Energy Transfer LP (ET) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Quarter 1 2013 ExactTarget Inc's. Earnings Conference Call. My name is Julianne, and I'll be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Mitch Frazier, Vice President, Marketing and Global Communications. Please proceed, sir.

Thank you, Julianne. Good afternoon, and welcome to ExactTarget's investor conference call for the first quarter ended March 31, 2013. Joining me today to discuss our first quarter results are Scott Dorsey, Co-Founder, Chairman and Chief Executive Officer; Scott McCorkle, President, Technology and Strategy; and Steve Collins, 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. The primary purpose of today's call is to provide you with information regarding our first quarter 2013 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, which are described in our most recent Form 10-K filed with the SEC. Should any of these risks or uncertainties materialize or should our assumptions prove to be incorrect, actual company results could differ materially from these forward-looking statements. To access our first quarter press release including the GAAP to 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 discussion, 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 that 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, everyone, and thank you for joining us on our first quarter earnings call. Our first quarter results were outstanding as marketers around the world continued to leverage our marketing cloud platform to drive business results. First quarter adjusted revenue increased 40% from 1 year ago to $89.4 million, our largest quarter in company history and our 49th consecutive quarter of revenue growth. Building on this momentum, I'm pleased to share that we're raising our full year 2013 revenue guidance to $376 million to $379 million from our earlier guidance of $370 million to $374 million. ExactTarget has emerged as one of the largest and fastest-growing software and service companies in the world. We are positioned at the intersection of several powerful trends: The growing adoption of cloud-based solutions, the explosive growth of digital marketing and the convergence of B2B and B2C marketing automation. Our marketing cloud platform enables marketers to integrate and aggregate customer data from any conceivable source and power digital marketing programs across email, mobile, social and the web, while leveraging our sophisticated and easy-to-use B2C and B2B marketing automation capabilities. We work with many of the best brands and brightest marketers in the world. In fact, we just completed an advertising campaign called, We Are Marketing, where we featured several of our most strategic clients like Coca-Cola, the Gap, Microsoft, Oakley, Lowe's and TripAdvisor. These organizations, along with the thousands of other clients we serve, are leveraging the ExactTarget platform to achieve new levels of digital marketing success. Marketing organizations are dramatically shifting budgets from offline to online channels due to the real-time nature of today's hyper-connected consumer and the compelling return on investment generated through digital marketing. As a result, the CMO, our target buyer, is growing in strategic importance. In a recent Gartner research report titled, Digital Marketing Pushes Executives to a More Strategic Role, the analyst firm predicted that in 2013, digital marketing would be a top 3 imperative on 100% of CEO agendas. Gartner's prediction supports our belief that digital marketing will emerge as the most strategic category of enterprise software over the next decade as it directly drives customer engagement and revenue. We plan to leverage our size, scale and momentum to capitalize on this tremendous market opportunity. In the first quarter, we focused our investment on 4 strategic areas: continuing our global expansion, driving innovation through research and development; advancing our recent acquisitions of iGoDigital and Pardot; and expanding our sales organization. Our global expansion continues to be a priority as we recently opened offices in Toronto and Singapore. These new offices, along with our growing presence in Europe, position us for continued international growth. Last month, I visited our European offices in London, Munich, Paris and Stockholm, and enjoyed sharing our vision with many CEOs and CMOs from our most strategic clients and partners. Our momentum in Europe is building and contributed to our strong first quarter. International interest in our digital marketing solutions is accelerating, and we're educating marketers around the world through our CONNECT Global Tour. Last month, our team in Brazil hosted nearly 500 digital marketers in São Paulo. And next week, we have more than 1,500 registrants for our tour stop in Sydney, Australia. In addition to international expansion, our relentless focus on innovation continues to fuel our growth. We invested approximately $18 million in R&D in Q1, more than 4x our nearest competitor, furthering our competitive advantage and our unique capability to meet the demanding needs of digital marketers, from small and medium-size businesses to large global enterprises across our full suite of marketing solutions. Our team is laser focused on building best-in-class applications across our 7 product categories: email, mobile, social, web, marketing automation, data and analytics and platform. Very unique to ExactTarget, these cross-channel applications can be adopted on a standalone basis or in any combination integrated into the Interactive Marketing Hub with single sign-on, common data model, integrated calendar, campaign management and analytics. The strength of each individual product, combined with the integration across our suite, is driving our powerful results. Accelerating investment in our recent acquisitions of web personalization pioneer, iGoDigital, and B2B marketing automation leader, Pardot, was an important priority in the first quarter. Demand for iGoDigital's web personalization and guided selling products has been outstanding as our global sales team has quickly embraced these innovative solutions, cross-selling iGoDigital into existing ExactTarget clients and winning new brands on a standalone basis. Pardot continues to drive impressive new client growth, fueled by their powerful B2B marketing automation capabilities. We are investing in furthering Pardot's leadership in the small business and mid-market, while building additional enterprise capabilities to better serve large organizations. We believe Pardot's continued push into the enterprise segment represents a significant growth opportunity. We are redefining marketing automation, eliminating data silos and transcending point solutions to provide one platform for marketers to implement audience-based, consumer-based and business-based marketing automation to drive revenue and business results. Gartner recently named Pardot and ExactTarget a Visionary in their Magic Quadrant for CRM Lead Management, and noted the convergence between B2B and B2C marketing. Pardot was also just named the Best Workplace in Atlanta for the second year in a row in the small business category of the Atlanta Journal Constitution's Top 100 Workplaces. This award is based on anonymous employee satisfaction surveys that were completed 2 months after our acquisitions. Winning the award post-acquisition is remarkable, an incredible testament to the strong cultural alignment between the Pardot and ExactTarget teams. Our passionate team of digital marketing and software experts continues to be our most strategic competitive advantage. In the first quarter, we added 108 net new employees, bringing our total global headcount to 1,781. More than half of our new hires in the quarter were made in sales and marketing. Our global sales organization has now grown to more than 440 professionals. Our sales team had a tremendous first quarter, earning the business of innovative brands across nearly every segment and vertical of the global market, including Aramark, Business Wire, Home Shopping Network, Luxottica Australia, NPR, newegg, Northern & Shell, Philosophy, Stella & Dot and Zendesk. We're excited to welcome these great new clients to the ExactTarget family. In addition, our relationship management team expanded many existing client relationships, including h.h. gregg adding mobile, social and iGoDigital; Tommy Hilfiger adding iGoDigital; VEGAS.com adding social; Siemens Healthcare adding Pardot; and Royal Bank of Canada adding our new MobilePush technology. With approximately 10,000 direct and indirect clients leveraging our platform, we have a tremendous opportunity to further cross-sell our suite of digital marketing applications. As we shared in our Q4 call, we anticipate that more than 20% of our 2013 subscription revenue will come from non-email products. And after the first quarter, we are on track to achieve this milestone. Our strategy is working. Strong revenue growth, continued investment in R&D and sales expansion, and successful integration of strategic acquisitions have positioned us incredibly well to capture this enormous market opportunity. Let me now turn the call over to Scott McCorkle, our President of Technology and Strategy, to discuss the most recent advancements across our platform. Scott will be followed by our CFO, Steve Collins, who will cover our Q1 financial results in more detail and provide Q2 and updated full-year 2013 guidance. Scott?

