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Edited Transcript of BV earnings conference call or presentation 28-Feb-17 9:30pm GMT

Thomson Reuters StreetEvents

Q3 2017 Bazaarvoice Inc Earnings Call

Austin Feb 28, 2017 (Thomson StreetEvents) -- Edited Transcript of Bazaarvoice Inc earnings conference call or presentation Tuesday, February 28, 2017 at 9:30:00pm GMT

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Editor: [1]

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[ Stand by for realtime transcript ]

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Unknown Speaker* [2]

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Greetings and welcome to the bazaar voice recorder 2000 recorder 2017 earnings conference call.

(Operator Instructions) as a reminder this conference is being recorded.

It is now my pleasure to introduce your host this Linda Wells, Director of Investor Relations . Thank you you may begin.

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Unknown Speaker* [3]

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Good afternoon and welcome to today's conference call to discuss is our boys financial results for the fiscal third quarter of 2017 Andy January 31, 2017. I'm joined today by Gene Austin, Chief Executive Officer and Jim Offerdahl, Chief financial Oficer . Following the prepared remarks will have and S question-and-answer session.

Please note that we are simultaneously webcasting this call on our investor relations website at investors.bazaarvoice.

com . The earnings release with our results for the third quarter of fiscal 2017 was issued after the market closed today.

Certain statements made during this call including those concerning our business Outlook and guidance, growth plans and opportunities, potential acquisitions, Outlook on legal matters, sales execution, and the ability to capitalize on our opportunities are all forward-looking statements.

Forward-looking statements are subject to a number of risks, uncertainties, and assumptions that are described in our Secretary filings including the risk factors section of our form 10K and fiscal year ended April 30, 2016 April 30, 2000 16,000 the Secretary on June 20, 2016. Additional information will also be set forth in our future early reports on 10-Q annual reports on form 10K, and other filings that we may make with the Secretary.

Should any of the risks or uncertainties materialize or should any of our assumptions prove to be incorrect, actual results could differ materially and adversely from those anticipated or applied it is forward-looking statement.

We do not intend and undertake no duty to release publicly any updates or revisions to any forward-looking statements made during this call.

Finally some of the numbers that we will discuss today during this call will be presented I know GAAP basis.

Today's press release together with the accompanying table contains the calculations of these non-GAAP financial measures and in full reconciliation between each noncapital measures and its corresponding GAAP measure.

Please note that we are unable to reconcile any forward-looking noncapital financial measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.

In particular we cannot reliably estimate our future stockbased expense which is dependent on our future stock price and we expect our future stock raised expense to have a significant impact on our future GAAP results.

With that Ill turn the call over to Gene Thank you Linda thank you all for joining the call today.

I am pleased with the overall progress we are making to transform the business, highlighted by continued improvement in retention in the bookings growth in our core business as well as 37% year-over-year revenue growth our advertising offerings.

Let me briefly review our financial results for the third quarter.

Revenue of the $.5 million was up 1% year-over-year and in the range of our guidance.

Adjusted EBITDA of five put $3 million was significantly better than our guidance and year to date adjusted EBITDA of $14.4 million was up seven-point $6 million from the same period a year ago demonstrating the success of our focus on margin expansion.

Not GAAP EPS of $0.02 was also better than our guidance . Our GAAP loss per share for the quarter was $0.03. Through three quarters it is clear that we have come a long way in both the health of our business fundamentalist and the execution of our strategy.

Client satisfaction and dollar terminated had take big steps forward and are the foundation for our future.

Our advertising business is beginning to demonstrate stronger fundamentals which we believe foreshadow more growth ahead and we are now consistently producing positive net bookings which point to higher growth for the coming quarters in our SaaS business.

Let me now turn to third quarter specifics beginning with our sales performance.

North America had a good quarter closing five yields over $200,000 and the selling environment remains healthy with stable ASP and generally good pipelines.

Dorks bookings performance was disappointing especially after having such a good first-half start.

Having recently reviewed the trends I am generally pleased with the pipeline for Europe heading into Q4 and believe we will see a rebound in the fourth quarter out of our team in a Mina.

Europe remains an important region for our company and we see a big market for both our core SaaS problems and our merchant offering space in our shopper data.

