甲骨文 (ORCL) 2012 Q4 法說會逐字稿

Good day ladies and gentlemen welcome to the Responsys, third quarter 2012, earnings conference call. At this time, all participants are in a listen only mode. Later will conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, today's conference is being recorded, and now I'd like to transfer this conference call, Miss Carla Cooper, you may begin.

Thank you, and thank you for joining us today to discuss Responsys' results for the fourth quarter ended December 31, 2012. Participating in today's call will be Dan Springer, Chairman and Chief Executive Officer, Chris Paul, Chief Financial Officer and Scott Olrich, Chief Marketing Officer. I will cover the Safe Harbor statement, and then turn the call over to Dan. The primary purpose of today's call is to discuss our fourth 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, the actual results could differ materially. For a listing of risks that could cause this, please see our most recent form 10Q filed with the SEC, as well as the factors identified in today's press release.

During the course of this call, 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 in the investor relations section of our website. Dan?

Thanks Carla, and good afternoon to everyone joining the call. Today, I'll start with brief remarks about Q4 results and our 2013 guidance. Then response is Chief Marketing Officer, Scott Olrich, will talk about why more and more companies are demanding our unique technology. Then Chris will review our Q4 financials, and 2013 guidance in detail. Followed by an opportunity for your questions.

Revenue in the quarter was $44.7 million, an increase of 20% versus the fourth quarter of 2011. We've benefited from strong volumes this holiday season, as our customers leveraged responses to drive their digital marketing success. We saw strong profitability derived from this solid revenue performance, and generated $0.07 in non-GAAP earning per share. Our guidance for 2013 calls for $188 million to $192 million in revenue, and $0.16 to $0.18 per share in non-GAAP EPS. This plan represents continued investments in our product innovation, and our sales and marketing.

I'm going to review three key themes today, that drove our business in 2012, which will also be important drivers in 2013. They are-- customer success, revenue growth, and product innovation. But before I discuss these in detail, I want to introduce Scott Olrich, our CMO, who has been the chief architect of Responsys' vision in customer centric, cross channel marketing. Scott?

Thanks Dan. When I joined the Company back in 2004, I did so because I believed marketing was going to fundamentally change for the digital age. And that marketers would need to invest in a completely new kind of marketing software platform, to help them succeed. This couldn't be more true today. Marketers are becoming increasingly important business drivers, in tasks not just driving awareness, but for actually making the sale. As a result, they're earning a much bigger piece of the IT budget. You've all heard about the recent Gartner study that predicts CMOs will spend more on technology and services, than the CIO by 2017. And we are seeing this happen with the CMOs we work with as well.

We believe the big need for CMOs will be to how you can communicate with these increasingly digital customers, as individuals across millions of interactions, and across all of the new digital channels. To understand why this is becoming increasingly important, let me first give you a little historical context. Marketers have always known that the ideal approach to marketing and driving sales, would be to build individual relationships with each and every customer. Think back to the relationship that customers had at their typical corner store. That was a powerful relationship. The hard part became how to do that at large scale. And so marketers gave up on the idea of individual relationships, in favor of mass marketing.

They became obsessed with the campaign and lost sight of the customer. So campaign management platforms emerged to first send offline campaigns, whether that was a TV commercial, or a direct mail piece, and then to manage digital campaigns, like a mass e-mail or generic display ads. Unfortunately for the marketer, mass marketing as we know it is becoming less and less effective every day, especially in the digital age. Today's consumers are demanding individualized experiences with brands, that unfold not according to the marketers campaign calendar, but according to their own behaviors and preferences. We at Responsys have been predicting this shift, and have spent the last five years building an interaction management platform, that puts the customer first, not the campaign. And unlike traditional campaign management platform solutions, we help marketers build individual relationships at massive scale, and across all of the new digital channels.

Our unique approach to interaction management, is why the top analyst firms continually rank our technology ahead of the pack. And it is why the world's leading marketers are increasingly seeking out Responsys, and why they're willing to pay us a premium, over traditional campaign oriented solutions. One of our customer wins from the fourth quarter, Virgin America, is a great example of how marketers are changing their buying criteria. Virgin America is a remarkable airline, that offers guests attractive fares and a host of innovative features aimed at reinventing travel. As part of their ongoing mission to improve the overall guest experience, Virgin America recently identified limitations with their current e-mail marketing platform. Having recently increased campaign volumes and frequency, in an effort to drive revenue growth, their guests began to find fewer relevant messages, resulting in decreased engagement, declining click through, and conversion rates.

