Good day, and welcome to the Bazaarvoice Fiscal Second Quarter 2014 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Jim Offerdahl, Chief Financial Officer. Please go ahead, sir..

Thank you. Good afternoon, and welcome to today's conference call to discuss Bazaarvoice's financial results for the second fiscal quarter of 2014 ended October 31, 2013. I'm joined today by Stephen Collins, our Chief Executive Officer; and Gene Austin, our President.

Following the remarks from Steve and Jim and me, we'll have a 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 second fiscal quarter of 2014, as well as the release announcing our succession plan, were issued earlier today and are also posted on our Investor Relations website.

Please remember that certain statements made during this call, including those concerning the business outlook and guidance, growth plans and opportunities, potential acquisitions, sales execution and our 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 SEC filings, including the Risk Factor sections of our Form 10-K for the fiscal year ended April 30, 2013, our Form 10-Q for the first fiscal quarter of 2014, and our Form S-1 as filed with the SEC on July 12, 2012, as well as other documents that we may file with the SEC in the future.

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 implied in these forward-looking statements.

In addition, forward-looking statements are based on currently available information, and we undertake no duty to update this information. Additional cautionary language regarding these forward-looking statements is further described in today's press releases.

Finally, some of the numbers that we will discuss during this call will be presented on a non-GAAP basis. Today's press release, together with the accompanying tables, contains the calculations of these non-GAAP financial measures and a full reconciliation between each non-GAAP measure and its corresponding GAAP measure.

I would like now to turn the call over to Stephen..

Jim, thanks, and to everyone on the call, thanks for joining us today. Let me start by thanking our clients for their business and by thanking all the Bazaarvoice team members around the world for their ongoing hard work and dedication.

As you no doubt saw in our press release, I am very gratified today to announce that Gene Austin will succeed me as CEO at the end of the current fiscal quarter ending on January 31, 2014. For me, it has been an honor and a privilege to service the company's CEO since taking over for our Founder, Brett Hurt, back in November of 2012.

And I am proud of what the company has accomplished during my tenure. I'd like to thank the Board of Directors and the Bazaarvoice team for the opportunity to lead our company during this period of time. Gene is going to be a tremendous CEO for our company and I was incredibly pleased to have been able to recruit him to Bazaarvoice.

Gene had to hit the ground running in May of this year, assuming a huge amount of responsibility and challenge by taking on all the sales, services, marketing and business development functions of the company.

With 6 months under his belt and the DOJ trial complete, it is clear that his leadership experience as a Chief Executive and his deep experience in software and SaaS is driving the organization forward, and the board and I are fully aligned on this as the succession plan.

Now, Gene and I are going to work closely for the next quarter to complete the transition of all the leadership responsibilities of the company to him.

Our key near-term operating objectives that relate to our long-term strategy will remain in focus through this transition and beyond, with the strong and ramp [ph] management team well in place, along with a tremendous portfolio of assets at its disposal, Gene is well equipped to lead the company to continued success.

Gene's commitment to performance and operational excellence is just what the company needs to take Bazaarvoice forward and to realize all the tremendous opportunities available. Jim and Gene are going to cover all the details about the quarter and forward guidance, but I'd like to briefly highlight several important achievements this quarter.

For the second quarter, we again delivered revenue above our guidance range and adjusted EBITDA in the guidance range. And for the third quarter in a row, we have delivered sequential growth in the number of new clients going live. As you know, new client acquisition has been an important area of focus for us this fiscal year.

In early October, I was excited to join our team in Tokyo to officially launch Bazaarvoice Japan, where I met with clients, partners, employees and the press. Global expansion into the Asia-Pacific region and specifically in Japan was a key objective of mine, and I'm very happy to see that come to fruition.

Now we have a great team in place to begin developing that market and expanding more aggressively into the Asia-Pac region. Now let me briefly comment on the status of our DOJ litigation. I am pleased that the trial concluded during the middle of October, and we were very satisfied with our ability to present the key facts and points in our case.

At this point, we await a verdict. We aren't able to accurately predict when we'll have the verdict, but we're hopeful that it will come in the next several weeks. Before turning the call over to Gene and Jim, I'd like to personally thank every member of the Bazaarvoice team for their support and hard work during my time as CEO.

And I'd like to make sure our incredible team of moderators are acknowledged for their amazing efforts as well. You all are all fantastic. And I'd like to thank Gene for his leadership and partnership since joining the company. Gene, congratulations. And I'll hand it over to you..

Thank you, Stephen. I really appreciate your kind words and I'm incredibly excited about the opportunity to lead Bazaarvoice moving forward. And I'd also like to thank all of you for attending today's call, as it serves as the beginning of our transition.

As most of you know, I joined the company in May of this year, and I have been leading our go-to-market initiatives for the business, including worldwide sales, services, marketing and business development.

I've spent much of my time with clients, prospects and partners, understanding the role Bazaarvoice plays in their business and what they want from us in the future.

Resoundingly, I'm told that we have made a profound impact on the marketplace by enabling businesses to build richer and more valuable relationships among consumers, retailers and brands.