As such we announced earlier this month we have promoted Joe Orrick our former CNN vice president of client success to Executive Vice President and General.

manager for a Mina will be responsible for building a comprehensive growth strategy for the countries we serve today and for further expansion.

Also during the quarter following the completion of a handful of pilots we have decided to delay the launch of our recommendations engine until the first-half of fiscal 2018. While our first group of retail pilot clients saw positive test results we need to run another set of pilots to validate the product functionality and also determine the pricing and go to market strategy.

The foundation for our transformation has always been centered with our clients and our progress in client satisfaction and dollar churn is notable this year . All of the investments we have made to enhance the customer experience and to beef up our professional services continue to pay off.

Fiscal year to date services bookings were up significantly versus a year ago and for the fourth consecutive quarter we delivered year-over-year improvement in dollar churn.

Additionally our client retention rate was its best intend quarters.

Underpinning these trends it is a continued improvement in our dated date measurement of client satisfaction as measured by our net from over spores which have consistently improved this year and are now positive.

Lastly we have seen an increase in the number of large of sales for the first time in a long time.

Combined these improvements in client help over the course of the year give us confidence to improve our forecast for dollar churn for FY17. We now expect in movement of 400 basis points year-over-year compared to our prior expectation of 250 basis points.

During the quarter we saw strong demand for our sampling offering . Recall that we launched sampling a couple years ago as it at onto conversations to help brand and retailers provide samples of an offering to community of consumers in exchange for reviews.

After early tepid demand we relaunched the program as a managed service with the key difference being the Bazaarvoice manages the entire program on behalf of our customer versus providing just the software.

Near brand launches are a vital source of revenue for our retailers and brands alike . In the sampling is extremely knowledgeable in providing the content required for a successful launch . The response to our new offering has been very strong and in Q3 alone we booked $750,000 in managed services.

While it is still early our new sampling offering seems to have met a critical need with our client base.

Our advertising business grew 37% year-over-year -- a nice increase, but slightly lower than our expectations.

In the third quarter we ran over 100 campaigns and our cancellation rate was less than 2% indicative of both our unique value proposition with our shopper data and our ability to execute effectively.

The percentage of repeat clients remains good and we see a clear trend of these clients signing up for much larger campaigns than their initial buy.

In aggregate these metrics continued to point to a unique digital offering and we remain focused on building a strong , sustainable, and growing business.

As we enter the fourth-quarter demand is stronger and I believe we will see an even higher year-over-year revenue growth rate.

In previous calls we have commented on gross bookings performance without Didi local , Asia-Pacific sales operations in North America SMB which were discontinued last year.

Using this measure year to date sales growth bookings were up 2% year-over-year.

Our overall gross bookings were not factoring out those three initiatives were now most likely be relative flat for the full year.

Through three quarters all of our main economic indicators have improved albeit slower than expected.

Our SaaS bookings performance have improved each quarter despite a week third quarter in Europe.

With our largest net bookings quarter still remaining.

Net bookings improvement have largely been attributed to our improved client health and accident expected dollar churn.

Advertising started the year slow but is building momentum the second half.

Due to these factors, as well as our delay in product recommendations, we are lowering our guidance for the remainder of FY17 and Jim will outline the details in a few minutes.

However, our progress is such that we believe the fourth quarter is the low point in revenue growth and that our topline performance will improve in fiscal 2018. Liminality, we are confident our revenue growth will be at least 3% next year and we will exit edit even higher growth rate.

Commence directly we expect to continue to increase our adjusted EBITDA dollars next year.

In short we have turned the quarter on revenue growth and expect steady improvement beginning in Q1 of fiscal 2018. We will provide more formal fiscal year 2018 guidance on our next quarterly call.

In summary, we are still in the early stages of our five-year plan to double the revenues of Bazaarvoice but leveraging our three core assets of CGC expertise, our growing network, in our unique shopper data.

Our client statistics have improved dramatically this year, indicative of our continued investment in innovation and services in our core business.

Our advertising is this powered by our very valuable shopper data got off to a slow start this year, but the business fundamentals put to improving performance in the future.

In short while there is much work to do , we are excited to see our revenue growth rates beginning next year.

Thank you I would like to turn the call over to Jim.

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Unknown Speaker* [4]

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Thank you Gene and thank you again to everyone who joined our call . Today we are reported results for our third quarter FY16 ended January 31 we are reported results for our third quarter FY16 ended January 31, 2017. For the third-quarter we achieved total revenue of $50.5 million up 1% year-over-year and within our guidance range.