Following a comprehensive review, Virgin selected Responsys as their preferred partner, to enable them to evolve their e-mail and cross channel program from a campaign centric to a guess centric approach. With the goal of automatically delivering a highly individualized experience for each and every guest. This is a pattern we're seeing again and again. Businesses are not buying Responsys only for our ability to execute e-mail campaigns, they're buying us because they want to move away from just sending campaigns, and instead move towards managing individual customer interactions. And once they've made this shift in their e-mail marketing department, they begin to adopt a cross channel approach, expanding their responses deployment across e-mail, mobile, social, display, and the web.

A perfect example of this expansion is L'Occitane, the global maker of all natural bath and body products. L'Occitane signed up with Responsys last year when they realized they wanted to take more of a customer centric approach to their digital marketing programs. After first using Responsys to drive better interactions in e-mail, they're now combining e-mail with individualized display ads. This approach now allows them to orchestrate messages across these two channels, letting each individual customers know when they're due to replenish their supply, or what product they should buy next in order to complete their set.

That's a big opportunity Responsys is after. Where every marketing organization uses our software to communicate with their customers as individuals, across millions of interactions, and across all the digital channels. It's where marketing is clearly headed and Responsys is uniquely positioned to continue to lead the way. Back to Dan.

Thanks Scott. It's great to see the market shifting towards, what just a couple years ago, would've been considered a pretty futuristic idea. This shift is responsible for the important factors we saw driving our business in 2012. And that we believe will continue to do so in 2013. So let me come back to these three factors, they are, customer success, revenue growth, and product innovation. First, customer success, a core tenet of Responsys' strategy is to focus on customer success. Our objective is to enable our customers to generate higher returns for their digital marketing programs.

By adopting a consumer centric approach, and managing individual interactions instead of just mass marketing campaigns, we've delivered much higher revenue for our customers. And this allows us to command a premium in the marketplace. Aldo Shoes is a great example of such customer success. Aldo is a global retailer who engages Responsys to enable consumer centric, rather than campaign centric marketing. Aldo is among those customers using interact program, to build automated multistage programs. This means each message is more relevant than ever before. And Aldo has achieved more than double the ROI they expected from their programs, after just one year working with the Responsys suite.

Enabling our customers to deliver more relevant messaging, and strong ROI, is not only the basis of our customers success, it also drives new customer wins for Responsys. This quarter we continue to sign world class brands. We saw particular strength in our wins in the travel vertical. These included JetBlue, Aer Lingus, Fairmont Hotels, and as Scott mentioned earlier, Virgin America. We already serve Virgin Australia, and we are delighted to add this second Virgin Airline. Given this momentum in the travel vertical, we've hired a travel industry digital marketing veteran Ted Wham, formerly the VP of Customer Relationship Marketing at Orbitz, and Ted will provide leadership to extend our expertise, and our growth in the travel vertical.

Outside of travel, we added great consumer brands, Wet Seal and LeapFrog. As well as the UK flash sale operator Yell Limited. We signed Yahoo Japan, an early marquee win for us, after entering this market in late 2012. The second big theme is revenue growth. We take seriously our commitment to drive our top line growth, while still being committed to maintain profitability. An important piece of our growth strategy is our investment in sales and marketing. We have made, and will continue to make investment in sales and marketing. Growing our yearend headcount in our direct salesforce at 88 compared to 66 just a year ago. As we told you in the past, it typically takes about 12 months from hire date for a new sales rep to begin generating revenue. So the full impact of this salesforce growth, we believe, is still to come.

A second piece of our growth strategy is global expansion. In 2012 we completed our acquisition of our Denmark joint venture, and invested in the high growth Brazilian market. Our international revenue in 2012 was 23% of our total, compared to 21% in 2011. We have also established our presence in Japan, and we are now seeing traction there, with great wins like the aforementioned Yahoo Japan.