Every review, question and service -- can help with this growth [ph] in the Bazaarvoice network is an opportunity to create experiences built on trust, mutual interest and collaboration.

Our capacity to help businesses tap into the most powerful marketing force in the world, the voice of the customer, has made us one of the most powerful engines in the world for generating authentic content.

In just the last quarter alone, the content on our network received more than 48 billion impressions and influenced 476 million average monthly unique shoppers who engaged with reviews, questions and answers and other forms of content displayed on our clients' website.

We have the honor of working with 283 merchants listed in the Internet Retailer Top 500 Guide and 44 companies ranked in the Fortune 100. These are clear indications of the value we drive for our clients today and the opportunity that lies ahead by building out our network. In short, I believe Bazaarvoice's best days lie ahead.

I would like to focus the remainder of my remarks into 3 sections. First, I will comment on some important operational improvements we are making in the business; next, I will discuss the specifics of the second quarter highlights; and finally, I will wrap up with a quick discussion of my strategic priorities.

Let me start with framing our opportunities for improvement. Driving bookings growth has been a priority, and we continue to focus on both better sales execution and expanding capacity. We are seeing steady improvement domestically and have added a number of reps to both our enterprise and small and medium business teams.

On the international front, we continue to invest in both Europe and Asia-Pacific, and we expect to see bookings growth in both regions in the quarters ahead. Adding sales capacity, improving execution is just the start to driving our top line growth, as there's also room for improvement in other key areas of our business.

In particular, I believe dollar churn or the amount of revenue loss from a termination, down renewal, or any type of concession, represents a real opportunity.

While our client churn numbers have been stable for the past several quarters, we mentioned on our last earnings call that we expected an increase in our dollar churn during the second quarter, due to one large client contract renegotiation. In addition, we incurred higher-than-expected dollar churn from a number of mid-size clients.

One way we are dressing churn is installing net bookings as the key metric in our corporate bonus programs. Net bookings is a difference in sales and churn in any given period. As a result, the awareness of churn as an opportunity is now very high at Bazaarvoice and related initiatives already having an impact.

I believe dollar churn will improve over time to a new level, which in turn, will drive our net bookings and revenue results higher. We announced our new conversations platform last year with the goal of migrating many of our key accounts during the middle of the fiscal year.

Today, while most of our new clients are being deployed on conversations, we are behind schedule on our migration plan. I expect the bulk of the migrations will begin during the first half of our next fiscal year.

Our new platform is our largest development project ever, and we expect the downstream benefit of improved customer satisfaction, strong performance and scalability and accelerated innovation to be well worth the wait. Finally, to date, our media business has not ramped to the degree we expected heading into the year.

We now expect media to grow at a solid pace, but below our original expectations. We have made significant investments in our media business and still actively believe in the potential for stronger results that lie ahead. With these improvement areas as context, let me now briefly comment on our guidance for the rest of fiscal 2014.

With the second quarter spike in dollar churn, combined with softness in media revenue, we are slightly lowering our revenue and adjusted EBITDA results for the rest of the year and Jim will provide specifics in his remarks. Now moving on to our second quarter results.

Revenue for the quarter came in at $45.5 million, above our guidance, and represented a year-over-year growth rate of 18%. We reported adjusted -- an adjusted EBITDA loss of $3.1 million and non-GAAP loss per share of $0.06, both within guidance.

We saw real signs of improvement in some key areas in the second quarter, including strong sales delivered by our North America team, particularly in our enterprise segment. Note that in our last call, we highlighted enterprise as an area of weakness, so it's gratifying to have enterprise back on track after a strong second quarter.

New account logos have been a focus all year. And through our efforts in our enterprise segment, as well as our small, medium business sales efforts, we had a good quarter in terms of both new sales and launch logos. Our launched client count came in at 90, our highest ever.

We did lose a total of 40 clients during the quarter for a net growth of 50, bringing the total number of enterprise clients to 1,289. Great new clients added during the quarter include Exxon, Hyundai, Del Monte and Church & Dwight, to name a few.

We are also pleased to see growth in existing clients, such as Nestlé, Whirlpool, Johnson & Johnson, Epson and Samsung. Connections continue to add a strong base, adding over 300 new brands to our network that now totals more than 1,900.

As a reminder, Connections enables brands to engage directly with consumers on our network by allowing them to answer questions and respond to reviews directly on retail sites. When brand engaged directly with questions and reviews, it raises overall consumer sentiment and increases purchase intent.

Connections is a premium model, with the base capability offered at no cost and a premium functionality available for a fee. Not only does Connections drive rapid network growth, we believe it is a source of demand generation for conversations.

Total clients in the Bazaarvoice network, inclusive of conversations, Connections and our PowerReviews client, is over 3,200 globally. Bazaarvoice media delivered $1.3 million in revenues during Q2, which precedes the active holiday quarter and was up 29% versus a year ago on a pro forma basis.

Shopper media is highly seasonal and correlates to increases at online retailer traffic and seasonal brand marketing efforts. Staples U.K. went live during the quarter, which is our first major retail publisher in Europe, and I'm excited about releasing some important innovations in the coming months.