We achieved SaaS revenue of 43.7 SaaS revenue of $43.79 in advertising revenue of three point to million dollars up 30% -- 37% year over year which is much improved versus our first Advertising performance as Gene indicated.

We achieved positive adjusted EBITDA of $5.3 million well above our guidance range.

This is better than anticipated mainly due to a favorable adjustment to our corporate bonus expense without which we will still would have been about our guidance range.

Our GAAP loss per share for the quarter was $0.03 . Our non-GAAP earnings per share was $0.02 , better than our guidance of in loss of $0.01 to $0.03. We launched 89 clients in the second quarter and ended the quarter with 1456 active clients up 5% from a year ago.

Annualize SaaS revenue for our average active client in the second quarter was $132,000 down slightly from recent quarters as we lost only 45 clients in Q3 . We believe that most of the SMB client losses are now behind us. As a result our client retention rate improved significantly to 96.8% in Q3 our vestry intend quarters.

Our dollar churn rate in Q3 was similar to Q2 and as Gene mentioned we now improved our dollar churn rate year-over-year for the fourth quarter in a row.

As we noted in our call last quarter , our fiscal year $2015 churn rate was approximately 20% . Our investments and customer satisfaction and retention are paying off.

And based on our dollar churn results for the first three quarters of this fiscal year , we now expect our annual dollar churn rate for fiscal year 2017 to improve by at least 400 basis points year-over-year compared to our prior expectation of 250 basis points.

Note that we plan to disclose our full-year distal FY17 dollar churn rate our Q4 call.

Moving onto our Place . Gross margin for the third quarter was 68 point one percent down 50 basis points for the same period last year.

We continue to expect gross margin to be in the mid to upper 60s for FY17. Sales and marketing expenses for the third quarter were $50.3 million or 3.3% of revenue as compared to 15 point to million dollars or 3.3% in the same period last year as we have continued to tightly manage such expenses.

For the full year year we expect sales and marketing expenses to be 30% to 31% of revenue or 200 basis points to better than fiscal year 2016. Our Road expenses for the third quarter were a point five Our Road expenses for the third quarter were a point $5 million representing 16.9% of revenue as compared to nine point to million dollars or 18.3% in the same period last year.

For the full the year we expect Road expenses to be 52 100 basis points better than fiscal year 2016 . G&A expenses for the third quarter work five-point $3 million or template for percent up slightly from the same period last year.

For the full-year we expect SG&A expenses to be similar to last year as a percent of revenue.

We ended the quarter with 777 employees down 5% from a year ago and we achieved annualized revenue per average employee of $260,000 up 8% for the same period last year as we have continued to manage our headcount across all functions.

Moving on to the balance sheet and cash flow.

We ended Q3 with DSO of 94 . Note that our DSOs typically increase sequentially in Q3 of each year as we have seasonally higher advertising Billings which are booked on a gross basis.

In addition in Q3 our percentage mix of annual and semi annual Billings was the highest looking back over three years.

Despite the higher DSOs our receivables are of high quality as our percent over 90 is less than 5% also the best it has been looking back over three years and we bad debt expense to the Place as they minimal over the last 7/4 . Our deferred revenue balance was $73.7 million at the end of Q3 compared to 63 point to million dollars at the end of Q3 last year and $65.1 million at the end of Q2 also reflecting our strong semi annual an annual Billings mix.

We ended the quarter with $83.5 million in cash, cash equivalents, and short-term investments we have $37 million in debt outstanding, $20 million last a year ago.

Our cash flow from operations was of $-1.1 million in Q3 . CapEx was $2.1 million most of which was capitalize capitalization of developed software as we continue our product innovation.

Free cash flow was a negative three-point $2 million in Q3. Based on our historical collections performance, relative to prior quarter Billings, we expect strong operating in free cash flow in Q4 and also continue to expect to be free cash flow positive for the full fiscal year 2017. Now I would like to finish with our financial outlook.

We Q3 bookings in Europe, our decision to delay general availability of product recommendations , and slightly lower than expected advertising revenue in Q3 is impacting our near-term revenue Outlook.