Thanks, Scott. I'm excited about our first quarter revenue growth and the role innovation continues to play in our success. Innovation is part of our culture. And with our Fuel platform and Interactive Marketing Hub, we have architected our product to drive rapid innovation across all of our development teams. The results are clear. We believe we have achieved best-in-class status across our 7 product lines: email, mobile, social, web, marketing automation, data and analytics and platform. The Interactive Marketing Hub enables us to integrate our applications with a single sign-on, a common data model, integrated calendar, campaign management and analytics. The Interactive Marketing Hub also provides an integration framework that enables us to quickly integrate acquisitions such as Pardot and iGoDigital to create a seamless experience for our clients. Pardot and iGoDigital will be available as part of the Interactive Marketing Hub in June. Our drive for innovation extends to our partner ecosystem and other marketing technology providers. And earlier today, we announced the general availability of our next generation of Fuel platform tools and technologies to accelerate third-party app development for the Interactive Marketing Hub. Three powerful capabilities have been enhanced with today's announcement. First is new software development kits, or SDKs, that provide for native language access to our API family in PHP, Ruby and Python, with Java and .NET coming later in Q2. Plus, our mobile SDK, which supports iOS and Android app integration for push notifications. Second is Fuel UX, which provides a suite of user interface controls that make it easy for developers to build applications on the Fuel platform; and third is the next generation of our developer support forum and community found at code.exacttarget.com. Dozens of our clients and technology partners are currently developing applications using this expanded suite of platform services. We expect to make these applications available to clients in early third quarter 2013 with the launch of our Hub Exchange app marketplace. Hub Exchange will enable marketers to select applications and install them directly into their existing ExactTarget accounts within the Interactive Marketing Hub. Applications currently being developed extend native ExactTarget functionality with new third-party integrations, analytics and expanded support for additional digital marketing channels such as Sleight Advertising. This is important. On top of ExactTarget's rapid pace of innovation, we now add the great ideas in innovation from other marketing technology providers, furthering our client's goal to establish a single, integrated digital marketing system of record through ExactTarget. The openness of our platform extends to data. Our platform enables our clients to integrate any conceivable data source into ExactTarget to build a common view of their consumer. Data drives relevance, and relevance drives increased results. Over the last year, I have worked closely with one of our European entertainment clients. Their data integration work on the ExactTarget platform is impressive, and the results are dramatic. Demographic, purchase history and product usage data have been integrated into ExactTarget for tens of millions of their consumers with many billions of supporting data records. The results have been more relevant communications for their consumers and double-digit increases in their most important conversion metrics. I would like to conclude by congratulating our technology, security and infrastructure teams on our recent ISO27001 certification. Our customers are continuously validating and assessing our technology, and many of their auditing processes are based on this ISO standard. Our alignment to this globally recognized standard has been well received by clients in all of our market segments, but especially, large enterprises. Now, it's my pleasure to introduce our CFO, Steve Collins.

