Energy Transfer LP (ET) Q3 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the ExactTarget Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today, Mr. Mitch Frazier, ExactTarget Senior Director, Marketing Strategy and Communications. Please go ahead.

Thank you, Diana. Good afternoon, and welcome to ExactTarget's Investor Conference call for the third quarter ended September 30, 2012. Joining me today to discuss our third quarter 2012 results are Scott Dorsey, ExactTarget Co-Founder and Chief Executive Officer; and Steve Collins, ExactTarget Chief Financial Officer. Our commentary will include non-GAAP financial measures today. Reconciliations between GAAP and non-GAAP metrics for our reported results can be found in our earnings press release. Non-GAAP financial measures exclude the impact of stock-based compensation, amortization of intangible assets and the impact of adjusting deferred revenue to fair value under purchase accounting. At times in our prepared comments or in responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be onetime in nature, and we may or may not provide an update in the future on these metrics. The primary purpose of today's call is to provide you with information regarding our third quarter 2012 performance. As a reminder, some of our discussion and responses to your questions may contain forward-looking statements as contemplated by the Private Securities Litigation Reform Act of 1995. These statements are subject to risks, uncertainties and assumptions. Should any of these risks and uncertainties materialize or should our assumptions, as outlined in our earnings release and the documents referred to in that release prove to be incorrect, actual company results could differ materially from these forward-looking statements. To access our third quarter press release, including the GAAP or non-GAAP reconciliations or historical results, any of our SEC periodic reports, a webcast replay of today's call or simply to learn more about ExactTarget, I encourage you to visit our Investor Relations website at exacttarget.com/investor. Finally, before I turn the call over to Scott, please be advised that during today's call, we may reference certain unreleased services or features not currently available. We cannot guarantee the future timing or availability of these services or features, and thus recommend the clients who purchase our services make their purchase decisions based on services and features that are currently available. With that, let me turn the call over to Scott.