We now anticipate advertising revenue growth from the full fiscal year 2017 to be the same as our original fiscal year 2017 guide of 20% to 30%.

As a result for the fourth quarter of FY17, we expect total revenue to be in a range of 49 point a 49 point $1 million-$56 million.

This is down slightly from Q4 of last year but recall that approximately $1.6 million of revenue in Q4 last year related to out of period revenue and higher than typical revenue coming off hold for nonpayment or nonrenewal.

We expect adjusted EBITDA to be in the range of 1.5 We expect adjusted EBITDA to be in the range of $1.5 million to $2 million.

Non-GAAP loss per share is expected to be in the range of two Centre4 than based on 83.7 weighted shares outstanding.

For the full fiscal year 2017 we arc commensurately lowering our revenue guidance to be in the range of 200 point a or 1% year-over-year growth at the midpoint.

A note our original revenue guidance for FY17 was $21 million-$23 million including advertising to grow in that 20% to 30% range.

We are pleased that despite having to absorb the approximate $1.5 million impact from foreign exchange headwinds we have occurred since then we expect to be within or very near the original range of both those metrics.

We are maintaining the midpoint of our guidance for adjusted EBITDA and expected to be in our range of $15.9 million to $16.7 million and implement at the midpoint of over $7 million from FY16. Non-GAAP EPS per share is expected to be in the range of zero Secretary to $0.02 . In summary our financial foundation is firm, our court SaaS business is strengthening.

We have strategic assets that we are beginning to monetize and we are excited that our revenue growth rates should increase in fiscal 2018. I would like to remind everyone that we will be presenting at the Morgan Stanley conference in San Francisco tomorrow.

With that, operator, please turn the call over for questions.

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Unknown Speaker* [5]

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(Operator Instructions) Kevin Liu, B. Riley and Company.

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Unknown Speaker* [6]

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Good afternoon.

I just wanted to drill down into a bookings performance in Europe a little bit more.

Could you talk little bit about what you thought the issues where within the quarter in terms of why it droptop relative to the first half?

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Unknown Speaker* [7]

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Yes I think, Kevin, there were two real factors.

We got behind in our hiring of sales headcount.

We had some attrition in the first half of the year and our ability to fill those positions in a timely fashion did not go quite as planned.

I think we are rectifying that as we speak.

And with a pretty solid first half, out of the European team, we entered Q3 with less material pipeline . Meaning pipeline from a numbers standpoint look good but the deals needed more time to write and if you will . I and expecting a strong rebound in Q4 because I generally feel like pipelines in Europe are good.

I also feel like pipelines in North America in the SaaS business are good . I expect Q4 to be our strongest bookings quarter for sure this year.

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Unknown Speaker* [8]

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Got it. And within advertising to growth rate looks fine for the third-quarter, but you mentioned it was lower than internal expectations.

How much more did you anticipate within the quarter?

And what do you feel is required to get this business performing more consistently with what you expect?

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Unknown Speaker* [9]

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Let me open and Jim compile on if he wants.

We clearly have had a fluctuating is this in our advertising business from a growth rate standpoint.

Part of that is because our first party data -- we have actually been really selling our first party data for three or four quarters at most and CEO we are still understanding the demand, understanding the ability for that business to go. The feedback from our client continues to give me a lot of encouragement, but we are still as a company trying to understand how this business is going to evolve than what the growth rate will be. We are generally very encouraged by it, but it has been a challenge for us to forecasted 2017. The advertising business is down.

We were expecting when we had the call in 90 days ago we felt like advertising was off to a strong start in Q3 and we thought it might perform at an even higher level than our guide , and since then it it came back a little bit from what we were expecting.

But 37% is still a growth rate that we have not had in that business and certainly it FY17 or 16 and we do think be pipeline supports even higher growth rate in Q4. Our job is to make sure we are in a position to do a good job of measuring that business and continue to forecasted better.

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Unknown Speaker* [10]

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Got it and one last one, Jim, you talked about the annual and semi annual tellings driving diverse a are higher.

I am just curious as to whether it is the customers that are trying to change the payment terms or whether you guys are pushing for more up payments.

Any color would be helpful.

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Unknown Speaker* [11]

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Yes it is a factor of a couple things.

Typically in the second half of the year, our larger deals renew and a lot of those are on annual type buildings which helps.