Thanks, Scott. Q1 was another quarter of exceptional growth with adjusted revenue growing 40% year-over-year to $89.4 million. We were pleased with all aspects of our revenue performance in the quarter, including recurring subscription revenue growth, renewal rates, cross-channel growth and international growth. Adjusted subscription revenue grew 41% year-over-year. Recurring subscription revenue grew 38% on an adjusted basis to $69.4 million. Overages revenue, which is not including any recurring subscription revenue, was 3% of total revenue in the quarter. We expect the overages revenue to continue roughly in this range as one of our larger enterprise clients transition to a fee structure based on monthly messaging volume as they enter the second year of a 3-year agreement. Our subscription revenue renewal rate exceeded 100% yet again as our clients continued to renew, adopt additional channels and increase their usage of our platform. International adjusted revenue growth was 56%, and non-U.S. revenue with 19% of total revenue in the quarter, up from 17% in the year-ago quarter. Our mix of subscription revenue versus professional services revenue in the quarter was 81% and 19%, respectively, with adjusted subscription revenue at $72.1 million and services revenue at $17.3 million. Non-GAAP overall gross margin was 66% in Q1, up from 63% in the year-ago quarter. Our non-GAAP subscription gross margin was 76% in Q1, an improvement from 75% in the year-ago quarter. Our professional services gross margin was 22% on a non-GAAP basis, which is up from 16% in the year-ago quarter. We are very pleased to have achieved a year-over-year increase in all 3 gross margin measurements: overall, subscription and services. Turning next to operating expenses, we have increased our investment pace from Q1 of 2012 in large part due to the opportunity to invest in our recent acquisitions of Pardot and iGoDigital, our ongoing focus on cross-channel innovation and our continued international expansion. OpEx as a percent of revenue increased from 66% in the year-ago quarter to 72% in Q1, with percent of revenue increases in sales and marketing and research and development. Scott mentioned our overall net new headcount growth in the quarter was 108. The majority of these were sales and marketing roles as we continue to expand our global selling capacity. Adjusted EBITDA was $0.3 million in Q1, and adjusted net income was a loss of $5.8 million, which were both consistent with our investment plans for the quarter. Q1 operating cash flow was negative $3.4 million. In the first quarter, we typically experienced higher than normal payments associated with our annual performance bonuses and commissions related to the prior year. CapEx as a percent of revenue was 8% in Q1, which is down from the 11% invested in full year 2012. Our CapEx investments can fluctuate quarter-to-quarter based on data center capacity expansion and facilities expansion. We expect 2013 CapEx spending as a percent of revenue to be below that of 2012 as we continue to see scale and leverage from our earlier investments. I will now discuss our guidance for Q2 and our improved outlook for full year 2013 as outlined in our press release. For Q2, we expect adjusted revenue to be in the range of $91 million to $92 million. We expect our adjusted net loss in Q2 to be between $7 million and $8 million, and we expect adjusted EPS to be a loss of $0.10 to $0.12, assuming Q2 weighted average shares outstanding of approximately 69 million. For full year 2013, we are pleased to increase our outlook for adjusted revenue to $376 million to $379 million, an increase from our prior guidance of $370 million to $374 million. We are maintaining our full year adjusted net loss guidance of $20 million to $22 million. We are also maintaining our prior full year adjusted EPS loss range of $0.29 to $0.31, assuming full year weighted average shares outstanding of approximately 70 million. Our Q1 results and our increased 2013 revenue guidance demonstrate that our strong growth is continuing, and that we have an abundance of compelling investment opportunities to further extend our market leadership position. With that, I will turn the call over to Julianne for question.