Finally, let me comment on our high-level strategies moving forward in leading Bazaarvoice. I believe Stephen's vision for Bazaarvoice is clear, and our guidepost to driving the business forward. We plan to continue to invest in the core business for global growth. I touched on many of the key initiatives earlier.

But in short, we have a large market to address globally with our reviews business that will require new innovations, better services and efficient go-to-market strategies. Our network is a rich asset and uniquely positions Bazaarvoice.

The opportunity to unlock the digital relationships between brand, retailers and consumers across our network is a capability in which we have only began to deliver. Over the coming quarters, we plan to invest in our network to continue to unlock rich information that can have a profound impact on our client and how they engage with their customers.

Lastly, while growth is our primary goal, I want the company to also make progress towards positive cash flow and profitability. I believe we can achieve both by focusing on the best opportunities for growth and improving our overall business operations.

Make no mistake, we have a great market opportunity ahead of us, and I fully believe we are taking the right steps to return long-term growth and strong operating results for the company.

The commitment of our board, leadership team and employees to the Bazaarvoice's success is incredible and I look forward to reporting a progress to you each quarter. I'm at the end of my remarks, but before I end, I want to personally thank Stephen for his many contributions in his commitment to Bazaarvoice.

He has greatly enhance our company during his time as CEO. He has assembled a strong leadership team and provided a true vision for our growth in the large and expanding markets that we serve in the years ahead. Stephen, I look forward to working with you on a successful transition over the coming weeks and months.

In closing, I'm honored and thrilled to lead Bazaarvoice and believe its best days are ahead, as we continue to build a truly global business that changes the world one authentic conversation at a time. I will now turn the call over to Jim..

Thank you, Gene, and thank you to everyone who joined the call today. As a reminder, we are on a fiscal year calendar ending April 30. So today, we're reporting results for the second quarter of fiscal 2014, which ended October 31, 2013, and all accounting periods discussed will be fiscal.

Unless otherwise noted in my remarks, I will cover our non-GAAP operating results that correlate with adjusted EBITDA as a measure of operating profitability, including discussions of cost of revenue and operating expenses.

Investors should refer to our press release for a complete overview of our financial results, including the reconciliations of GAAP to non-GAAP operating results, comparative information to prior periods and key operating metrics.

I'll first provide commentary on our second quarter 2014 financial performance and will then conclude with our outlook for the third quarter and full fiscal year 2014. As Gene mentioned, we achieved total revenue of $45.5 million in the second quarter, up 18% year-over-year, exceeding the high end of our guidance range.

This year-over-year growth rate benefited from our Longboard Media acquisition in the third quarter of fiscal 2013. So on a pro forma basis, our year-over-year growth rate was 15%. We achieved SaaS revenue of $44.2 million, up 15% year-over-year. Net media revenue was $1.3 million, up 29% year-over-year on a pro forma basis.

Adjusted EBITDA for the second quarter was a loss of $3.1 million, in the range of our guidance of the loss of $2.5 million to $3.5 million.

As a percentage of total revenue, our adjusted EBITDA loss improved 340 basis points year-over-year, driven primarily by gaining leverage in operating -- operational efficiencies in our cost of revenue and G&A activities, while at the same time, allowing us to increase investments in R&D and sales and marketing to support our short- and long-term growth opportunities.

Our non-GAAP net loss per share was $0.06 in the range of our guidance of a loss of $0.06 to $0.08. As Gene noted, we launched 90 active enterprise clients in Q2, up from 68 in Q1 and up sequentially for the third quarter in a row, reflecting increasing new client bookings over the last several quarters.

Client losses were 40, resulting in a Q2 active enterprise client retention rate of 96.8%, which remain consistent with our average over the last 5 quarters. As a result, we added 50 net new clients in Q2, up from 31 in Q1 and up sequentially for the third quarter in a row.

Our dollar churn was higher in Q2 than it has been in past quarters, driven partially by the mid-contract price change for one of our largest clients that we talked about in our Q1 earnings call and also driven by higher-than-expected churn from the number of mid-sized clients.

This higher Q2 dollar churn contributed to a slight lowering of the full year revenue guidance for which I will provide additional detail in a few moments. As Gene noted, we have put significant focus on churn throughout the organization, and will continue to do so going forward as a matter of course.

As a result, we expect our dollar churn to improve as we move forward. We ended Q2 with 1,289 active enterprise clients with annualized SaaS revenue per average enterprise client of $140,000, consistent with the prior 4 quarters.

We continue to expect this annualized revenue per client to decline in the future, as we concentrate on adding larger numbers of new clients at initial pricing, is lower than our company average. We continue to view this as healthy for our network and consistent with our land-and-expand approach. Turning to the P&L.

We achieved gross profit of 70.6% in Q2, up a strong 480 basis points from the same period last year. Our gross margins benefited from continued economies of scale, more efficient implementations, as well as higher margin net media revenues.

Sales and marketing expenses were $19.9 million and represented 43.6% of revenue this quarter as compared to 42.6% in the same period last year.

Sales and marketing expenses increased year-over-year in absolute dollars and as a percent of revenue, as we continue to increase our quota-carrying sales reps and as we increased sales and marketing to support our media operations.

