甲骨文 (ORCL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Responsys second-quarter 2013 earnings conference call. At this time all participants are in a listen-only mode. Later, we ill conduct a question-and-answer session and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to the call over to Carla Cooper, Senior Director, Planning and Analysis. You may begin.

Thank you and thank you for joining us today to discuss Responsys' results for the second quarter ended June 30, 2013. 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 and then turn it 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 opportunity, 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?

Thanks, Carla, and good afternoon to everyone joining the call. We are quite pleased with our strong second-quarter results and our progress against our long-term goals. Responsys delivered second-quarter revenue of $49.5 million, an increase of 25% versus the second quarter of 2012, and non-GAAP earnings per share of $0.02. We believe our strong performance is further recognition that Responsys is an established leader in marketing cloud software and services. Our continued investment in product innovation has allowed us to stay at the cutting edge of the marketing technology industry, maintain a clear competitive advantage for our customers, and increase the rate of return on their digital marketing programs. This strategy, coupled with an increased investment in sales and marketing, has introduced us to new customers and expanded relationships with our existing ones. We believe this important investment will allow us to continue to drive revenue by meeting the growing market opportunity and extending Responsys' leadership position.

In the second quarter, we signed many new North American clients including iconic fashion brand, J. Crew; jewelry and watchmaker, Swiss Watch; and next-generation event technology website, Eventbrite. These wins underscore Responsys' ability to meet these leading marketers' need for a sophisticated platforms that will drive automated and personalized lifecycle messages across the digital marketing channels. Globally, we have also continued to expand our footprint. New international customers this quarter include Golf Digest Online, Japan's largest online golf business; Kmart Australia, Australia sixth largest retailer; and UK-based ASOS, the UK's largest independent online fashion and beauty retailer.

We also continue to expand our relationships with existing customers. More and more Responsys customers are turning to us to add new capabilities and services that complement their current programs. We believe that the world's leading marketing organizations are choosing Responsys for enhanced sophistication in targeting and sequencing of digital messages because Responsys offers the only marketing orchestration platform that can support these advanced requirements.

One example of this is 1-800 Contacts, which is been a Responsys customer since 2006. 1-800 Contacts was already running a successful e-mail orchestration program using our technology and opted to add display retargeting to their digital marketing program to optimize their connection with consumers. By leveraging the display retargeting capabilities of the Responsys Interact Marketing Cloud and, specifically, our Interact program functionality. 1-800 Contacts is now able to target customers who have their prescription expiring with coordinated e-mail and display messages. They do this through automated programs that start 45 days before a patient's prescription expiration and deliver a coordinated series of display ads and e-mail messages. The automation here is key. 1-800 Contacts' marketing staff could not deliver this level of orchestrated and individualized messaging manually. And the impact is significant, as adding this extra touch point has led to an incremental four times return on investment for the company.

Another recent example of how we have expanded one of our existing customer relationships is with electronic payments company, ACE Cash Express. ACE selected Responsys to orchestrate its messaging across the digital channels. In addition to our best-in-class e-mail orchestration functionality, ACE Cash leverages Responsys Interact for Mobile in order to deliver timely reminders of payment, loan extensions, and extended product line qualifications via SMS notifications to their highly mobile customer base. As an early adopter, ACE sees major value in the ability to cohesively market across the digital channels.

Across our entire customer base, an important measure of the significant usage is our $1 subscription rate, which during the second quarter was once again more than 100%. We have achieved this result all 10 quarters since our initial public offering. We believe this trend underscores the value customers place on working with Responsys.

Turning now to our product innovation efforts. The Responsys Marketing Cloud was created to orchestrate individualized communications across digital channels at massive scale, which is more important to marketers today than ever before. And this quarter, we delivered several new enhancements to help marketers realize this vision. First, we rolled out a completely reimagined Message Designer that helps marketers easily create messages that are tailored to the individual consumer with dynamic content and greater personalization. Our research shows that when consumers received these kinds of personalized communications they are significantly more likely to buy a brand's products, to consider other products from that brand, and to maintain a longer-term relationship with the brand. This new Message Designer gives marketers easier and more powerful tools to do just that. The initial release of this Designer is focused on e-mail messages but the framework and personalization language that are included will support other channels like mobile and display. We have also continued to invest in our mobile offering and have made enhancements that allow marketers to track mobile conversions and better establish the ROI of their orchestrated mobile marketing programs.

Finally, we continue to make significant investments in our display product line. After releasing a brand-new platform for orchestrated display advertising in the first quarter of 2013, our June release added capabilities that give marketers better visibility into their addressable display audience so they know right away who they can target not only with personalized e-mails but also with personalized display advertising. With brand new testing and reporting capabilities, they can now measure the specific impact of orchestrating display impressions along with e-mail. For our customers who are already using this technology, they are reporting that they are seeing increases in conversion rates of over 50%.