[Operator Instructions] Your first question comes from the line of John DiFucci, Deutsche -- JPMorgan.

A question for Scott Dorsey. Scott, your overage this quarter was a little bit -- it was greater than it's been a little bit, not huge, but bigger than it's been, even bigger than last quarter and a little bigger than we expected. This means customers are using the system more than they expected. I guess the question is why, and does this mean anything going forward?

Thanks for the question. System usage continues to be outstanding, so we're very pleased with adoption and usage across really all of our products and across our platform, so that remains very, very strong. Overage fees continue to be a very small percentage of overall revenue. As Steve mentioned during his prepared comments, we have one -- one of our larger clients, one of our larger, more strategic clients that just shifted into year 2 of a 3-year agreement and has gone into a different monthly messaging fee structure, and that's contributing to some of the increase we saw in overage fees in the first quarter, John. And we'd actually expect that to continue as that's more of a structural dynamic to this one specific agreement.

Okay, okay. And I guess, Scott, a follow-up question. Can you talk a bit about the development of your sales process? You're going to go from last year of about 10% or so of your revenue being non-email to, as you said, you are on track to go to over 20% this year. I mean, are you talking more about sort of simply cross-selling here? Or is there more of a platform sale developing where you have more multiple products sales with plans, customers saying, you know I'm going to start with these couple and I'm going to move, I think we're going to expand into these other areas. And I guess, can you address this, especially as it applies to Pardot, because it seems that, that particular category, that particular product sort of opens the door for more of that.

Thanks, John. The digital marketing suite is really resonating in the market. So clearly, our selling and positioning has shifted to helping marketers really understand and leverage consumer data, and then using those data insights to power digital communications across all channels. And we really are selling the power of the suite in the Interactive Marketing Hub. A really exciting trend is we're seeing more clients at contract initiation start with more than one channel. So that's been a real powerful trend that we saw in the first quarter. In addition, our team is getting very skilled at cross-selling new applications into our existing base. I referenced during our prepared comments, we have approximately 10,000 direct and indirect clients. So we've got a big pool of amazing organizations leveraging ExactTarget, using our data capabilities, and that allows us to really build strategic relationships with those organizations and cross-sell new products. Pardot has been just a terrific acquisition for ExactTarget. It's a hot category. We're seeing a lot of greenfield opportunity in the marketplace, both on standalone basis. And then one of the clients we referenced during our earnings call was Siemens, is a great example of an organization using ExactTarget email and B2C marketing automation, and now adding the B2B Pardot marketing automation alongside and really leveraging that power of one platform.

Okay, great. And if I just might, I'm sorry, just one for Steve. Steve, cash flow was a little lower than we had modeled. We don't really focus on cash flow on a quarterly basis a whole lot, especially given the volatility in that line, but -- and especially given your investments going forward. But we just want to make sure we don't miss anything here. There were 2 items that were different than we had modeled. One was prepaid expenses and other assets, and the other was accounts payable and accrued liabilities. Is there just -- is there anything there we should be aware of?

John, thanks for the question. As I mentioned in the prepared remarks, part of it is Q1 is historically a lighter quarter for cash flow because of paying commissions and bonuses associated with the late activity in the prior year. So we do expect to see an improvement in cash flow as the year progresses. And then yes, prepaids were a little higher, just mainly associated with prepaid insurance and then some of our software license renewals that tend to happen in Q1. So we will see a benefit later in the year in the prepaids.