R&D expenses were $9.1 million, representing 20% of revenue this quarter, as compared to 18.2% in the same period last year, as we continue to increase investment to their new platforms to better take advantage of our network opportunity.

G&A expenses were $6.3 million and represented 13.8% of revenues this quarter, as compared to 15.3% in the same period last year, as we continue to gain operational efficiencies.

Acquisition-related expenses, which we exclude from our adjusted EBITDA loss and non-GAAP net loss per share, were $8.3 million in the second quarter, all of which related to our lawsuit with the Department of Justice and related shareholder derivative litigation. The DOJ trial was completed in October. And as Stephen noted, we await the verdict.

The level of Q3 expense will depend on the verdict and whether there are additional proceedings to discuss remedy in the event the DOJ prevails, or whether either party chooses to appeal the court's decision.

We continue to gain operating leverage as a company, as we achieve annualized revenue per average employee of $231,000 in the second quarter, up 16% from the same period last year. In addition, our annualized gross profit per average employee improved to $163,000, up 24% from the same period last year. We ended the quarter with 798 employees.

Now let's turn to the balance sheet. We ended this quarter with $75.4 million in cash, cash equivalents and no debt. DSOs increased to 61 days, slightly above our average of 58 over the prior 4 quarters. Our deferred revenue was $53 million, as compared to $49.5 million a year ago and $54.5 million in the first quarter.

Our deferred revenues would have been approximately $4 million higher, if not for the continued lower mix of annual billings in Q2 similar to what we experienced in Q1. We continue to believe that measuring changes in deferred revenue is not a good proxy for new bookings during the quarter.

We typically have a varying mix of billing frequency with average upfront billings of less than 1 year.

Further, given our typical 3- to 4-month implementation cycle between the booking of a new client and the date at which we've launched a new client begin recognizing revenue, the value of any new bookings closed during the quarter may not be reflected in deferred revenue until subsequent quarters.

As a result, total contract value of new bookings is just not discernible in deferred revenue. From a cash flow perspective, cash used from operations in the second quarter was $12.6 million, of which $8 million was related to the DOJ case and related shareholder derivative litigation.

CapEx was $2.3 million, of which $2 million was capitalization of developed software. We expect our cash used from operations to be impacted over the next several quarters, as we paid the accrued expenses and other current liabilities on our October 31 balance sheet that relate to the DOJ case, sales tax and other stock-related expenses.

Expenses related to these items are all excluded from adjusted EBITDA and, in total, are expected to be approximately $15 million. These accrued expenses and liabilities are estimates and are subject to adjustment, as described in the footnotes to our financials.

I'd like to now finish with some thoughts regarding the financial outlook, starting with guidance for the full year of fiscal 2014. As Gene noted, we are lowering our full year guidance by approximately 2% to $181 million to $184 million, driven by the higher-than-expected dollar churn in Q2 and to a lesser extent, softness in our media revenue.

We now expect media revenue to grow in the 20% to 30% range on a pro forma basis, which is approximately double on a reported basis. As we noted last quarter, we continue to invest in the business, including sales and product development to leverage the network effect of retail and brand clients.

We remain optimistic that if we execute as expected going forward, including continue to ramp our sales force, increasing the pace of new account acquisition, improving our dollar churn rates, continuing to grow our media business and continuing to gain operating leverage, we would expect our revenue growth rates to begin to reaccelerate some time during fiscal year 2015 and also make progress towards profitability and positive cash flow, as Gene noted earlier.

In regard to adjusted EBITDA, we are adjusting our guidance to a loss of $12.5 million to $14.5 million, primarily reflecting the change in our revenue guidance. Non-GAAP loss per share is now expected to be in the range of $0.25 to $0.29, based on 75.1 million weighted average shares outstanding.

Turning to guidance for that third fiscal quarter of 2014. We expect total revenue to be in the range of $46 million to $47 million, up 9% year-over-year at the mid-point of the range. We expect adjusted EBITDA loss to be in the range of $2 million to $3 million.

Non-GAAP net loss per share is expected to be in the range of $0.05 to $0.07, based on 75.8 million weighted average shares outstanding. With that, I will turn the call over to the operator for questions..

[Operator Instructions] We'll take our first question from Greg Dunham with Goldman Sachs..

I guess, first off, I've gotten a number of questions from investors as to your succession and just the catalyst behind that decision, as why now? So that's first. And then I do have a question on churn..

Okay, Greg. It's Stephen. First, I would say that the board and I feel like it's a good time and a really great time to make the change. And we're focused on conducting an orderly succession plan here. So it's a little bit different than when I took over about 1 year ago. I had the opportunity to recruit Gene. He's got extensive CEO experience.

I've been able to accomplish a lot of what the board set forth for me to accomplish. And as we proceed into, let's say, the next phase of our growth, Gene's experience and skills are really perfectly adapted to what we have to accomplish.

He's already been running 2/3 of the operations of the company for the last 6 months, he and I have had a chance to get to know each other and get up to speed and talk a lot on strategy. And before you know it, we'll be on our FY '15 planning process, about a quarter from now.