The third big theme is product innovation. In 2012, we continued to bring consumer centric, interaction management capabilities into the display, and mobile channels. In May, we introduced Interact For Display. While traditional campaign centric display advertising platforms are designed to target a broad audience, or a set of anonymous visitors, Interact For Display empowers companies to deliver display messages to specific consumers, based on individual data and behavior. And in the fall, we introduce Interact For Mobile. A new platform that greatly enhances our consumer centric mobile marketing capabilities. These new capabilities include over a dozen types of mobile campaigns, from automated two-way interactions, to instant win competitions. It can all be deployed according to individual behavior, throughout the consumer lifecycle.

Of course, we believe these solutions will deliver great ROI in each individual channel, but they're also integrated with the core Interact platform which will allow marketers to orchestrate sophisticated, individualized interactions, across every channel. In 2013, we will continue to deliver innovation, that will make our cross channel interaction management platform both easier-to-use and more powerful. We will also introduce entirely new streamlined interfaces, to marry ease-of-use, with sophisticated interaction design. This will support our vision of delivering tools that are powerful enough for sophisticated marketers at the enterprise level, but also easy enough to use for our general business marketers.

All of our product innovation is focused on enabling our customers to do great consumer centric marketing across the digital channels. These product innovations contribute to our visionary status in Gartner's Magic Quadrant, for multi channel CRM and our top overall score in each of the Forrester e-mail waves for the past seven years. Now, I'll turn the call over to Chris Paul, our CFO, to discuss the financial details of our fourth quarter. Chris?

Thanks Dan. Fourth quarter revenue was $34.4 million, up 20% year-over-year. Subscription revenue was $30.3 million, up 13.2% over the prior year. Subscription revenue for the quarter was impacted by approximately $2 million, from our service disruption we experienced during the quarter. If you exclude the effect of this disruption, total subscription revenue growth was 22%. Average revenue was $8 million, or 26% of total subscription revenue. Professional services revenue was $14.4 million, up 37%. Our subscription dollar retention rate, was approximately 100%, after the impact of the disruption. We added 14 customers in the quarter, bringing customer count at December 31 to 413. We are pleased with our customer additions in the quarter, which is a reflection of the success of our investments, and attraction of our salesforce hiring.

Let me talk briefly about expenses and profitability before I discuss our guidance. Please note that the following commentary refers to non-GAAP expenses, and income measures that exclude amortization of stock compensation, and amortization of intangibles. Subscription gross margin was 71% for the quarter, compared to 72% a year ago. Professional services gross margin was 25% for the quarter, compared to 8% a year ago, benefiting from high demand for those services. In Q4 operating expenses were 43% of total revenue, compared to 40% a year ago, reflecting the 3 percentage point increase in sales and marketing expense, from 23% to 26% of revenue.

R&D expense decreased by 2 percentage points, due to the capitalization of software development costs in Q4 of about $600,000. G&A expenses saw an increase of 3 percentage points of revenue, as compared to the prior period. Operating margin was flat at 14% in the fourth quarter versus a year ago. Our cash flow from operations in the quarter was approximately $8.6 million. CapEx was $2 million, which is about $1 million below our forecast. This amount [was current] in Q1 of 2013. Free cash flow, which is cash flow from operations less purchase of equipment, of $6.6 million. Cash and equivalents were approximately $107 million, at December 31, 2012. Fourth quarter earnings per share was $0.07, compared to $0.06 in the fourth quarter of 2011.

Turning to guidance, our revenue guidance for 2013 is $188 million to $192 million. Looking at the year ahead there are three key drivers to our new plan. First, our 2013 guidance is based on robust new customer acquisitions. We added 37 customers in 2012, plus about 25 through the acquisition of our Denmark joint venture. We are targeting to add organically over 35% more customers in 2013, with a target of [50] net additions. In any one quarter, as we saw in 2012, customer count can ebb and flow, because we count customers at the time they generate over $3,000 in subscription revenue in a quarter. We're seeing good results from the investments we are making in sales and marketing. And this we believe will benefit us in future years as well.