We've given you some examples of our enhanced market-leading functionality and why customers are returning to Responsys to increase their competitive advantages. We are also honored that Gartner recognized this leadership in May, naming Responsys as a visionary in their 2013 Magic Quadrant for CRM Multichannel Campaign Management. The Gartner Magic Quadrant is one of the industry's most rigorous research tools for evaluating marketing-leading technology companies. Responsys is the only SaaS provider who has earned a position in this prestigious evaluation six consecutive times. We feel this further validates that the Responsys Interact Marketing Cloud has become one of the leading solutions for companies looking to more effectively and efficiently manage their digital relationships and marketing interactions across e -mail, mobile, social, display, and the web.

Finally, on a more personal note, I'd like to thank directly the now more than 1,000 employees who work hard every day to make the Responsys Interact Marketing Cloud the must-have solution for CMOs in this new era of marketing. Reaching this milestone, as well as celebrating Responsys' 15th anniversary this year, demonstrates what an exciting time it is here and I'm thrilled to be working with all of you. Together, we're going to continue to drive more customer success than anyone in our space and make Responsys the best place we all have ever worked. With that, let me turn it over to Chris.

Thank you, Dan. I am pleased to report second-quarter revenue of $49.5 million, up 25% from $39.5 million in the second quarter of 2012. Subscription revenue was $34.3 million, up 25% as compared to $27.5 million in the second quarter of 2012. [Overage] revenue remains strong at 24% of total subscription revenue driven by a continued strong usage of our platform. Professional services revenue was $15.2 million, up 25% as compared to $12.1 million in the second quarter of 2012. Subscription dollar retention rate was more than 100% and, as Dan mentioned, this has remained more than 100% all 10 quarters since our IPO. Our customer count was 432, up 17 from last quarter and up 23% from the second quarter of 2012 count of 353. Please note that the following commentary refers to non-GAAP expenses and income measures that exclude amortization of stock compensation and the amortization of intangibles.

Subscription gross margin was 73% compared to 71% a year ago. Professional services gross margin was 13% versus 14% a year ago. In the second quarter, R&D spend was flat as a percentage of revenue at 9% and G&A spend was flat as a percentage of revenue at 10%. In line with our previous commentary, we have continued to pursue our strategy of investing for growth to capitalize on the tremendous opportunity in our market. As a result, sales and marketing expense is up 5 percentage point versus a year ago to 34% of revenue. There are couple of elements worth noting within sales and marketing expense for Q2. As planned, we experienced seasonally higher Q2 marketing expense due to our annual user conferences in the US and EMEA. In addition, we are glad to see this quarter's commission expense at higher than forecasted levels, as this was driven by sales traction that exceeded our expectations.

Non-GAAP operating income for the quarter was approximately $700,000, reflecting the operating expense items I just mentioned. During the quarter, we added approximately 100 people and ended with almost 1,000 employees. Our people are key to capitalizing on the market opportunity and we are thrilled to be a sought after employer by showing such success in recruiting and retention. Non-GAAP net income for the second quarter of 2013 was $1.1 million, part of which was the result of a tax benefit we had in the quarter to true-up our year-to-date tax provision. Non-GAAP earnings per share was $0.02 per share compared to $0.03 in the second quarter of 2012. Free cash flow, which we define as cash flow from operations less the purchase of property and equipment, was $1.9 million in the quarter. Cash and equivalents at the end of the quarter were approximately $107 million.

Based on this strong revenue performance and our view of the rest of 2013, we are raising guidance for the second half of 2013, bringing our 2013 revenue guidance from a range of $190 million to $193 million to a range of $195 million to $198 million. The mid-point of our range represents growth of over 20% for the year and reflects the confidence you are seeing with our existing clients increasing their spend and expanding the uses of a variety of offerings as well as the contribution from new customers. Regarding earnings per share, we are providing updated 2013 non-GAAP earnings per share guidance of approximately $0.15. As you know, we are determined to drive our revenue growth so we increased our sales organization by 20% in the first half of 2013 and saw tremendous results. Because of the success, we will continue to explore investments in the growth of our Business, which is contemplated in the earnings per share guidance.