So we just sat down as a board and felt like this was the right succession plan, and I think it's going to be a smooth transition and great for the company..

Okay. And then, I guess, switching gears a little bit. You mentioned that the dollar churn change and then that impacting guidance. I know last quarter, you have the contract renewals that impacted that specific deal. It sounds like this is a little bit more widespread.

And I guess, what actually happened that surprised you this quarter on a dollar basis? And outside of change in the incentive plans for net bookings, is there anything else you can do to help improve that dynamics?.

Yes, Greg, this is Gene. In addition to the one-time large client renegotiation, we did have a number of, more mid-sized organizations that churned. And so I use the term," "spike in churn" for Q2, which I think is a good term for.

We expect churn to be lower as the rest of the year unfolds, but let me give you a little bit more color on what happened in Q2. And frankly, I think it's emblematic of what we're working on operationally going forward. I would really break our churn down into 3 large buckets.

One is execution by our company and that could be selling too much into the account and account coming back and rightsizing downstream. That could be an implementation that was incomplete. That could be a poor contract.

And so many of those, as you want to talk about solutions, many of those are being worked and fixed as we go forward in that we've strengthened our implementation processes, our sales processes, et cetera, to where I think we're executing at a much higher level on that front.

The third area -- the second area would be what I would call classic churn you see in any SaaS business, which could be anything from your champion leading the organization and the new person coming in and having to resell and perhaps, they decided to do things a little differently to any other -- to the fact that it's maybe not as good a fit as they thought.

So those would be what I would call classic SaaS churn that you see in any SaaS business. And then the third area is a little bit of a dynamic of our market, where we -- when we sell to somebody's large brands, we have brands buying on one side and churning on the other side.

They could be because the brand no longer are -- they're being taken back or taken off the shelf, as I would say, or it could be for a variety of different reasons. And we're -- we have plans in place to address that to take some of the noise out of that inter-client churn that we see on occasion.

2 of the 3 are being actively worked, and I think we're going to see much stronger churn results as we go forward. But yes, we did have a spike this quarter..

And we'll take our next question from Jennifer Lowe with Morgan Stanley..

Maybe just to quickly follow up on Greg's question regarding churn. Two quick questions on that.

First, were those -- the customers that were churning, where they switching to competing offerings or were they just going without ratings and reviews, technology reports, communication platform altogether? And then related to that, were those retail brand -- retailers that were churning or were there brands churning?.

It was largely a mix on how the organizations break down between retailers and brands. And I'm aware of no significant competitive pressure that cause the churn. I mean, I don't have all the details.

I know the largest ones that churned were not due to another competitor, but I'm sure there was plenty of competitor influence on some of the churn, so best way to answer that for you. I don't know -- I certainly don't know of any widespread, one competitor taking our business in these accounts..

Okay. And one more for me. So in terms of the new customer go live, the 60 go-live growth. Obviously, it was a pretty big improvement from last quarter. I know last quarter there was also some discussion around trying to refine some of the implementation processes to kind of speed up the rate of implementation.

So I'm just trying to get a feel for how much of that improvement was related to you improving your implementation processes and potentially working through maybe some backlog of signed customers that still need to go live versus just broader growth in the number of customer signings..

I think -- I mean, I think the significant rate is both a reflection of our accelerating sales progress, our sales progress, but also the fact that our services team, engaging with our sales team on better cycle times, cleaner processes, shorter durations of [ph] the overall implementation.

We took some serious step-forwards in that area, and I expect that to continue going forward.

And those implementations, the type of implementations that our company is embarked on now are the types of implementations, from my 12 years of being in the SaaS business, those are the types of implementations that lead to long-term customer value and lower churn.

And those are the types of downstream effects that we expect to see from the way we're implementing customers now..

And then just one last one for me. Again, not to beat a dead horse but on the churn issue, it looks like the number of customers churning was fairly consistent with the past. It was really just the size that was a little bit bigger than normally is.

Is that a fair characterization or was it necessarily pervasive, it was just a slight number of customers if it's fixed [ph] , the customer number was fairly similar, it was really just a dollar that was different versus past quarters?.

The way I would characterize it, is we had a number of organizations effectively right-size. So there's still clients at a lot lower level or a lower level. And so in my opinion, that's -- if you're going to have churn, that's the best way to have it because you have the opportunity to go back in and regrow that business..

And we'll now take our next question from Nandan Amladi with Deutsche Bank..

The first question on revenue from old products versus new products. I know you said early on the global expansion plan is still focused on ratings and reviews, but you also made reference to Connections having grown significantly.

Are you happy with the revenue contribution from these new products? And should we expect any changes in the product portfolio as a result of the transition in [ph] leadership?.

Well, Nandan, this is Stephen. We've got several long-term growth bets in play right now. Connections is one of them, as is media. Connections is a network strategy. So the first objective is to get as many brands as we can on that platform and engaging consumers. Now we have a couple of thousand.

And as I've talked about in the past, there are tens of thousands of unique brands that have content on our network, but are either small or don't really have a use case for our ratings and reviews platforms. So this is really key for us to expand the market.