Second, we're continuing to work through the contract renewals generally at lower pricing, that we described in last quarter's call. As you saw in Q4, the strength of customer additions in our customer base, did more marketing, allows us to deliver strong performance, and we expect this to continue in 2013. Finally, we expect subscription growth to outpace our professional services growth in 2013. We have seen strong additions of self service customers than our full service customers. That should mean higher growth in the higher margin subscription business in 2013. ¶ Turning to our 2013 margins, we expect gross margin percentage on subscription to remain approximately flat for the year, as we continue to invest in our platform and delivery capabilities, to enhance the customer experience. We also expect our professional services gross margin to remain roughly flat as a percentage of revenue, following an increase of 5 percentage points in 2012, from 11% to 16%. We continue to set as a goal 20% of [regular] margins in this business over the next several years.

Regarding sales and marketing, as we noted on our recent calls, we are pleased with the traction we are seeing in the marketplace, from our investments in sales and marketing. We believe those investments, along with continued product innovation, are important to 2013 and lay the ground mark for growth in 2014 and beyond. We will continue to make investments in sales and marketing, and build on the traction we attained in 2012, by taking a percent of revenue in sales and marketing from 25% to 28%. We believe this will support our goal of driving subscription revenue growth above 20%. Our R&D expense will be roughly flat as a percent of revenue, we have transitioned from using outsourced contractors to hiring our own employees in Bangalore, and are seeing results and financial benefits from those investments. General and administrative expenses will be flat as a percentage of total revenue in 2013, as we've now largely absorbed the cost increases associated with operating as a public Company.

With these expense levels, we are forecasting non-GAAP operating margin in the range of 7% to 9%. We do not expect to become a full cash taxpayer in 2013, benefiting from NOLs and R&D tax credits. We expect our non-GAAP tax rate to be approximately 35% for the year, and slightly below the [first] quarter reflecting the reinstatement of the US Federal R&D tax credit. Our non-GAAP earnings per share guidance for 2013 is $0.16 to $0.18 per share. This is based on estimated shares outstanding of 54 million. We expect our cash flow from operations to be in a range of $20 million to $22 million, and CapEx approximately $15 million. Our CapEx forecast includes approximately $5 million in items we do not expect to occur annually. These are approximately $2 million for a planned third-party data center, to be located in Europe to start our business in that region, and approximately $3 million to upgrade our data center storage to the highest level, in line with our commitment to build world class infrastructure and performance.

Our first quarter revenue guidance is $43 million to $45 million. We expect to see strength in our first quarter, based on the timing of revenue with some of our large annual contracts. Our first quarter earnings per share guidance is approximately $0.05. This is based on 53.6 million shares outstanding. To wrap up, we're excited about the opportunity for Responsys to serve marketers who are looking for product and [solid leadership] to drive their growth. We believe we are making the key investments in sales and marketing, as well as product innovation, to deliver solid growth in 2013, and also build a foundation for future growth. We are now ready for questions. Operator?

(Operator Instructions)

Carter Malloy, Stephens.

First off, on your 18%, give or take, growth outlook for this year, can you help us understand your confidence in that number? I.e., how much of it is from existing customers versus how much you're having to rely on potential new wins?

Carter, thanks for your question.

It's a -- the view we have right now is with a great deal of confidence in that number. As we've described in the past, even when we have significant new customer adds, which, as Chris said, we indicate we will have in 2013, the bulk of the revenue achieved comes from the customers that we had at the beginning of the year, which gives us a fairly high degree of visibility to that revenue forecast. So the confidence is very high.

Wouldn't that scroll up in '13 and suggest similar if not better growth -- maybe an acceleration through the year and into '14?

Yes, that's the view we have right now. And if we continue to have the success with the increased sales and marketing spending that Chris referred to, that's exactly what we aspire to achieve.

And Chris, was that $2 million related to the data center -- help us understand a little more of that -- and that was a one time loss of revenue, correct? So that revenue should actually come back into the model?

Correct, that's a one-time impact we took in Q4. That's a majority of impact from the disruption.

And lastly, the inevitable pricing question, which is, how much pricing impact from the resets you guys discussed last quarter? How much was actually in the quarter and is in your guidance?

If you look at the guidance -- the question we had on the Q3 call, we mentioned the impact of renewals. And that a significant part of those renewals have already taken place during 2012. If you think about our overall customer base, new contracts are at current rates. And in total, more than half of our customers have been reset in pricing. And that has been factored into our forecast and guidance for 2013. So, by the time we're through this year, I think we will be well-positioned, after taking that one-time adjustment, to have higher growth going forward.