Thanks, Mitch. Good afternoon, and thank you for joining us on our third quarter earnings call. I'm very pleased to share that we extended our market leadership in the third quarter with 35% year-over-year revenue growth, solidifying our position as one of the largest and fastest-growing software-as-a-service companies in the world. During the quarter, we earned the business of leading enterprise brands and mid-market companies, achieved strong subscription revenue renewal rates and posted record-breaking revenue and bottom line results. In addition, we recently completed 2 strategic acquisitions, business-to-business marketing automation leader, Pardot, and Web personalization leader, iGoDigital. And we hosted more than 4,000 marketers from around the globe at our Connections client conference here in Indianapolis. As you might imagine, this has been an incredibly exciting time for ExactTarget employees, clients and partners around the world. I'm eager to share more about our quarterly financial results, key client wins, Connections highlights, new product introductions and expand on the strategic impact of the Pardot and iGoDigital acquisitions. Third quarter revenue increased to $74.7 million, up from $69.3 million in Q2 and $55.1 million in the prior-year quarter. I'm proud to share that this represented our 47th consecutive quarter of revenue growth. Third quarter non-U.S. revenue increased to $14.1 million, representing a year-over-year increase of 80%. Non-U.S. revenue represented 19% of overall quarterly revenue, up from 14% in the same quarter last year. We continue to build momentum and invest internationally. From our more established markets like the U.K., Australia and Canada, to our newer markets like Brazil and Germany. During the fourth quarter, we've opened a new office in Paris and are on track to open an office in Stockholm, further accelerating our expansion throughout Europe. Just yesterday, we hosted over 700 marketers, developers and partners at our Connections U.K. event in London with attendees from more than 10 countries throughout Europe, we were very pleased with excitement and interest in our cross-channel marketing automation solutions. In addition to another outstanding quarter of revenue growth, we also achieved significant operating leverage throughout the business. Gross margin increased to 67% with continued strength in both subscription and professional services gross margins. Adjusted EBITDA improved to $7.7 million, adjusted net income increased to $2.3 million and operating cash flow reached a new high of $6.8 million. Based on the strength of our Q3 financial results and market-leading momentum, we are raising our outlook for full year 2012. Our Chief Financial Officer, Steve Collins, will provide more detail on our financial results, Q4 guidance and updated full year outlook later in today's call. In the third quarter, we welcomed terrific new brands across nearly every segment and vertical of the global market, including BBC Worldwide; Cabela's, Getty Images; GoDaddy; Informa; Keurig; USA Football; Roses Only, Australia's largest florist; and bebe store, a Brazilian e-commerce portal for new mothers. These new clients highlight the versatility of our cross-channel marketing automation platform from powering marketing e-mails for Cabela's to managing real-time conversations on Twitter and Facebook for leading brands like Keurig and GoDaddy. We're also pleased to see increasing number of organizations begin their relationship with ExactTarget by leveraging multiple digital channels. Switzerland-based publishing giant, Informa, selected ExactTarget for our realtime integration, data management and cross-channel capabilities and will leverage our email, mobile, social media and Web applications to deliver highly relevant and personalized communications to customers in more than 40 countries, all based on a single view of their interests and cross-channel communication preferences. USA Football, the national nonprofit youth development partner of the NFL, selected ExactTarget for our ability to integrate customer data from Salesforce.com and pass purchases, along with our ability to unite digital channels within a single dashboard. Through use of our platform, USA Football will further their goal of providing health and safety education to engaging in one-to-one conversations with players, parents and coaches across both email and social media. These new business success stories illustrate our unique competitive advantage of building best-of-breed applications across email, mobile, social, web, marketing automation, data management and platform, all of which can be purchased independently or as a collection of highly integrated cross-channel marketing applications. In addition to driving new business, we're very focused on helping our existing clients realize the full potential of our cross-channel interactive marketing suite. Many of our clients are adding additional applications to drive more relevant and coordinated cross-channel communications. Travelocity is a wonderful example of an existing client, who purchased additional functionality in the third quarter. Travelocity added Audience Builder for its unique data segmentation and discovery capabilities thus enabling them to better understand their customers and power more personalized communications. Sears Canada is an excellent example of a longtime ExactTarget email client that added our mobile and social media products in the third quarter. Through MobileConnect and social pages, Sears Canada will now be able to engage with their customers via mobile devices and through social networks like Facebook. Expanding relationships with clients like Travelocity and Sears Canada is essential to our growth strategy, and reinforces the flexibility of our platform, where marketers can easily add new interactive channels like social, mobile, web or email to evolve their digital marketing programs and keep pace with today's hyperconnected consumer. As I shared earlier, we recently hosted more than 4,000 of the world's top marketers, developers, industry analysts, thought leaders, answer-intuitive partners for Connections, our annual client conference here in Indianapolis. Connections is the highlight of our year. Three days packed with energy, innovation, learning, networking and world-class entertainment. One of the most rewarding aspects of Connections is the opportunity to celebrate the extraordinary work of our clients. We showcased award-winning marketing programs from great brands like Papa John's, Gilt Groupe, Hotels.com, Von Maur, VEGAS.com and many others. With more than 40 breakout sessions and panel discussions, our clients also had the opportunity to connect with their peers, share real world stories and most importantly, learn from one another. We are inspired by the compelling stories of how ExactTarget is helping our clients transform their businesses to digital marketing. Let me share a few quick examples. Brooks Running, a leading global athletic shoe and apparel company, shared how they are using our social-engaged product to manage conversations with runners on Twitter and incorporate their feedback directly into the development of new products. Microsoft shared how they're partnering with ExactTarget to leverage our realtime consumer-based marketing automation capabilities to provide an unprecedented level of automated and personalized cross channel communications to their Microsoft Office customers. And finally, in one of the most intriguing examples of integrated digital marketing communications, General Electric announced their next generation of connected water heaters and appliances at Connections. Through GE's Nucleus home manager suite, consumers can receive timely text and email alerts, like maintenance reminders, from their appliances. GE is truly a pioneer in serving the needs of today's hyperconnected consumer. In addition to highlighting the great work of our clients, Connections is a fabulous platform for launching new ExactTarget innovations. Our President, Scott McCorkle and I shared the opening keynotes and unveiled new product like MobilePush, Distributed Sending and expansion of our field platform. We also welcomed the Pardot and iGoDigital founders to the stage and expanded on how these products strategically fit with our vision of connecting brands with their customers through digital marketing. Let me share more about these exciting product introductions. Building on our strength and momentum in mobile, we were incredibly excited to launch our newest mobile application called MobilePush, which enables marketers to drive consumer engagement with mobile apps through the emerging, digital communication channel of push notifications. MobilePush is the first enterprise application to integrate push notifications into a broader cross-channel digital marketing suite. We also launched our next generation distributed sending solution, which allows enterprises and distributed organizations to empower business units, franchisees and stores with an intuitive application to create, send and track email campaigns at a local level, while still maintaining enterprise content management, approvals and permissions. We also announced the opening of our Fuel platform for third-party development, revolutionizing the way developers and marketers alike can unlock the power of data and the marketing cloud to better connect with their customers. Fuel extends our capabilities to power advanced integration and realtime messaging and creates the foundation for an entirely new app ecosystem that will serve as a catalyst for digital marketing innovation worldwide. Finally, Connections was the ultimate platform for introducing our clients and partners to the Pardot and iGoDigital teams and their innovative marketing automation and Web personalization products. The response from our clients and partners has been overwhelmingly positive. Together with Pardot, we're redefining market automation, eliminating data silos and transcending point solutions to provide one platform for marketers to implement audience-based, consumer-based and now business-based marketing automation to drive revenue and deliver business results. International Data Corporation, or IDC, predicts the marketing automation market will grow to $4.8 billion in 2015. Forrester Research estimates that together lead origination and lead nurturing account for 21% of the overall B-to-B marketing technology budget, the largest component of marketing spend. This incremental market potential represents an awesome opportunity for ExactTarget, and one that we believe will accelerate as marketers are able to unlock the value of B-to-B and B-to-C marketing automation, all from one integrated platform. Let's move next to Web personalization and our acquisition of iGoDigital. We've been pioneers in email marketing, Mobile Marketing and social media engagement and now, we're excited to take our Web offerings to the next level. Together with iGoDigital, we can now deliver on the power of the personalized Web, helping marketers transform data into highly personalized, seamless experiences across email, mobile, social media and the Web. We're incredibly excited about iGoDigital's Web personalization and predictive analytics technology. In fact, they power guided selling and product recommendations for approximately 100 clients, including 8 of the top 10 online retailers and many of the world's most well-known brands, including Staples, Wal-Mart, Proctor & Gamble, Scholastic and Marks & Spencer. I look forward to sharing more about our integration of Pardot and iGoDigital during our Q4 earnings call in February. Now it's my pleasure to introduce Steve Collins who'll provide a more detailed review of our third quarter financial results, as well as our guidance for Q4 and our improved outlook for full year 2012. Steve?