So we want to continue to nurture that and continue to get thousands of people on that platform and then use that as a channel to launch other new products and also to generate leads for our conversations ratings and reviews platform. Media is one of the other bets that we've got on. And we've got a roadmap, a product roadmap, behind that.

We've increased our investment there and put a team on it. We've been signing up some exciting new retailers. That hasn't happened quite as fast as we want so we haven't quite got the inventory that we want. But it still remains a tremendous opportunity and you don't have to look any further from Amazon.

But these are the growth drivers, really, in future years, more near-term, as Gene described, I'm going to turn, the rest of this answer over to him. It's about great execution on our core business and very much about global expansion and, of course, I mentioned, we launch officially in Japan.

Gene, what would you like to add to that?.

Nandan, I would say that as you look at this transition from Stephen and myself, it's really a building-block approach.

And so the short answer to your question is that I believe the bets and the product plays and the strategy that the company has embarked upon is solid, and that we have an opportunity to really drive results much higher through global expansion and better execution overall.

The way I framed the succession plan here is that Stephen has come in and laid the foundation with a new management team. He had to lead, obviously, the company through the DOJ process. But he's also set a vision for how the company continues to evolve.

And he's put in place significant opportunities investments that it's my job now to make happen from an execution standpoint and drive the returns that we expect from the business. We all -- we have a very common view of what success is. And we believe that Bazaarvoice has that foundation in place to go forward.

The strength of my leadership is around solidifying teams and driving execution, while continuing to foster strategic innovation. And that's why I'm excited about this opportunity. I think we have a real positive and bright future..

And a quick follow-up, if I might. Compensation plan changes. I know, I think it was 2 quarters ago, you had taken the approach of raising the new customer adds; that became an important metric. Also earlier, there was a balance between upsell versus new customers, and you pushed more on the new customer side.

Today, you're talking about a net new bookings to get control over churn.

Is this actually having a disruptive effect on the salespeople in the near term as they get used to these new metrics?.

So our sales team definitely has new account acquisition goals. Our leadership team is the team that -- what I mean by leadership, I mean, vice presidents and to some degree, directors, so pervasive across the company, are -- their bonus plan is on net bookings simply because it's my belief that everyone in the company impacts churn.

And so I think having a common base of compensation around something that we all can affect, whether it's answering a phone or improving customer satisfaction or fixing bugs, what have you. I mean, that's the way, I think, you really move the needle.

And to answer your question, the net bookings change remains in the sales force is definitely have an impact. I think that's showing up in the numbers. And the focus on net bookings in a more pervasive way in our company is, at the same time, making changes happen. We have programs in place to improve customer satisfaction.

We've talked about the fact that our implementations are much stronger. We are proactively investing in technology to help us monitor accounts to make sure that they're getting the right value, that they're driving content that we know will lead to success. So the company is on a different level right now as far as attacking the churn challenge.

And like I said, I'm very -- I feel very good about the fact that churn will be heading in the right direction as we head into the next several quarters..

Yes, and then a quick little history. The executive team has always been bonus on net bookings. What we've really done here, this is a total company thing, not just a sales thing.

Gene has come in, and really, we've pushed down the net bookings objective as a foundational component of all senior management executives, not just the executive team, to align the whole company. So Gene is to really be commended for putting a laser-like focus in this area..

[Operator Instructions] We'll go next to Mark Murphy with Piper Jaffray..

So Gene, first of all, congratulations. I'm curious, and I think we're all trying to understand what elements of the business strategy, as laid out by Stephen, do you think you would modify? I mean, I think, clearly, if everything's remaining 100% consistent, there's no reason to make this kind of change.

So for example, do you think you'd take any different approach or de-emphasis on the media side? Is there anything you would change with respect to Connections? Did you still intend to grow the quota-carrying sales headcount by 40% this year and so on and so forth?.

Yes, Mark, I think -- I guess, Stephen and I would dispute your first statement about having to have changed to make this succession plan. And I would tell you that I think Stephen and I fundamentally bring different skills to the business. And the board has openly discuss this with both of us. And I am a 12-year veteran of the SaaS business.

We are largely a SaaS company, as we have plans to obviously add to that in a number of different ways. And I think media is a very important investment that we have. I think Connections is a very important investment we have.

But when we look ahead and we look at what lie head, my skill sets of a dozen years as an executive in SaaS and you know me, obviously, from my years at Convio, was the best lineup, if you will, of skill sets to put forward for the business, and we all came to that conclusion. Stephen has laid a great foundation.

I came here because of the strategy he's deployed and his vision. And I intend to really turn the company into a sound executing organization that is driving significant value, both from our core business on a global basis and the network, as we continue to invest going forward..

Okay. So Gene, Stephen was CEO for about 1 year. And you say he wasn't interim CEO. He was CEO. And I mean, I guess the way you're presenting it is that this is expected and normal and a great timing and everything.

Can I just ask how long did you anticipate being CEO?.

This is Stephen. Mark, when I took over as CEO, I had a pretty clear charter to build a management team from top to bottom that was scalable. Now when you take -- I took over under completely different circumstances. This is an orderly succession plan. I went out and recruited Gene, and I chased him hard and I wanted him on board.