It typically does go up in Q3 but what happened more in the prior years we do have our sales force pushing it a bit -- not a bit but a lot more.

We do have a little stiff in place for our sales force for multiyear contract and payments.

And that has worked.

Our average termite has gotten longer and as exemplified in Q3 did mix of semi and annual Billings was higher than typical and higher than it has been in a number of years.

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Unknown Speaker* [12]

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Okay.

Thanks for taking my questions.

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Unknown Speaker* [13]

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Mike Latimore, Northland capital markets.

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Unknown Speaker* [14]

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Thanks so much.

Just wanted to clarify you think the advertising revenue growth rate will be faster in the fourth quarter?

I just want to clarify that.

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Unknown Speaker* [15]

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Yes.

Based on the guide for 20% to 30% for the year and based on the total guide for revenue , Mike, it just points to a higher growth rate and 37% in Q4. . Okay got it and then in terms of the salespeople and the advertising group.

Are they all in place now?

And then I guess secondly any success getting some more of the holding company's onboard?

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Unknown Speaker* [16]

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Bike , yes the sales force is fully staffed and I would say the vast majority of our sales force in advertising our productive meeting they had been with the company long enough to be contributing meaningful sales.

Our progress on rate cards and the holding company's continues.

We still have more to go but I think we have now signed two holding companies of a large size , so I think we have made good progress here.

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Unknown Speaker* [17]

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This is Jim.

Let me out a little bit . Our sales activity for ad reps is up . We still think we have some room to grow.

But it is up year-over-year so that is a good sign.

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Unknown Speaker* [18]

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Okay and typically what percent of bookings would you expect on a fourth quarter?

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Unknown Speaker* [19]

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I don't think we have disclose that from a percentage standpoint, but it is typically one of our strongest quarters of the year.

The forecast that I see right now would indicate we will have Q4 will be nicely higher than Q3.

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Unknown Speaker* [20]

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That would translate into a higher net bookings for the quarter as well since churn continues to do well.

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Unknown Speaker* [21]

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I think it is important to realize when we give 2018 guidance, that most -- well not most but 30% to 40% of the net bookings attainment in 2017 will be this quarter.

And so we are expecting a continued good turn environment with improved sales performance which should drive higher net bookings.

So our guidance of at least 3% is based on still making sure Q4 performs as expected

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Unknown Speaker* [22]

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Scott Berg, Needham and company.

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Unknown Speaker* [23]

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Great.

This is actually Peter in for Scott.

Just a couple quick ones here.

Maybe you could did a little bit deeper on the product recommendation on the delay.

I guess what did you see internally from the customers that you had on the demo that would force you to push it out and does that affect you releasing the product in Europe?

I believe last quarter you said you would release that I believe in the second half as well?

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Unknown Speaker* [24]

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Yes . The answer to second question first is we probably will windup releasing it in US and Europe closer together with this delay because they are already factoring in a second half rollout or the first half of 18 rollout in Europe.

So I don't think at this point it impacts Europe.

Simply put , recommendations has proven to be a very strong offering what -- for our clients with new visitors and new visitors need to find people or we tell that it has not seen in 30 days.

And so that has been a significant statistic and win for us. Most of these clients already have a recommendation to product but it is also designed around just what is taking place inside their website.

We bring the ability to recommend an offer for people that are coming from various different website -- very different but when we talked to our clients they are trying to reconcile the difference between what they currently have and what we offer here and so we want to test it a little further -- test other metrics and try other types of build tolerance and we want to make sure we understand what is the best way to approach a market that has incumbents but albeit they are doing very different things.

And so we just want to be diligent in the way we go. But the other thing I will say -- the bigger picture for us is that we believe the data that we have is really an opportunity to be a unique solution and personalization.

Depersonalization recommendations is just one aspect of personalization but we think our data gives retailers the opportunity to personalize the shopping experience in a way that they have not been able to do as we are providing them insight into people that are in market for a brand of product at that moment in time.

So recommendations -- the first foray into this personalization initiative but at this point we want to make sure that it is on the mark and that it is the right product for our retailers going forward and it fits well into that foreign environment.

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Unknown Speaker* [25]

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Great and just a little color -- more colors on the bookings in the quarter.

Can you give a percentage or breakdown of deal size in terms of new logos versus sales in how you saw that in the ad business as well.