In terms of our investments, our spending is primarily focused in the area of sales and marketing, including the hiring of quota-carrying salespeople. Because it takes about a year from the time we hire a sales rep until the first clients produce revenue, our investment precedes revenue growth, driving our margin down as we make this investment. For the third quarter, we are establishing revenue guidance of $47 million to $48.5 million in revenue and non-GAAP earnings per share guidance of approximately $0.02. Note that in past years, we have seen total third-quarter revenue relatively flat with Q2 and our [overage] percentage tends to hit its low point for the year. We expect these investments in the Business will affect our cash accordingly, giving us operating cash flow in the range of $16 million to $18 million for the year.

Our CapEx budget for the year remains unchanged at approximately $15 million. We saw better than expected collections in the quarter and although we will attempt to maintain that performance, we believe it is appropriate to forecast a more prudent result and therefore project collections in Q3 to be slightly less than Q2, which results in operating cash flow of around $1 million to $2 million. This, together with CapEx of around $3 million to $4 million, yields a modestly negative free cash flow. Incorporated into our guidance is our 34% non-GAAP tax rate and 54.8 million shares outstanding for the year.

In conclusion, we couldn't be more excited about the revenue growth we are delivering and our market opportunity. We believe we have a strategy in place along with the ability to leverage our products and people to deliver attractive results. We are now ready for questions. Operator?

(Operator Instructions)

Carter Malloy, Stephens Inc.

Congratulations on another big quarter. So first question on just sources of growth, is your growth primarily been driven by new customer acquisition or more existing customers? And really, just trying to get a sense going in the next year, given the big ramp in sales people and the time it takes to get them to be productive, is this a growth rate you guys think you can sustain into 2014?

Sure. Why don't I take the first piece and Chris can talk to you a little bit about the growth rates. So it's really across the board. We've had very good strength in our new customer adds. You've heard me refer to some of the great brands we brought on both in North America and across the globe so we're very pleased with that and as the examples I gave you, ACe and 1-800 Contacts, we continue to see that very high-dollar retention rate as existing customers are expanding their profile, taking on more and more of the capabilities that Responsys now has to offer to allow us to increase the revenue there. So it's been consistent across both the new and the existing and same thing for the discussion around the enterprise versus the general business segments, Carter. We continue to see very enthusiastic results across both of those segments and that's part of why Chris articulated we're going to continue to heavily invest to go after that very significant market opportunity.

Remember also that because our business model -- the traction that we are seeing in sales this year -- has had many more impacts so far on our current year revenue that ties into forward-looking on the headcount in sales. Absolutely w e continue to make those investments. We think positioning ourselves well for growth not only this year but also in 2014 and beyond.

Okay, thanks. So -- and then can you guys also discuss the changes to Gmail and how that impacts deliverability or ROI and the change that will impact your business potentially from that?

Oh, sure. Well so I can give you a little context, Carter. So Gmail represents a little less than 20% of most of our customers' lists but any time someone has an innovation that changes anything in the e-mail portion of our Business, we are always quite attuned. [ISPs] in general continually make changes in how they think about managing deliverability and delivering messages to their end consumers. What we tend to find is for the marketers that really have the permission, as our customers do, these kinds of changes don't have a significant impact and we haven't seen any significant impact in terms of open rates as an example to date. So we don't expect this to have, again, any long-lasting impact on our customers, on their ability to reach their end consumers through the e-mail channel but I will also add that it's one of the reasons we are such strong proponents of a cross-channel approach, so that marketers make sure they have multiple vehicles for reaching their valued consumers.

Okay. Thanks so much, I will hop back in the queue.

Pat Walravens, JMP.

Oh, great. Thank you and congratulations, you guys. Let me just ask the big question, which is what impact have you seen in the competitive environment from Salesforce.com's acquisition of ExactTarget?

Well it's a little bit early but what we have seen so far has been consistent with our expectations were. A big positive for us is that it's pushing them more to the B2B space, as we would all expect, being acquired by a company like Salesforce.com, who is fundamentally focused on B2B customers. And for us, in our core B2C space, which we think is the much larger, bigger opportunity, we are quite pleased. We are seeing customers coming to us and prospects coming to us saying your leadership and your focus on the B2C space, makes you even more attractive to us now that one of your more significant competitors is now evidently less focused on that space. But, in general, Pat, it's the same thing we've talked about for years.

Responsys has been very focused, for really the last 10 years, on being the independent leader in e-mail and cross-channel marketing and we have seen a lot of competitors get purchased by other companies and in general just like the Forrester note that came out on the Salesforce deal for ET, attempt to make those people less focused on that business, and they tend to get distracted, they have turmoil internally, they management challenge with integrating acquisition, et cetera, et cetera. And that has allowed us to continue to have our independent leadership position. So we feel this will hopefully have some of the same dividends for us and allow us to continue to grow as the clear leader in the space.

Great. Thank you.

Michael Nemeroff, Credit Suisse.

Just a follow-up on Carter's earlier question, so the 20% of inboxes that are Gmail customers, have you seen a drop in response and/or open rates subsequently from the change that they've made to the inbox?

We've not -- well, we've had our deliverability team look carefully at it, there has also been some other documented work from other companies that are in our ecosystem and so far the reports are no changes to open rates or response rates for the folks -- the portion of their list that are Gmail.

That's great, thanks. And then on the services margin at 13%, Chris, how can we get -- how could you get those margins up or what do you expect those to trend over the next couple of quarters and over the next couple of years and if you could remind us again what the target margin is for that section of the Business?

Where we are operating now is at the low-end of where they're likely to be and it is a little cyclical, right, as you make those investments in the Organization and staff up and have them work on projects on to get productivity off the broader PSR team and starting [up] with forecasting revenue so you will go through the cycles were you do have a do a little lower profitability than we would like to see. Long-term, our view has not changed. Those margins needs to be 20% plus and we have the focus and the discipline to get there, it is just going to take us a while. But our current model still absolutely contemplates 20% plus margins in that business.

So does the lower margin imply that you are doing a lot of work on new customers that are being brought on to -- that we will start to see an even larger ramp in subscription revenue going forward? Is that how we should think about it?

Absolutely. The core focus of that team, if we look at the priorities, [number] first is customer success and Company overall growth. So that's refocusing on the higher-margin subscription business. If you go way -- next down on the list, somewhere down there would be the profitability so -- it would [cause mechanism assertions] how high do we treat that business versus how do we focus on growth and forward-looking growth and we've made it clear to everybody that right now the priority for us is the overall growth of the Company and margins afterwards.

Just one last one, if I may, just the implied Q4 guidance subtracting from the year from Q3, just around close to 14% at the mid-point, is that due to some something that you guys see in the Business or is that just a bit of conservatism and will update that following Q3?

It's obviously guidance, we are putting in the mid-year -- it is guidance -- we will revisit that as we go along and have better visibility after Q3.

Thanks for taking my questions.

Brendan Barnicle, Pacific Crest Securities.

Thanks, Dan. I wanted to just follow up quickly on Pat's question about the ExactTarget acquisition, are you seeing any additional opportunities in the ecosystem and partnerships or relationships that may come up as a result of this change?

Yes, we have. We've had a couple of different large technology companies reach out to us and say very specifically they were trying to figure out away to partner with ExactTarget and to give them credit and, that is a company that put a huge focus on their partner ecosystem and so was an important part of their success. And some of those people are saying they see less support than they used to and some of them are saying they are not comfortable partnering with someone owned by Salesforce.com. So there is different reasons for that but we are seeing a reasonable number of calls from folks that say, they would like to invest more aggressively and in a Responsys partnership, post that deal.

And when you think those new relationships might bear some fruit?

It's 2014, the question is, is it first half or second half and I want to be a little bit conservative, Brendan. I believe that those partnerships take a little while. There is technology investments on both sides, integration efforts on both sides, before you really get to the aggressive selling. Now some of the people have come to us with actual leads and say, here is a customer of ours and we would really rather get them on your platforms than their platform given this change so let's talk about making that happen sooner rather than later but those are one-off sales opportunity. In terms of really trying to leverage a partner ecosystem, we are thinking a year out just before we start to see that so second half of 2014 is the appropriate time scale.

Perfect, thank you. And Chris, just touching base back on pricing. Any changes there? I know last quarter you were saying that it looked pretty stable and we saw a nice customer count and we saw that accelerate again this quarter. So is that all behind us now?

Yes, what we are seeing now is very consistent with what we mentioned on the previous calls. Directionally there is no change in that at all.

Terrific. Thanks guys.

Jennifer Lowe, Morgan Stanley

I just wanted to touch on the cost side a little bit and I know, Chris, in your prepared remarks you flagged a couple items that were impacted this quarter specifically on the cost side but even looking out to the year as the revenue continues to outperform, it looks like Q3 being a little better than you, raising the guidance for the full year, we're not necessarily seeing that translates through, so relative to where you thought the costs were going to be coming into the year, is this a function of continuing to increase the investments on the sales side as you start to see some flow-through of some of the investments you've already been making there or is this really more one-time items or less recurring items that should go way over time? I'm just trying to triangulate the spending versus the upside on the revenue?

Well in the near-term, there are less one-off items. It really is investments we are making in the bigger organizational structure of the Company primarily in sales and marketing. Obviously as we scale, we're going to have to scale that Organization in line with that. [We'd] be taking a [tier] step forward now in just making significantly more investments than we were contemplating in the beginning of the year when we gave annual guidance and we absolutely believe that that's the right thing to do for where we are as a Company so effectively we are taking our top-line beats and reinvesting it back in the Business, which is the right thing to do at this point.