And it was a real privilege to be able to get someone with public company CEO experience on the management team and turn over a huge portion of the operation immediately.

Now when you take over as CEO under the circumstances I took over, I made an open-ended commitment to the board to do whatever it took to build the right management team and ultimately, take us through the DOJ litigation and put in place some initiatives that were long overdue, like expanding in the Asia-Pac region.

But I went into this with my mind on doing the right thing for Bazaarvoice for the long-term as a shareholder. And when I recruited Gene, I didn't recruit him and say, "Hey, you're going to be CEO." But we certainly talked about it.

And it was very comforting to me personally and to the board that we have a real pro coming to the company here and someone I can rely on. And as we've talked at the board level about what happens next and how to best align the company and drive the company forward, we wanted to be proactive and do the right thing.

So you really can't compare the last change to this one. It's quite different. And I'm still CEO until January 31, whatever it's worth. So -- and Gene has been a great partner. We're going to continue to work together. So with all due respect, I think it's a little bit of unfair question.

I feel Gene is going to have a great and successful and very long tenure here..

Mark, just like we spent many quarters together in my last business, you're going to get to spend many, many quarters with me in this business. So I look forward, too. I'm going to build the best, large independent business I can. I believe in Bazaarvoice. I believe in the employees here.

I think the board is -- has been very sound in the way it has gone through this process. So you're stuck with me..

All right. I guess, so far, I'm asking unfair questions or making comments for you....

No, you're not. I think it's very fair..

I do appreciate it. And actually, the extra color is very helpful. I just wanted to ask you one more. Just on the growth rate of your ratings and reviews volumes, I think you showed today, it's getting close to 500 billion conversations across your network.

And I'm wondering, if you look at the trend in that and think about what Bazaarvoice's market share is of all these ratings and reviews volumes globally or conversations, whatever you want to call it.

And if you compare it to the vendors -- excuse me, to all the firms globally that did not use Bazaarvoice, like Amazon, Yelp, TripAdvisor, and there are a couple of others.

What do you think -- do you think Bazaarvoice is gaining share there? How do you think that, that would stack up just in terms of the trend?.

So, if I may, I don't -- this is Stephen. I don't think that's the right way to look at it because when you're talking about consumer reach, audience reach on the web, there's massive overlap. The terminal value, if you will, is Facebook or Google, at a little over 1 billion uniques around the world.

Having close to 0.5 billion uniques simply means that we directly interact with consumers. So there are pixels [ph] on retail and brand sites, we directly interact with nearly 0.5 billion consumers. That's likely to put us in the top 10 of companies in terms of audience reach.

Now we're not like Facebook but that's an important metric to determine the impact that we have and the potential value of analytics solution and the potential value of our data. As you know, we don't monetize our unique audience or impressions.

We have a SaaS model, okay? But in terms of the underlying value that we drive for our clients and the value, the intrinsic value of the assets that we have to build upon, that's an incredibly important metric because it differentiates us from other players that might have a much smaller audience. But there are many sources of audience.

If you want to reach 500 million people, you can do it through Amazon, you can do it, maybe not that many, but you can do it through Facebook. And that's how you should think about that. It means we have a big impact and the value of future solutions can be exponentially higher than what we've created today as we unlock that..

And we'll take our next question from Brendan Barnicle of Pacific Crest..

I just wanted to check a couple of things on the model.

If the media revs are going to basically double on a reported basis, then am I reading it right that the SaaS revenue's basically going to be flat sequentially, Q3 to Q4, based on that mid-point of the guidance you've given us for Q3 and for the fiscal year?.

Yes, Brendan, this is Jim. I think if you do the math, you will see some sequential increases relatively small, but sequential increases, if you do the math at the mid-point. Again, not, for certain, exactly what you're assuming for Q3 and Q4 for media..

Great. Okay, good. I just want to double check that. And then if we go back to -- we've seen deferred revenue is not the best indication of growth, but it has been trending lower in the last third quarter in a row now.

How much of that is related to the churn versus some other factors, like as you're signing up these new customers are they coming in at lower ASP, or it didn't sound like it from the way you gave us, but I'm trying to understand the dynamics around that decline?.

Yes, I would talk about 2 things on our deferred revenue. One is we have a lower mix of annual billings, again, similar to what we had in Q1. Two, the second half here, what I've seen is typically higher annual billings, especially for larger existing clients. For some reason, we typically sign those up in the latter half of our fiscal years.

So that's one item. So the lower mix of annual billings, again, was about a $4 million impact. And of course, the Q2 churn spike -- the spike in Q2 of churn, didn't help us any from a billing standpoint. So I would hook it on those 2..

Great. And then, Gene, you made some encouraging comments about balancing out growth and profitability. We had been remodeling some improvement in that for next year.

But are you thinking that in fiscal '15, you're trying to target getting to breakeven or profitability?.

Brendan, I think, at this point, I want to commit to making progress and not really get to any targets just yet. I think we're -- but I do believe we can make measurable improvements there..

Great.

And then lastly for me on the media business and with the sort of shortfall there, how much of that is that there has been issues in terms of integrating Longboard Media versus maybe some of the legacy stuff?.