In terms of actual impact to your business, it was 2% or 3% or 4% of revenue -- something like that? And that is what you guys have in your guidance?

We're not aggregating out the different impacts of which areas impacted revenue by how much. And overall we said we'd be in the high teens this year and obviously that was part of what impacted the guidance. Going forward, we said we'd be at a higher growth rate than that. That is a combination of, one, working through the impact of these renewals, and also the high growth rate which will get us to the 25% growth.

And your customer discussions there haven't changed any to lead you to believe differently than you did last quarter?

No, (inaudible) what we saw in Q3.

Okay. Thank you very much

Laura Lederman, William Blair.

Can you talk a little bit about what the impact of the outage is -- not from the revenue standpoint; you already talked about that -- but customer discussions you've had, impact on pricing, any customers that feel uncomfortable with it, and are thinking of maybe not renewing? So maybe talk about the impact of that outage besides --?

Sure Laura, in the technology business, service disruptions are, of course, an inevitable part of the business. Most of our customer conversations have centered around the fact that over the last half dozen years, we've had just under a 99.99% uptime. And one of the reasons why people are excited to work with Responsys as the enterprise leader is because of that performance. So I think people have taken it in context.

I do believe the phenomenon of having it happen in the fourth quarter for big retailers makes an impact on their business; and that's why, as Chris indicated, we addressed that with the credits that we made in Q4. From your question, on a go forward basis, we think we factored in all the input we've gotten from customers into our guidance. It's very difficult to disaggregate the specific impacts from a service disruption vis-a-vis overall industry pricing vis-à-vis the great value they get from Responsys and our high ROI. But we've tried to factor those all together to come up with that guidance that we articulated.

Can you talk a little bit about what percentage of the business comes up this year for renewal? I mean a 50% on the new lower pricing -- is it another 25% or so that come up this year for renewal? Or give us a feel for the upgrades this year?

The best way to think about it is around our average contract length. So we have about an 18 month average contract; so you would assume in that construct that maybe two thirds, 60%, 65% of our customers would come up for renewal in any given year.

At the same time, any deals we signed in 2012 would already be at the new pricing, I'm saying not the long-term customers who have grown over time and at a different situation.

Shifting gears a little bit, you mentioned a few times on the call that you have a premium versus other vendors. What has that premium gone to, given the reset in pricing?

We actually think there's been very little, if any, change; but we continue to maintain that 25%, 30% premium. We see that both with new deals that are coming in today, as well as when we see discussions about renewals, that we have not had a challenge maintaining that differential.

But what was the reset? I'm a little confused.

The reset was still done at a 25%, 30% premium to our pricing was today. But we had a set of customers that, over the last several years have not had -- they just have renewed at the same rate, even though the industry pricing had come down. Because of the high ROI they achieved, they weren't really pushing us, and we, as we described before, there's a few years that were built into that. Now we had a set of customers that would've been very pleased to have a 30% premium, but some of them found themselves in a situation that maybe being a 60%, 70% premium. And as we went into those renewals we described late last year, wanted to level that back to a 30% premium.

That make sense. Final question for me, which is on the competitive environment -- what changes have you seen? I mean, now you see ExactTarget, [Buying Per Dot], and a lot of other interesting changes, with [Aliko] getting bought. What are you seeing competitively, in terms of who you are seeing more of and who you are seeing less of, that sort of thing?

Since we happen to have Scott Olrich here, I'll turn to him. My particular perspective is, we haven't seen some significant changes from any competitive dynamics over the last part of the year, but let's take advantage of the fact that Scott's here, and more time in those trenches he can give you the perspective he has.

Great.

I think the big thing you're seeing is that marketers are increasingly coming to Responsys because they understand this kind of traditional campaign mindset is not going to cut it; and they are actually looking and need to move more towards this idea of an interaction management mindset, which a larger portion of their programs are going to be automated in nature. Because marketing organizations just don't have the ability to actually deliver relevant marketing in a manual campaign mindset; so they're really looking for platforms that are going to allow them to automate in individualized and ultimately optimize their marketing across channels, because they know that, that is the path to higher revenue and engagement with their customers.

And then, lastly, it's a lot more efficient, and so they need that. And I think you're seeing that across B to B and B to C. Obviously, it's even more important in the B to C world because you have a larger number of customers that you need to have, and you need to be able to manage those interactions at a much larger scale, than you traditionally need to do in the B to B world.

Thank you.

Jennifer Lowe, Morgan Stanley.

John Parker calling in for Jennifer Lowe. Nice end to the year.

I was hoping, one, you happened to notice in the quarter is that your Professional Services revenue came in a little bit higher than your modeling. I was wondering if you could talk a little bit about that outperformance in the quarter, and what we should be thinking about as it relates to the impact on the P&L in the fourth quarter?

Absolutely. The PS was quite strong this quarter. If you go back and look at the comparison, it was a relatively light compare from 2011, which is why the percent increase was higher. We sell a lot of customers in the holiday season looking to Responsys to say we want even more support to make sure we get the full value, particularly for those retail customers. So they increased their usage above what we planned. And good news is, we built some capacity into that part of our organization, and we were able to meet that demand -- that increased demand -- from our customers.

From a go forward perspective, I think as Chris indicated, we actually see the subscription side of our business growing faster than the Professional Services any given quarter. Of course, there can be a variation there, but going forward we actually think that, while PS will continue to be strong, subscription will be a little bit stronger.

Great, and I think I might've missed the exact numbers you mentioned, but originally you were speaking to a 40% increase, I believe, in sales capacity for calendar '12. And I'm curious how you saw the end of the year compare your goals -- what productivity looked like for some of those reps that you've even hiring throughout the year? And what type of growth you're also looking for in capacity in calendar '13? And then, as a follow-on to that, how are you thinking about that growth as it relates to both your Enterprise versus the General Business segment in the business?

Sure. Again, since having Scott here is wonderful, I'll let him talk a little bit to the General Business versus the Enterprise mix and where we're seeing that growth. But in the macro numbers we had 66 reps in the end of 2011, and we ended at 88 reps at the end of 2012. So easy math to do -- 33% increase in that front. We also made increases in some of the support functions, the marketing functions that improve our win rates; and making those reps successful.

Scott, do you want to provide some color? We don't break out the number of reps by group, but Scott, do you want to provide some color on where you see that demand?

Yes, the fastest-growing segment in the business is the General Business segment; so that's the largest number of net new reps we've added in the field. I know that Chris and Carla have shared, traditionally the General Business segment has been focusing on deals that are about $50,000 in annual subscription value, all the way up to about $150,000.

The one additional shift is, we've been having so much success with that model that now we actually are starting to increase the deal size that, that particular team can go after. So now they're actually going after deals up into the $225,000 mark. So we are extremely bullish on that sales model, and are continuing to grow it rapidly.

Okay, that's helpful.

Then maybe one last one following up on that -- I know you probably can't give an exact number in terms of the wins that you've had over the past couple quarters coming from Enterprise versus General Business. But is there any high-level commentary you can help directionally tell us about -- where some of those new customers are coming from in those segments?

Sure, and I think -- again we don't have a breakout by segment, but if you think about it from a customer count standpoint, and what we've talked about in the past, we're getting to the point where the numbers of customers are about equal between those two businesses. Obviously, the total revenue and the booking size is much larger to the Enterprise because we do have the significantly higher AOV there. But from a number of customers, think about that roughly in the half range.

Great, thanks a lot guys.

Mike Nemerov, Credit Suisse

Kyle Chen for Michael Nemerov. Thank you for taking the question.

I was wondering if you can comment in terms of the traction that you're seeing from your non e-mail products -- mobile, social display -- and how much you are baking in terms of contribution for 2013?

The impact there from a contribution standpoint will still be relatively small to our total revenue in 2013. But the growth rate is much higher; it's just coming off a very small base. One of the things we talked about, we aspire to do from a reporting standpoint is, sometime this year start to break out things like, what's the attach rate we have, what percentage of our customers have an e-mail and an additional -- whether that be display or mobile or social. And again, by the end of the year we've given the indication that we hope to be able to actually give you a breakout on -- here's the revenue coming from the emerging channels.

And from a standpoint right now, qualitatively, I'll tell you, though, we are quite excited. We finished the year very strong from a standpoint of customer excitement and enthusiasm around our enhanced display and mobile products. And I think those are the two areas you're going to hear us talking a lot about in 2013, both from the standpoint of driving continued great customer success around these true cost channel marketing programs; but now in 2013 having that start to actually translate into revenue success for Responsys as we scale those programs beyond the testing level.

Great and I guess with the hiring of Ted Wham to head up the travel industry solutions, is this a new strategy for the Company in terms of becoming more vertical-specific?

Yes, the verticals is something we spend a lot of time on. And again, I'll refer to Scott to give you a little more color on it. I would say it is not a significant strategic shift into a vertical orientation; we do believe there's a lot of value that we cross-fertilize companies between different verticals. But we spend a lot of time thinking about this particular movement.

Scott do you want to talk a little about travel in the general question?

Yes. I think the most important thing, I think -- the way we positioned ourselves in the marketplace is that we're not a vendor; we're a partner with these leading brands as they move from a campaign-centric approach, to a customer-centric approach. So one of the things we do is, we are actually seen as a thought leader. And so what we're doing with Ted, just like we've done in retail and other verticals, is we are actually bring that thought leadership out into the marketplace to our prospects and to customers, to give them a better sense of what the leading marketers are doing in that particular vertical, so then they can be able to leverage our platform in the most powerful way for their business.

Thank you.

(Operator Instructions)

Brendan Barnicle, Pacific Crest Securities.

Chris, when I think about the guidance, it's implied that earnings will be lower in the remaining three quarters because of the investments you're making that you laid out. What do you expect the linearity on that to be? Is that going to be more heavily weighted in Q2 and Q3 and then we see the benefits in Q4? Or is it going to be all the way through those remaining three quarters? Can you give us any better sense on how that may roll out?

Brendan, was your question on the linearity of profitability or the linearity of something else?

Yes -- linearity of profitability. And really, I'm just getting at how the earnings numbers are going to flow through those remaining three quarters? If it's going to be consistent across all of them; if you expect it to be more weighted towards the Q2 or Q3 or Q4? How we might think about where the bulk of that spending is going to come?

There are two sides, right? One is the revenue side and the other one is the expense side. So I think on the expense side you will see a fairly constant increase during the year on particular sales and marketing, which is the area that has the highest growth. Then back to revenue; we do get a boost in Q1 from some of these [old] contracts, and have good subscription revenue, overage revenue in Q1.

In Q4 is a high seasonality; Q4 is obviously the higher-volume retail period, so we get the boost from the revenue. And then there's some seasonality in expenses inn for example [In Tract], the big customer event that we have, specifically in May. It was in May last year; it will be May again this year. And I guess a couple million dollars in marketing spend we have coming in there. So Q2 typically is the lowest profitability quarter during the year. And Q1 and Q4 tends to be higher profitability.

That's helpful.

I also noticed in the guidance for this year it looks like the comp assumption is about double what it was last year. Why the big uptick there?

We're making assumptions on some hires and also some additional RSUs for some key team members. Remember, a large part of our team has been in the Company for a while. One thing we are about is retaining employees, so we've got a lot of employees that have been fully vested in some stock options; we have some resales we need to do there. It really is new grounds to new employees. Obviously, every employee member gets some grant, although smaller amounts typically; but then most of the key employees has some grants in there.

Lastly, as we think about the shift towards these new contracts that may have a smaller overage -- or correct me about this -- should we be assuming a smaller overage component in those, so that overage may in fact, could be down this year on a year-over-year basis because of the shift that's going on there?

As a percentage, I would say yes. We saw very good decent overage in Q4, larger than we've seen before, but we are assuming that customers making high adjustments on renewals; that which we saw some in 2012 we think we will continue to see that in 2013. [High commitment] will mean some lower overages as a percentage of total revenue for the year.

Do you think overage will be up on a year-over-year basis in an absolute dollar number?

It'll be up, but the question is the extent of that, right? I don't think it'll be up at the same growth rate that the core subscription will be growing.

Got it. Thank you.

I'm not showing any further questions at this time. I'd like to turn the conference back our host for closing remarks.

Thank you all for joining us, and we'll talk to you next quarter.

Ladies and gentlemen, this does include today's presentation. You may now disconnect, and have a wonderful day.