Your next question comes from the line of Nandan Amladi, Deutsche Bank.

It's actually Stan Zlotsky sitting in for Nandan. So I wanted to focus a little bit on your -- on the investments in this -- and where the investments are going. So I'm thinking when we spoke last in the 4Q call, you mentioned that you were looking, as far as overall headcount additions to the year, it was going to be, in terms of total magnitude, about in line with what you did last year. Is that still the plan? And how much of that would be in sales? Would it be approximately half, kind of like what you did this current quarter?

Stan, thanks for the question. From a headcount perspective, that's a safe assumption, that approximately 100 net new adds per quarter is roughly the pace that we've seen over the last few quarters, and we expect that to continue going forward. We really are focused on adding sales capacity, so we're really delighted in the first quarter that more than half of our new adds went into the sales and marketing organization. We haven't provided a specific allocation of what we expect in the out quarters, but just as a general tone, we see great opportunity to continue to increase sales capacity both in North America, as well as in international markets. So that clearly will be a big focus for us throughout the year.

Okay. And on the sales ramp, last year, especially in the second half, you had a lot of sales headcount. How are those guys ramping? Are they -- I mean, is it according to your plan? Is it a little bit faster? Help us out.

Sure. We did hire a considerable amount of new sales representatives in Q3 and Q4 of last year. Their enablement in ramp is going very well. Historically, we have seen our inside sales team tend to ramp in roughly a 3-to 6-month period, where our field representatives ramp in more of a 6- to 12-month time period. A very strategic area of focus for ExactTarget is on sales enablement. So we've continued to add capabilities and really bring quite a bit of sophistication and focus to our business. With such a large selling organization, increasing productivity, accelerating ramp of new sales professionals can have a really big impact on overall performance. So we're really pleased with our progress and momentum there, and that will continue to be a real strong focus throughout the year.

Okay. And then the last one. The services revenue was, I think, a little bit higher than what we were modeling. Anything to call out there? Is that just a matter of larger -- or implementations at larger customers?

Historically, our software services mix has been around 80-20, so Stan, we're comfortable with the 81-19 ratio that we saw in first -- in Q1. In some cases, services can tick up a little bit when we have a large number of new clients that are getting implemented, and that's very much the nature of Q4 where we close lots of new business and larger enterprises. They get implemented in the first quarter so perhaps, that's one indication of services coming up 1 point to 19%. But overall, we're very comfortable with the 80-20 mix. And also, we continue to put a tremendous amount of energy and emphasis into building out our ecosystem of service partners globally. So in addition to ET services professionals, we've got a very strong network of partners that continue to deliver work on our behalf, on behalf of our platform.

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

So I wanted to just ask a little bit about the enterprise segment here for you, particularly given that you talked about this ad campaign where you highlighted some key enterprise customers, Coca-Cola, Gap, Microsoft, TripAdvisor. I guess Gap is the one name that stood out there that I don't think you'd formally announced as a customer before, but in any case, sounds like you've built a nice roster. Can you comment as to what the competitive environment looks like for the enterprise arena? Can you give us a sense as to how your pipeline might be building for that segment of the market? And how should we think about growth potential for enterprises? Is that a segment that is kind of growing faster than the rest of the business? Or can you just give us some framework to think about that versus the sort of classic mid-market segment of the business?

Tom, Scott McCorkle, and Royal Bank of Canada might be another enterprise client that was in the mix that had not been disclosed previously. We're very strong in enterprise. We enjoy our all market segment focus very much. We think that's a great advantage to all of our customers and our company, but we're particularly strong in the enterprise. We see very strong deal flow in the enterprise, and we compete very favorably for those large enterprise businesses. So a point we sometimes highlight is our software is often broadly distributed across organizations. We have implementations with hundreds into [ph] thousands of users. So large enterprises, and Gap could be a good example here, look to our platform to manage the process, the workflow, the way the digital marketing happens in addition to just the messaging. So that makes our platform very strong for organizations like that.