No real -- this is Stephen. No real integration issues. A couple of things. Number one, we certainly would have liked to have been able to get more retailers onboard. But that's proved to be a little harder than expected. They're just slow to adopt. But with that being said, like Staples U.K.

and other things, we've had some good wins and have a really good pipeline. It's just taking longer than expected. The other thing that is harder to discern is that -- and this is deliberate, a good trend is we're selling more and more of our retailer's inventory.

Longboard didn't just sell Shopper Media, meaning, online retailers, they sold what they call reach on mobile and just sort of general remnant space to bundle together. And that actually came with higher gross margins than our retail partners in many cases, who are also conversations clients.

So I've been pushing them to utilize the inventory from our retail clients because that's where the synergy is and to sell less of the other stuff. You can think about it as an integration activity. The results of that, though, is because we report on a net basis and we don't disclose growth, that actually had an effect this last quarter.

And -- but it's important that we're servicing our mutual clients here. And so that had an effect. But still, we definitely would like to see more retailers adopting, and I'm excited about some of the ones in the works. And so we feel good about that, and I'm excited about some of the new products there in the pipeline..

[Operator Instructions] We'll go next to Stephen Ju with Crédit Suisse..

So looking at your overseas initiatives and especially in the cases of Japan.

What is the competitive landscape there like? And is there an entrenched player who you have to unseat in order to take share on the retailer side? And do you think it will be harder slog to bring the brand marketer there on board the platform? And then, secondarily, on the media side, just digging [ph] a little deeper here.

So am I correct in thinking that the shortfall on that side is more of a supply-constrained problem with new inventory coming online? But do you think there's an awareness problem on the demand side as well from your advertising clients? And specifically, what is the game plan to get more publishers on the platform? And at what point, in terms of size, whether it's uniques or whatever, other metric you care to measure it by, specifically, do you think you will have to be at this scale to necessarily [ph] to attract the attention of the brand advertisers?.

Yes. So 2 questions I heard. One was Japan and Asia-Pac, and the other was basically supply-and-demand issues with regard to media and the current state of evolution of Shopper Media. So let me address Japan first. So I went over to Tokyo for about a week to launch Bazaarvoice Japan. And I met with all the folks you would have heard of over there.

So we have a partner that was in Japan that was actually an acquired partner [ph] relationships from the PowerReviews acquisition. So we have now launch some clients over there. It's also important to note that many of our brand clients are headquartered in Asia-Pac region, Samsung, for example. Procter & Gamble has a major operation in Singapore.

So we look at this as a real opportunity to develop more global relationships with our existing clients by having capabilities there. And we've already had and I had a number of great meetings with our existing clients there. Even doing things as simple as translating reviews from some geographies into other languages is important.

Competition, it's different. You have players over there who are, like the RocketOns [ph] and things like that, who have review capability. There's more concentration of retail. But we're just figuring out the competitive landscape. But I think it's a very rich opportunity for us and it's great that we're there on the ground.

We got a lot of positive reinforcement from being there..

Maybe just a real quick comment in Europe. We're a little bit more mature in the European market. The opportunity there is really getting the sales force built, grown and organized for much higher levels of bookings performance. Competitively over there, there are a few Pan-European competitors, mostly though, they're more regional in nature..

So I think it's great timing. On media, you're exactly right that as this -- as Shopper Media is evolving. There's a 800-pound gorilla, if you will, and that's Amazon right now. They've built a strong Shopper Media business, estimates have that around $1 billion. And so they definitely have the lead.

There are other players that are out there starting to sell this. So we do have an issue where there's still an awareness issue with brands about how to buy Shopper Media. The easiest thing to do right this minute is to buy Amazon, for example.

And so we're both working that in and we're also continuing to build inventory, so we can meet big enough RFPs. As you know, Stephen, media buyers don't often split RFPs. They might just choose, hey, let's go a 100% with Amazon. And so that's very important for us, the Staples U.K. win was good.

We've got some other big publishers, hopefully, in the works.

And I think it's just a process that we have to continue to push on and we have to continue to educate retailers about the benefits of Shopper Media and site monetization through media, and we've received no indications that this is going to be an important part of economic model for e-tailers.

It's just a matter of when they're going to adopt and getting the critical mass..

How is the inventory being purchased right now in your platform? And is there a long-term plan to open this for programmatic?.

We've already opened it up to programmatic. We did that this quarter and so the media just started ticking on that. And our future product development initiatives are more programmatic in nature. It was not our intent from the beginning to look at that this as what you might call a rep business or a rep model.

We definitely want to pursue programmatic capabilities and to integrate those capabilities with our ratings and reviews content in data. So we have already cross that bridge just starting this quarter..

And there are no further questions left in the queue. At this time, I'd like to turn the call back over to management for any closing remarks..

Well, thank you all for attending and we look forward to reporting our progress as we go forward. And again, Stephen, thank you for all you've done in Bazaarvoice in your tenure..

Gene, congratulations. I'm excited and look forward to your leadership. Thank you, everyone. We'll talk to you next quarter..

Bye-bye..

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation..