytics is segmentation. So, you've talk heard us talk in the past and seen some of our conferences. If customers are able to do thoughtful analysis about which of their customers they should message more frequently, or which of their customers they should message with different types of product offers, et cetera, that is probably one of the biggest thing we can help them with their performance, in driving more revenue. And it is one of, again, the reasons that distinguishes Responsys from other players. So those would be the areas around analytics we see our customers doing the most.

Great. Thank you.

Carter Malloy, Stephens.

Hello, guys. Thanks for taking my questions. When you think about overall company growth right now, is the primary driver existing customers and them growing their lists and growing the number of things they are buying from you, or -- you named off a very impressive list of new customers earlier. Are those guys the larger driver of growth right now?

It's a very challenging question. In the past, Carter, as we talked about it, we said roughly-- and this is still true today -- if you look at our growth, roughly half of the growth comes from, grows from our base, and that over 100% dollar retention that Chris referred to. And roughly half comes from the net new customers that we bring on. The reasons it's complicated is it depends over what time period. If you look over the course of a month or a quarter, a very small proportion of the revenue is from new customers, as we're onboarding them and scaling them. But if you look over the course more of a year, or five or six quarters, it roughly comes out about half and half, for that net growth.

Okay. So it's still basically consistent with where it has been?

That's right.

Okay. The other is on this professional services side of the house. Can you give us a little bit about the dynamic of growth there? And should we expect that to reaccelerate alongside subscription, or stick where it is, at this point?

Yes, I think our view is that our mix will stay roughly the same. We believe that our subscription business over time will grow a little bit faster than our services business, just because opportunity on the services side, there is a lot of hiring required to meet that demand. And unless we were to do acquisitions that increase that shift toward services, we probably see the services as a percentage of revenue drop a little bit. But we think of it as there's a robust market opportunity. Our customers increasingly want more help from us. So we don't expect there to be some sort of deceleration in the services growth.

That's helpful. Thanks, guy.

(Operator Instructions)

Michael Nemeroff, Credit Suisse.

Hello, guys. Thanks for taking my questions. Most of them have already been asked. When I talk to investors, I guess one of the push backs I hear from people is they don't necessarily understand how the market is segmented. Could you tell us how often you guys see ExactTarget competitively, and what the win rates are against them in the mid market?

Sure. ExactTarget, which we traditionally didn't see them as much, because we weren't in the general business, or the high end of the mid market. And we didn't see them very much in the enterprise, over the last, maybe, year or two, both of those things have changed. And I think they're trying to push more aggressively into the enterprise base, and we're, as you just heard, aggressively pushing into the mid market, or at least the high end of the mid market. In our general business segment, I would say they're the most frequent company that we see. I think we feel very good that we win our fair share, or more than our fair share, of those deals and at a very significant price premium to ExactTarget. In terms of the enterprise, they are one of the many customers that we see. It is a much more robust set of competitors. And we've talked about all the marketing service providers who bought into the space, with companies like Experian buying Cheetah Mail, Epsilon buying both the Double-click business as well as Bigfoot, Axiom buying Digital Impact, et cetera. And those are all the core competitors we see, in addition, in the enterprise space.

That's helpful. Thanks. Also, you mentioned that you are starting to see a little bit higher quality and starting to hire some more salespeople. At what point in time over the next couple of quarters should we start to expect you to get some -- or full productivity out of those new hires?

Chris, do you want to walk through our path to revenue and the calendar, how that works with sales hiring. And then I'll talk a little bit about that last part.

Yes, Michael, one of the -- the significant ramp between hiring a salesperson then, when they're transferred to revenue, one is in the subscription business. Typically, it takes about a quarter or two for us to get a sales rep productive. And then on the enterprise side, on the bigger deals, it's roughly a six-month sales cycle. And then, third step for us is actually to get customers up and running on the platform. A lot of customers have a lot of systems that they integrated at the backend. So we do a lot of technical integrations. So there can be up to a three-month lag between signing a deal and getting it fully ramped. So there's a significant lag between the investments that we're making on sales and headcount, that we're making during the year, and when that's fully ramped revenue. Remember, the next cycle then is, we typically also grow our customer base at a time. So any deal we sign now is going to grow over the next couple of years, also.

The only other piece, to the second part of your question, about the impact of that hiring or the sense of the future of that hiring, we have already given the indication that through 2012, we plan to continue to invest significantly in sales and marketing, specifically around sales headcount that will then be yielding growth, as Chris said, for the year-plus ahead. But our expectation at this point is that as long as we see opportunity as we see today, we will continue to hire aggressively on the sales opportunity, and that that should allow us to increase our revenue growth rates going forward, as well.

That's helpful. Just one last one, if I may, to Chris. On the tax rate for the quarter, came in substantially lower than what you were expecting. Could you talk about that and what we should expect going forward, and why that was?

In a small quarter, when there's a pretty low overall tax, you can get affected by the R&D credits, which impacted the quarter. So think of it as, you're taking on the tax rate and getting some benefit from the R&D, and that gives you the effective rate in the quarter. For the year, we're still sitting the same, 40% tax rate.

Great. Thanks very much for taking my questions.

Sure.

Thank you. This does conclude the question-and-answer session of today's program. I'd like to turn the program back to management for any further remarks.

Thank you all for tuning in. We will speak to you next quarter.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.