Thanks, Scott. Q3 was another great quarter for ExactTarget on every key financial metric, including revenue growth, gross margin expansion, OpEx leverage, profitability and cash flow. I'll provide a little more detail on each of these areas. Scott previously described that our strong revenue growth rate continued in the quarter, with overall revenue growth of 35%, recurring subscription revenue growth of 36% and international revenue growth of 80%. I'm also very pleased to share that once again, our subscription revenue renewal rate exceeded 100%. Our mix of subscription revenue versus professional services revenue in the quarter was 79% and 21%, respectively, with total subscription revenue at $59.2 million and services revenue at $15.5 million. Our targeted long-term split of subscription revenue versus services revenue continues to be 80% and 20%, though you may see services revenue modestly above 20% in the near-term as we continue to onboard new enterprise clients that tend to be services-intensive through their initial limitations. Non-GAAP overall gross margin was 67% in Q3, which is consistent with prior year and up from 65% in the first half of 2012. We are benefiting from continued efficiency gains as we expand in our third data center, which opened midway through Q4 of 2011. Our non-GAAP subscription gross margin was 77% in Q3, which is consistent with prior year and improved from 76% in the first half of 2012. We also had a strong quarter in our professional services gross margin with Q3 at 29% on a non-GAAP basis, which is up from 23% in the year-ago quarter and up from 20% in the first half of 2012. We continue to target long-term services gross margins of approximately 20%, though there will likely be short-term fluctuations based on the timing of hires and their ramp on the billable projects. Turning next to operating expenses. We demonstrated significant leverage in the quarter, as our non-GAAP operating expenses as a percentage of revenue decreased 13 percentage points year-over-year to 64% in Q3. Some of this year-over-year improvement was due to the timing of our Connections client conference, which was in Q3 of 2011 and was in Q4 this year. The combination of better-than-expected revenue, gross margin expansion and operating expense leverage drove bottom line performance in a quarter that exceeded both our expectations and prior year results. Adjusted EBITDA was $7.7 million in Q3 of 2012 compared to a loss of $0.9 million in Q3 of 2011. This was the company's strongest quarter ever on adjusted EBITDA. And the adjusted EBITDA margin at 10.3% was the strongest margin performance since Q2 of 2009. Adjusted net income in Q3 was $2.3 million compared to a loss of $20.1 million in the third quarter of 2011. The prior-year quarter included $14.7 million in tax expense when we made the determination to fully reserve our deferred tax assets. Turning to cash flow, we achieved a quarterly record on operating cash flow with Q3 OCF of $6.8 million compared to $2.4 million in Q3 of 2011. Our operating cash flow year-to-date is now at $14.8 million compared to $1.8 million in the first 3 quarters of 2011. CapEx, as a percent of revenue, is 14% in Q3, bringing year-to-date spending to 9% of revenue, both of which are below the 15% of revenue invested for full year 2011. Our CapEx spending can fluctuate significantly quarter-to-quarter based on data center capacity expansion and facilities expansion. CapEx investment in the second half of 2012 will be higher than the first half, but we have still showed significant leverage in CapEx as a percent of revenue for full-year 2012. Finally, turning to the balance sheet. Our cash balance end of the quarter had just over $212 million, which is about $0.5 million above where we ended Q2. However, this cash balance does not incorporate the just over $100 million in cash we used on the 2 acquisitions that were completed early in Q4. I will now elaborate on the guidance for Q4 and our improved outlook for full year 2012 that is outlined in our press release. For Q4, we expect non-GAAP revenue to be in the range of $79 million to $80 million. This revenue estimate is non-GAAP in that it does not incorporate the impact of fair value adjustments to acquire deferred revenue. We expect our adjusted net loss in Q4 to be between $12.5 million and $13.5 million. We expect adjusted EPS to be a loss of $0.18 to $0.20, assuming Q4 weighted average shares outstanding of approximately 68 million. As you consider our Q4 guidance, please keep the following in mind: First, our Connections client conference was in Q4 this year, which is a net investment of approximately $2 million; next, as expected, our hiring pace has accelerated throughout the year from 46 net new hires in Q1 to 89 net new in Q2 to 128 in Q3. And we expect this hiring momentum to continue in Q4. Next, we continue to expand our investment throughout Europe, including the newly announced offices in Paris and Stockholm. And finally, our 2 new acquisitions, Pardot and iGoDigital, are part of our consolidated results beginning in Q4. For full year 2012, we are pleased to increase our outlook for non-GAAP revenue to $287 million to $288 million, an increase from our prior guidance of $277 million to $280 million. Our raising of guidance is driven by an improved revenue outlook for our existing business and from the expected contribution from the 2 new acquisitions. Similar to our Q4 guidance, this full year revenue guidance also does not incorporate the impact of fair value adjustments to acquire deferred revenue. We now expect our full year adjusted net loss to be in the range of $12 million to $13 million, which is an improvement of $3 million or $4 million when incorporating the effect of our recent acquisitions. We also expect adjusted EPS to improve to a loss of $0.22 to $0.24, assuming full year weighted average shares outstanding of approximately 53 million to 54 million. As we look ahead to 2013, we remain optimistic about our growth potential and intend to continue investing to capitalize on our large global market opportunity. We will provide 2013 guidance during our Q4 call in February. With that, let me turn it over to Scott for a few closing remarks before we open the lines for questions. Scott?