And just giving you specific example, Jen, if you go back to Brendan's question, earlier in the year we weren't thinking of investing as much of the partner ecosystem and the partner program. Now that we are seeing a dramatic increase in those inbound interest, we are also realizing there is a much bigger market opportunity for us to go after that so we are aggressively hiring into a program to work with partners in that way and that's an example of an additional sales and marketing investment opportunity we might not have seen. The more we look out in the marketplace in general, we are just seeing a tremendous opportunity for marketers that want to leverage our technology and we want to invest now while the time is right to drive that growth.

And maybe just one last question for me related to that, so in terms of as you go out and you are looking for good salespeople. A lot of other companies are hiring fairly aggressively as well. What has the hiring environment been like and how do you -- how have you been in terms of your ability to find the right people to fill these roles?

The competition for the top talent that we want to bring into Responsys is always difficult and the markets in which we operate, the geographies in which we operate are very competitive, full stop. We've been very successful at building a culture at Responsys that attracts people that want to be at an exciting growth Company that is going to be really great from the standpoint of delivering customer success but also a great career opportunity. And I'd just note, if you hadn't seen the press release, we're really were pleased to see the Glassdoor mentioned us as one of the top 25 technology companies in the world to work for and we, at our first debut there, at number 8 on that list. And so we think that there is a lot of opportunity for us to leverage that popularity amongst our employees and their enthusiasm for reworking at Responsys to win that war for talent. And at this point, we've been very pleased with our success both on our retention as well as our ability to go out and bring in great new talent and I don't see that changing in the future. I don't think that the hiring environment will stop us from achieving the growth goals that Chris outlined.

Thank you.

(Operator Instructions)

Justin Furby, William Blair.

(Operator Instructions)

Thanks for taking my questions and congrats on the quarter. I just wanted to follow up on the pricing. Chris, I just wanted to be clear, did you say that you are now pretty much through all the renewals? Last quarter it was something like 75% of the way through -- are you now mostly through all of those in terms of getting through and updating pricing?

Yes. We are substantially through those renewals. Obviously we have longer-term contracts that will -- we constantly have contracts renewing but [far] the majority of those are through the pricing at this point.

Okay. And then Dan, if you look at the 17 customer adds that you guys brought on and new business in this quarter, what were the bigger -- competitively, who are you mostly replacing and has that changed at all over the last few quarters?

Yes. I don't think there's a significant change in the mix for the -- so the net new adds coming in, where they are coming from. We continue to see two sets of competitors, so there is the traditional marketing service providers who acquired into the space several years ago -- that's your Epsilons, your AXIOMs, your Experience, and then we see more the -- in the general business segment, we see more [per play] market companies, that had been ExactTarget's strength, of course, Silverpop, Bronto, et cetera. And so that mix hasn't really changed in the last couple quarters and I don't foresee that would be changing going forward. Folks that are on those platforms that decide they want to upgrade to Responsys is going to continue to be our primary source of growth.

Okay, great. And then I'd love your thoughts on the other acquisition, the Adobe Neolane purchase -- what impact you think that may have on your space?

Yes we're very close with Adobe, they are an important partner for us, we've recommitted to each other to sponsor each other's marketing events in 2014, I don't believe we see a significant change in their relationship to Responsys or for that matter to any of the other competitors of ours that they partner with. And the Neolane, the core of what they're looking for there is more the traditional campaign management tool, very competitive to a Unica, if you will, and that offline capability is the primary attractiveness to Adobe so at this point we don't expect to see and we don't see Neolane that frequently on a competitive set and we don't think that will change the ecosystem for us.

Okay. Great. And then one last one if I may, where are you guys in terms of moving your legacy customers off of the old platform, what does that look like today if you look at your overall installed base? What is the rough percentage still on the legacy platform?

Yes, so the vast majority of our significant customers are on the new platform. We are 75% and above in terms of all volume is now on the [Orion] or 6X platform. We have a couple customers left that we are migrating over before holiday season this year and we should have them -- the vast, vast majority -- maybe a few outliers -- any significant customers for holiday 2013 will be on the new platform.

Okay. Great. Thanks very much guys, congrats again. Thanks again.

(Operator Instructions)

And I am not showing any further questions at this time. I would like to turn the call back over for closing remarks.

Great. Thank you everybody for joining our second-quarter call today. We will speak with you next quarter. Thanks for joining in.

Ladies and gentlemen, this concludes today's program. You may now disconnect. Good day.