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Unknown Speaker* [26]

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Let me start . We typically have an almost 50-50 mix between bookings of new business up cells , sometimes 40/60 new business to up cells which we think is healthy in the SaaS business.

From an ad standpoint as gene noted on the call we have really good rates and repeat buyers and when they repeat they typically -- the campaign sizes go up.

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Unknown Speaker* [27]

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Comment a little bit more on bookings in general for you is -- when it a comment in the call that bookings this year going to be relatively flat.

We have seen remember that the year before we -- I should say flat for this year an improvement over the prior-year so we are seeing a nice improvement in overall sales productivity deal sizes are stable.

Pipeline is in good shape as well and I think as we sit there looking at 18 I think the company has a great opportunity to grow bookings next year.

We thought we might get there this year.

I think we will follow a little short of that but the trends in our bookings performance on the SaaS side are definitely turning in almost every category that we measure.

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Unknown Speaker* [28]

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Another point I would like to add their member last year FY16 bookings -- 15% to 20% of that was maybe local, AIPAC and we just continue sales ops for those so without those our bookings year-over-year grow.

So that is why we think going into 18 we believe we can continued to grow our bookings.

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Unknown Speaker* [29]

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Great.

I appreciate the color.

Thank you.

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Unknown Speaker* [30]

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Siemens you, Credit Suisse.

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Unknown Speaker* [31]

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Hi guys.

This is Chris on for Steven.

I am curious about the delay in the product recommendations product . Should be expected to still launch with the same feature set or should we expect some type of sponsored product listing to be incorporated into it?

And then how much does that product alone in whatever capacity launch and in factor into the 3% for next year?

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Unknown Speaker* [32]

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Answering the second question first -- not much.

I think it will be minimal for our revenue growth rate.

I think that as far as adding additional functionality, I think running additional tests, getting more client feedback absolutely would open the door for additional functionality but I can't tell you exactly what that might speak.

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Unknown Speaker* [33]

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Okay and then one follow-up.

On the sampling product you brought the in-house and now you are running it as a managed service what is the incremental cost Burdick look like for you when you bring a product inside them running versus just selling the service?

The software?

Stephen, this is Jim.

I think you can looked at it as other typical services offerings win we expect to take a typical margin on services and so gross margins are less on services but we believe that margin is similar because that is really no hard DD needed to support it and so just like any other typical services offering a business.

And just another point our services revenue is the percent of our grand total revenue is immaterial at this point.

We have a lot of them to grow their if we choose to.

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Unknown Speaker* [34]

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Okay.

Thank you.

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Unknown Speaker* [35]

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Ilya Grovosky, National Securities .

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Unknown Speaker* [36]

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Thanks.

Just wanting to get an update . You guys were working on getting the shopping data rights from a lot of your clients.

That was a process you were going to over the past several quarters.

Can you update on that again.

If everybody sign unto you getting that information?

Bank.

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Unknown Speaker* [37]

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Ilya , all of our new client contracts contain the rights to their data from our shopper data standpoint which we call EDR -- enhanced data rights -- is our internal term for it. Very few clients turn that down each quarter . So we are making good progress with sign-ups.

I can also very pleasantly -- I am really pleased with what is going on in Europe are not we have made good progress in the UK and even in Europe . In the Continental Europe so I think that is also bodes well as we look to 18 for moving some of our personalization and shopper advertising solutions over to Europe.

The shopper account, for the quarter was well over $200 million meaning that is how many shoppers we had in our network that we could identify and could identify their shopping behavior.

That number is going to come down.

It is inflated because of the holiday season, but it is still very high number and more than enough for our solutions to work extremely well.

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Unknown Speaker* [38]

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Okay.

Thanks.

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Unknown Speaker* [39]

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(Operator Instructions) it appears we have no additional questions at this time I would like to passive floor back over to Mr. Jean Austin for any additional concluding comments.

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Unknown Speaker* [40]

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I want to thank everybody for taking the call.

I know many of you are going to be with us next week in our client conference or client Summit which we are excited to meet you all and have further conversation and we will be out tomorrow at the Morgan Stanley conference.

Until next quarter, thank you very much.

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Unknown Speaker* [41]

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Ladies and gentlemen this does concludes today's teleconference.

Again we thank you for your participation and we make now disconnect your lines at this time [ transcript concluded ]