Thanks, Steve. As the largest pure play marketing SaaS provider in the world, we're committed to innovation and providing marketers with powerful software to communicate with their customers through digital marketing channels. With over 1,500 employees around the world and the leading marketing technologies in email, mobile, social, Web and marketing automation, we're incredibly well-positioned to meet the needs of digital marketers and capitalize on our large and growing global market opportunity. In closing, we're very pleased with our third quarter financial performance, and are proud to once again improve our outlook for full year 2012. We'll now open the call for questions.

[Operator Instructions] Our first question will come from the line of John DiFucci, JPMorgan.

My question is for Scott. Scott, you've always been respectful of your competition but recently, one of your biggest competitor's Responsys reported disappointing results, and it looks like your stock retreated in sympathy. Now you put up some really strong numbers here in their own right but also definitely in relative to what Responsys did. So 2 questions here. One, one issue that Responsys spoke about was pricing pressure. First, are you seeing any abnormal pricing pressure? And then two, can you just review some of the differences, I mean, something that we do but it would be nice to hear you just talk a little bit publicly about some of the differences between you and Responsys and why your business continues to grow at meaningfully high rates here. I know you can't comment on them but when they faltered here a bit.

Sure. This is Scott. From a competitive or price dynamic position perspective, we're really not seeing any material change in the market. Our positioning, that's serving us very well as we continue to expand our market leadership, is very unique in that we're a marketing SaaS platform that serves a small market, midmarket and large enterprise organizations across all geographies and then across multiple products, e-mail, mobile, social and the Web, and I referenced during our opening comments but a very big differentiator for ExactTarget is our ability to sell standalone applications into the marketplace, as well as integrate those applications into our comprehensive cross-channel marketing suite. So those are some big differentiators for us. We also have been in position to invest very aggressively in R&D, sales capacity and international expansion over the last 2 or 3 years, and that's really led to our impressive growth rates and expanding market leadership position. So we remain very optimistic about the future of our business and continue to see a tremendous amount of success across really all product categories and also across the market segments that I referenced.

Okay, great. And if I might just a quick follow-up for Steve. Steve, it looks like as you pointed out, hiring momentum accelerated this quarter or continues and it will continue into Q4. Can you just address where that hiring is going? Is it more sales and marketing or R&D? During your prepared remarks, Scott talked a bit about Fuel and some of the improvements you've done there. You've been doing all along. But is in the current hiring going more so to sales and marketing or to R&D or to both?

Good question. It's definitely spread across both R&D and sales and marketing. And as you kind of look throughout the year, yes, earlier in the year, probably a little more tilted toward R&D and more recently, a little more tilted towards sales and marketing.

Next question comes from line of Tom Ernst, Deutsche Bank.

It's actually Stan Zlotsky sitting in for Tom. So if we're doing the back of the envelope calculations correctly on organic growth for 4Q, it looks like your guidance is implying a slowdown into the high 20s. How much of that is conservatism versus the business sort of settling down into its -- the more intrinsic growth rate?

Stan, this is Scott. We remain very optimistic in the growth potential of our organic business, as well as the 2 strategic acquisitions, Pardot and iGoDigital. When you take a look at the overall marketplace, our size, our scale and momentum, we're in a very unique position to continue to grow the business. So we're confident and feel good about the results, the margins we've shared and also the guidance that was extended during the call.

Okay. And a very quick follow-up on what John was just asking. Maybe specifically on the enterprise segment because that's where Responsys said that they're seeing the most pricing pressure. I'm guessing you haven't seen any of that at the highest end customers that you have.