Tom, this is Scott Dorsey. I would just add that, as Scott mentioned, we really like the portfolio approach or the balance across small, mid and enterprise. Although over time, as we push up market, we are seeing mid market and enterprise gain roughly 1 point or 2 per year in share as we continue to really sharpen our competitiveness up in the large enterprise space, which is really terrific. Another very fun client story, as Scott mentioned, how widely distributed ExactTarget can be deployed within organizations, we released a press release this week for an organization called Thirty-One Gifts, an at-home retailer, that they've now deployed ExactTarget over 100,000 users as they're leveraging our platform in a big, big way. So that really illustrates this notion that in addition to driving lots of data and messaging, we're also able to really widely distribute our software and capitalize on revenue per user dynamic that's a real compelling element of our platform and the enterprise-ness of what we do.

That's great. Turning to Pardot. It seems like this is an organization that had its pretty substantial growth when you acquired them. And I know that the plan was to throw quite a bit of additional investment into the sales and marketing machine at both Pardot and iGoDigital. Can you give us a sense as to what you're seeing from early returns from those investments and where you're placing them within those organizations? Do you feel like as you look out 1 year and maybe even 2 years, that the growth rates you inherited there from those organizations could even accelerate from what you bought?

Thanks for the question, Tom. Pardot has built an amazing sales and marketing machine, and we have continued to invest in that existing machine as they focus on small and mid-market organizations. B2B marketing automation lead management is a very hot category of software, and the Pardot team are finding mostly greenfield opportunities out in the marketplace. Their product is very powerful yet very simple to use and very simple to understand. So we're finding new reps can get on board it very, very quickly, and their new client growth has been excellent. So we're really, really pleased. In addition, we're working with the Pardot team and our enterprise sales organization to really pull the enterprise product, the Pardot product, up into the enterprise segment, and we're off to a very good start there. iGoDigital, we also have seen just the enormous amount of demand across our existing client base. With iGo, we're building their selling organization, and really building quite a bit of sales process and rigor in infrastructure. And then in addition, Tom, we're really focusing on the cross-sell opportunity. So driving a tremendous amount of enablement across both our new business team and existing business teams so they can be selling iGo into the market, and that's going quite well.

Great. Maybe one last follow-up on that, Scott, just from the perspective of Pardot. As you move into the B2B world, does that world for you get any more competitive where, of course, you're going to bump into players like Marketo and Eloqua. Do you find it that those vendors are out there being perhaps more aggressive on pricing on the email side of their equation? Does that change anything for you in the enterprise? Just any comment you can add on the competitive environment would be great.

Yes, Pardot's competitiveness is really outstanding, and the pricing model, Tom, in B2B marketing automation tends to be more driven by records under management as opposed to a messaging or a CPM element. So we're finding that Pardot's pricing is very competitive and working incredibly well in the marketplace. If anything, I would say, we're seeing a weakening of the competitive landscape as Eloqua was acquired by Oracle. They're no longer publicly listed on the Salesforce app exchange. We're actually seeing just a tremendous amount of demand and really feel that the Pardot product is competing very, very effectively in the marketplace.

Your next question comes from the line of Robert Breza, RBC Capital Markets.

Scott, as you look at the kind of the landscape right now and you talked about achieving the 20% number in terms of revenues outside of email marketing, where are you seeing -- you talked a lot about the new opportunities and thanks for the RBC shoutout. But really wanted to see what's driving that? Is it more in the mobile side, the social side? Where are you seeing the most traction? Thanks.

Thanks for your question, Rob, and thanks to your new colleagues for your business with RBC. We really enjoy the great strategic relationship. We're seeing really growth across all product categories. When you look outside of email, the portfolio includes mobile, social, web, marketing automation, data and platform. I would say the 3 areas that are most substantial would be the marketing automation, web and then mobile. Those are the 3 that are really standing out. But we're seeing nice growth really across the entire portfolio.

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

Scott, over the last couple of quarters, we've heard some concern about pricing in this category, and I was wondering if you'd seen any changes there. I know last quarter, you said you hadn't, but I was wondering if there were any dynamics that had changed, and particularly given your previous comment about Pardot in the competitive environment in that segment.

Thanks for the question. We're really seeing no material changes in the pricing environment, and we're actually very pleased, as Steve mentioned, that our gross margins showed nice year-over-year increase across subscription services and overall gross margin. So we feel very good about pricing and competitiveness in the marketplace.

Great. And then following up on the comments about the additions to the sales force, I think I had in my notes on the last call, you talked about adding 100 sales reps, and then today, you mentioned that you had added, I think, 108 people, of which the majority, I think, were in sales and marketing. Now, is that sales reps specifically or are we talking about kind of a combination? I'm just trying to get sort of an apples-to-apples to the 100 reps that you mentioned on the last call.

Sure. The more than half, Brendan, was referencing hiring that went into sales and marketing. And then separately, we referenced that our sales organization is now over 440 professionals. During the last quarterly call, we mentioned it was over 400 sales professionals. So that gives you kind of a rough ratio.

Perfect. And then lastly, Scott McCorkle, you and I have talked a lot about the innovative steps you guys have done on big data, and you talked about some more new products today. Are any of those using any of the new kind of data management tools, big data initiatives that are out there that you hadn't previously been working with?

Yes, they -- Brendan, great question. They sure are leveraging all the great new big data architectures that we've put in place over the last several years. So the example I shared of the highly relevant data creating great lift for one of our European entertainment customers with billions of records that we're managing, that's on our big data platform, yes.

Our next question comes from the line of Richard Davidson, Canaccord.

It's DJ on the call for Richard. So maybe building off Tom's questions around Pardot, can you give us a sense of where you are from an ASP's perspective now, and I guess as you triangle up market, where that number could go? And then related to that, you talked about investing in the platform to build out some enterprise capabilities. Maybe give us a little color on what they are. What do the enterprises require that the SMB customers might not? Is it advanced lead scoring? Is it analytics? What specifically will you be building out there?

DJ, thanks for your question. This is Scott Dorsey. We have not previously disclosed ASP for the Pardot solution. But I think what I'm comfortable sharing is that we do continue to see an opportunity to move their ASP or average contract value up higher over time. And we've already actually seen that in the short number of months that we've been together as an organization, that is, the Pardot product goes up into the mid-market, that average contract value increases, and we certainly see a lot of upside potential as we look to the bigger, more widely distributed enterprises. I'll turn it over to Scott to talk a little more about the product innovations that are going into the Pardot product as we continue to build more capability targeted toward the enterprise.

There are 2 primary categories of capabilities we're excited about for the enterprise. You mentioned the advanced lead scoring. That is one where we'll do scoring across a multiple product line company, and those lead scoring algorithms can be different for each of those product lines. And then business units rolls permissions [ph], the more advanced architecture for how Pardot spreads across the enterprise. So those are the 2 primary areas.

Got it, great. And then the international markets that you guys are pursuing, have they hit a tipping point like it feels like we have in the U.S. in terms of adoption of marketing automation platforms? Any color on kind of where they are relative to the U.S. and how the competitive landscape differ there versus here.

Thanks, DJ. We are definitely seeing growing adoption across channel digital marketing around the globe, and it's very, very exciting. Because our message of leveraging data to power digital communications in a coordinated and orchestrated way across channels like email, mobile, social and the web is really resonating. I referenced during my prepared comments, I just came back from a trip to Europe and we found just enormous interest and demand for our solutions, and really a growing level of sophistication around data and integration. Also, in 2012, we put a tremendous amount of focus into building out a localized UI so that we could really support large global organizations in whatever native language the user preferred. And that's really making a difference in the market, both as we focus on these new countries, and then we also support more global organizations that have users around the world. That's been a real differentiator in our category.

And then is it more or less or equally competitive? Do you have a feel?

Each market has its own different dynamics. I would say as we expand around the world, we find there are small local providers with limited capabilities, and we're a really nice alternative as we come into those new and emerging markets relative to being a more sophisticated platform. So we're finding that we're very competitive around the world, and in many cases, we're a platform that organizations will graduate to as we see more opportunity to drive sophistication through the digital marketing.

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

I guess, Scott Dorsey, maybe a question for you initially. You've got this huge installed base now, and I'm curious, you've helped us in terms of quantifying how much expansion you had in your sales force. How much of the surface have you scratched though in terms of this large installed base and have more of a relationship management teams that are methodically going into the installed base to drive more cross-sell or upsell? Where are you in that as opposed to these new salespeople being more, what I'll call hunters, going after new customers?

Sure. Terry, thanks for the question. We have a very good head of steam as the relationship management team has been in place now for 3-plus years, although we are barely scratching the surface of the potential. There's just no question about that. And our selling organization is really helping drive client success within these existing clients, but really, most importantly, upselling those new solutions. And it's working, the model's working, but we're definitely in the early innings as it relates to cross-selling these new channels and these new products into the base. That's very, very exciting. And in many ways, it's a vehicle for us driving lots of new business within that base. And that's a huge asset that we continue to focus on and leverage going forward.

And I guess, Scott McCorkle, I think Brendan had asked a question about the big data and just the data management side of your business. In the past, I've liked to ask about Audience Builder, which is one of those permutations of your data management technology in the product skew. What kind of attach rate -- where do you think we are or what inning we're in with Audience Builder maybe into some of your larger B2C customers in terms of the uptake of that? And I assume it's based on customer records being analyzed. I mean, does that add hundreds of thousands of dollars or can you get 6 figures when you upsell that product in the installed base?

Great question. Absolutely, Audience Builder can get well into the 6 figures as a price point, and it is driven from number of records under management from a contact or consumers under management perspective. So it can grow quite handsomely. And it's my personal favorite product because it shows the common view of the consumer so well. And we see -- while in early innings for adoption, we see that adoption increasing dramatically. And the example that I referenced earlier was data flowing through our big data architecture, which includes tools like Kafka, Hadoop to manage petabyte scale, and then into our Audience Builder product, that's running on our MPP architectures for just massive segmentation. A piece I didn't mention in my anecdote was this organization has been distributed that kind of segmentation across 50 users throughout Europe. And those individuals are performing very sophisticated segmentations with minute, sub-minute response time, just incredible. So it's one of my favorite stories.

Your next question comes from the line of Nathan Schneiderman, Roth Capital.

Well, first question for you. Just if we look at the subscription revenue part of the mix without the overage, it didn't look like you grew as much sequentially in Q1 this year as Q1 last year. And I was just curious if there was anything onetime or just how should we think about that and any reason why there was that dynamic?

Good question, Nathan, this is Steve. Yes, one reason why we pointed out in the script this one larger enterprise customer, just the dynamics of their contract put them into overage mode, and rather than it being recurring subscription revenue by our definition. But it's certainly acting like that as they have just started year 2 of a 3-year agreement. And when you look year-over-year, we're at 3% on overages in part due to that dynamic versus only 1% 1 year ago. So that's a key part of the explanation.

So effectively, had this customer been in the year ago period, that overage revenue that you received this year might have fallen into core subscription last year?

Exactly.

Effectively. Okay. And has there been any other mix shift towards overage other than this one particular customer?

No, that was the primary dynamic, which is why we highlighted it.

Got it, that's helpful. I was just curious on the seasonality of sequentially declining bottom line results for Q2. Is there anything kind of onetime or blippy that happens on the expense structure that's just a seasonal issue? Or is it just how you're timing the investments this year versus prior years?

Yes, Nathan, good question. Probably one area that tends to be a little more seasonal is our marketing events calendar. And it is quite busy in Q2 compared to Q1. We talked about our Global CONNECT Tours happening in 3 cities around the globe, as well as a Pardot marketing tour that is mostly hitting Q2. And then just our international expansion is a little bit more intense in Q2 versus Q1. And then finally, the 108 new heads getting a full quarter impact of that in Q2 versus a partial period impact in Q1.

Got it. And the final question for you. I was just curious, when you look at the direct and indirect customer base of 10,000 or so, what percent would you say are using products outside of email? Or maybe another way to describe it is, do you have an average number of products per customer? Maybe you could give us both of those.

Nathan, Scott Dorsey. We have not shared those metrics, but really happy to point out that we are seeing that cross-channel adoption increase in a real material way. And what gets me so very excited is we're seeing it both at contract initiation, as well as longtime existing ExactTarget clients adding new channels as they continue to grow their digital marketing sophistication with our company. So there's a lot of very, very positive momentum happening as we're selling more and more channels into the base and into the new market.

You have no questions at this time. I would now like to turn the call over to Scott Dorsey for closing remarks, Chairman and CEO.

Thank you so much. I'd love to personally thank everyone for joining us on our Q1 earnings call. I'm hopeful that you share the excitement and passion we have for software-as-a-service and digital marketing. We're very proud of our first quarter and very, very excited about the remainder of 2013 and beyond. So with that, I wish everyone a great evening. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.