Stan, when we look at the marketplace, it's very competitive but it's been very competitive for an extended period of time. I think that happens whenever you're in high-growth market with tremendous growth potential. So we're very confident in our competitive position, feel very good about the gross margins, both in subscription of professional services and our ability to compete effectively and provide marketers and organizations with tremendous value and we're able to do so, I think, in a very unique way across small business midmarket and enterprise segments.

Okay. And then last one. As we've followed this earnings season, we've heard some software companies highlight that they've seen a little bit of closure rates slip, a little bit of slipping into next quarter. Are you guys seeing anything of that? How are general marketing budgets that you're seeing out in the field?

Thanks, Stan. We continue to be strong. We're benefiting from that macro shift of offline marketing budget shifting online, and we're in a very advantageous position to help organizations optimize those online marketing dollars. The ROI that we're seeing from our clients and their marketing programs continue to be very, very strong, and we're seeing a real willingness from marketers to continue to invest in those measurable online marketing channels that are producing such great results.

Next question comes from line of Robert Breza, RBC Capital Markets.

Scott, I was wondering if you could just comment on any kind of disruption that you've seen given the recent negative hurricane activity that we've seen on the East Coast and how that might have impacted you. And then maybe talk a little bit about the resiliency of the platform and the redundancy that you've built in to not be at least disrupted from the Indianapolis.

Thanks, Rob. We did not experience any disruption. We have built a tremendous amount of redundancy into our platform with multiple data centers and really the core of the service that we provide into the marketplace, it's supporting mission-critical, transactional and marketing communications, which have to flow every second of every day. And many organizations are selecting ExactTarget because of our robust infrastructure, the CapEx and development investments we've been able to make over the last 2 or 3 years. We actually had a number of our clients and organizations leveraging ExactTarget communication channels during the hurricane as they were getting very important messaging out to their constituents. But from a business continuity perspective, we saw no disruption and feel quite comfortable and confident in our competitive differentiation as it relates to infrastructure, scale and redundancy.

Maybe just as a follow-up. If you look at the acquisitions and look into bringing those companies into the ExactTarget platform and Orange Culture, how far along are you -- I mean, do you feel like they're fully integrated or do you think it takes another 3 to 6 months or how long before you think they're like fully integrated into ExactTarget?

We are so excited about our first 30 days with both Pardot and iGoDigital. So the integration efforts are underway. They're going well. It's difficult to put a timeframe on the integration, Rob, because it happens across so many different facets of the business, but I can share that we're off to a tremendous start, and I think you hit on a really important point. The cultural alignment between both Pardot and iGoDigital and ExactTarget is extraordinary. The technology set sitting into the Interactive Marketing Hub and our cross-channel marketing automation vision is really ideal but in addition, the people fit, the teams fit, the cultural fit is really outstanding and we're seeing tremendous synergy. And our development team is working together and also, our sales and marketing organizations working hand-in-hand. We were so fortunate to be able to really announce both companies and share quite a bit of detail about our vision of integrating these companies and technologies into our platform at Connections, and we've already seen really outstanding results of leads and even some early closes where iGoDigital and Pardot have both closed opportunities that were generated from a Connections lead. So the teamwork and synergy, just really couldn't be going any better so far.

Your next question comes from the line of Tom Roderick, Stifel, Nicolaus.

This is actually Gur Talpaz on for Tom. If we look at the 100% dollar renewal rate, the 100%-plus dollar renewal rate, can you talk about what's driving that? Is that sort of customers contracting for more usage or is it product upsell or is it both?

Scott here, thank you for the question. It's really a combination. We continue to see organizations increasing their messaging volumes but also purchasing additional digital channels. And we shared some really neat examples during our opening comments. So it's really a combination of the 2 that's driving that subscription revenue renewal rate to continue to be above 100%.

Excellent. And I was wondering if you could comment a little bit on what you're hearing from your customers. It's been a few weeks since Connections. [indiscernible] like regarding the new feature releases, including things like push notifications and the other ones you sort of alluded to on the call?

Incredibly high, incredibly high. feedback from Connections has been extraordinary. We're seeing just a great level of enthusiasm not only about the 2 acquisitions that we referenced but also all the new functionality we've introduced. And then really the same sign to yesterday during our Connections U.K. conference with MobilePush, Distributed Sending and then opening up the Fuel platform. So our enthusiasm and interest in the new capabilities has been quite impressive so far.

Excellent. And then just one last question. As you go into a new customer engagement or a bake off, even if you're going after a standalone solution initially, is the fact that you guys have sort of a broader integrated suite, seen as a real differentiator on that by those customers even if they look at you just for an individual solution initially?

Absolutely. We are seeing more clients. As we shared during our opening comments, start to adopt multiple channels at the time of contract initiation but even more commonly, it's organizations, to your point Gur, that are starting with one channel but are selecting the ExactTarget platform because of our ability to help them grow and really evolve into true cross-channel marketing. So that vision roadmap, cross-channel marketing automation capabilities is really putting us in position to win lots of new business, even if the organization isn't ready to adopt those multiple channels at the time of contract initiation.

Your next question comes from the line of Brendan Barnicle, Pacific Securities.

As I was looking at just operating expenses for Q4, and you highlighted, obviously, the expenses related to Connections. Are there any other sort of onetime or seasonal expenses that we have there in Q4 that we should be thinking about?

Steve, here. Yes, you're correct, we definitely wanted to highlight Connections being in Q4 this year whereas it was Q3 last year. The other the things I mentioned in the prepared remarks, those are not onetime in nature. The accelerated hiring pace, the expansion into Paris and Stockholm and then finally, the acquisitions and the ongoing expenses associated with those acquisitions. There are more ongoing so, no, really just the one major onetime item.

So if we just backed out the $2 million from Connections, would that be a reasonable run rate to assume for operating expenses going forward?

Yes. I guess, the one other thing to think about is the hiring in Q3 was probably a little bit more later in the quarter, but, yes, I guess, you'd have that fully in Q4. And then in Q4, it's probably going to be more evenly spread throughout the quarter. So yes, that would work.

And then as we think about or just look at typical seasonality, Q4 to Q1, you typically see sequential improvement in subscription revenue. Any reason that trend in that seasonality wouldn't continue even with the different -- with the acquisitions, or any changes in the business that might change that?

Nothing that comes to mind. I mean, we will obviously begin in February, we will give guidance on Q1, as well as full year 2013 and we'll be able to be much more precise on that.

Sure. I just wanted to make sure we're not working on any changes there.

Your next question comes from the line of Richard Davis, Canaccord.

So I'm probably even more bullish on the eventual size of this kind of next generation marketing than those industry consultants. So, Scott, maybe the question I have for you would be is in your opinion, where do you think this space is in terms of evolution? And I guess, more specifically, I mean, do you think there's room for half a dozen public or private companies in the space to grow rapidly in this space for at least a couple -- 2 or 3 years? Because that's frankly kind of what happened in HR. It seems to me, marketing is an order of magnitude bigger. So just kind of your thoughts and your opinion as to where you think the space has evolved to at this point.

Sure. Thanks, Richard. Certainly, absolutely feel like we're in the early innings of marketing software and marketing automation growth. Many have been sharing that lovely Gartner quote that by 2017, they estimates the CMO will control more IT dollars than CIO. We really believe that to be the case, and when we look at our market potential across market segments, verticals, geographies and then across all digital channels, it's just an enormous, enormous market opportunity. And there is room for many companies to do well. We really like our competitive position and really think there's a big opportunity to provide a suite of solutions to digital marketers as opposed to individual point solutions. So we think we're incredibly well-positioned to capitalize in the growth opportunity. But it's large enough. Multiple companies can certainly succeed.

Got it. And then a tactical kind of follow-up question maybe for Steve. But when you guys open up foreign offices, I mean, we don't model it down to this level but at least notionally, we probably think about it. Should I assume that they're kind of losing a little bit of money, are they a drag because, I mean, almost always that's the case. And then at what point do you guys notionally try to have these things make money? Is it 18 months, is it 24, is it -- how do you think about that when you make those investments?

Yes, good question because it certainly varies based on the ramp that we choose to take in a given country. Generally thought, it's probably at about the 18-month mark that we like to see them get to breakeven.

Your next question comes from the line of Terry Tillman, Raymond James.

The first question, I guess, Scott, just relates to Pardot specifically. How should we be thinking about the relevance of you all taking that product up market and some more larger enterprise or just large enterprise into 2013? And then in relationship to that, how relevant it could be to the revenue model for 2013 in terms of that opportunity?

Thank you. We're extraordinarily excited about Pardot, both for their strength in the small and midmarket but also that opportunity you reference of bringing them up into the enterprise segment. It really starts with connecting to our messaging platform. So in many ways, email is really at the heart of B-to-B marketing automation. And now, we're going to have an integration to renew Pardot in ExactTarget messaging platform that can really meet the needs of advanced enterprises. Secondly, we're building capability around permissions, roles, kind of advanced enterprise functions, if you will, that are very inherent in our other products. Those will be built into the Pardot product and it will make it even more competitive up into the enterprise segment. But probably even more material than the product and technology itself is really just the go-to-market strategy. Pardot's been incredibly disciplined around serving small and midmarket companies with a telesales model, we're able to marry that model with our field sales organization, professional services group, even presales engineers and really believe we can put the Pardot product quickly in a position to be very competitive up in the enterprise segment. So that's really, really an exciting opportunity moving forward. So it's kind of a combination of keeping the sales machine and engine that they built that's working incredibly well within the small and midmarket. And then together, we'll pursue the enterprise market together.

Okay, great. And then, I guess, Steve, just last quarter, on the second quarter call, it seems like a long time ago now. You talked about actually seeing operating leverage in 2013. I mean, granted we have the acquisitions now but you are talking about kind of accelerating the headcount in the third and fourth quarter in the core business. So does that still hold true, the idea of potential operating leverage in the core business next year or has something changed on that front?

Yes. Terry, no, we made that comment before even knowing about the acquisitions. And with the acquisitions and the impact we described, we'll be able to answer that question more precisely when we give the guidance in February.

[Operator Instructions] Your next question comes from line of Jeff Houston, Barrington Research.

Regarding the mix of transaction and campaign e-mails, is it safe to assume that your customers are delivering more and more transaction e-mails than they are with campaigns? And if you could just provide any insights around the dynamics there, that would be great.

Jeff, this is Scott. So we really like to see a combination in blend of marketing communications, as well as more the operation and transactional messaging. Marketing is actually the larger component of the 2, but we do see great growth from the operational transactional side. And much of this really speaks to our unique differentiation around mission-critical sending and some of the comments I made earlier around multiple data centers, redundancy, data management, very unique integration capabilities. We're finding more and more organizations are turning to ExactTarget to leverage our infrastructure to power those operational and transactional messages, and we think that can be a significant growth lever for us going forward.

Got it. Then switching gears a bit to the Pardot and iGo acquisitions. Are those deals both expected to contribute? I think, you gave before $3 million to $4 million in 2012 and $24 million to $26 million in '13. Is this performance roughly in line with that or is that proven to be conservative?

No, that is correct, that is the guidance that we've shared.

So there's no update to that I assume?

Correct.

There are no more questions at this time. I would now like to turn the call back to Scott Dorsey, CEO, for closing remarks.

Excellent. Well, thank you for your interest in ExactTarget. We enjoyed sharing our Q3 financial performance. More information about our very successful Connections and Connections U.K. and our 2 very promising strategic acquisitions of Pardot and iGoDigital. As we shared during the call, we're incredibly excited and well-positioned to meet the needs of digital marketers and capitalize on our large and growing global market opportunity. So thank you for joining us, and have a great evening.

And thank you again, ladies and gentlemen, for your participation. This does conclude today's conference. You may now disconnect and have a great day.