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Article by DailyStocks_admin    (11-03-08 07:51 AM)

Vocus Inc. CEO Richard E Rudman bought 50000 shares on 10-31-2008 at $16.43

BUSINESS OVERVIEW

Overview

We are a leading provider of on-demand software for public relations management. In an age of real-time communication, with an increasing number of media outlets, a rapidly growing volume of news and the emergence of blogs and other social media, traditional approaches to public relations, or PR, are becoming outmoded. Our web-based software suite helps organizations of all sizes to fundamentally change the way they communicate with both the media and the public, optimizing their public relations and increasing their ability to measure its impact.

Our on-demand software addresses the critical functions of public relations including media relations, news distribution and news monitoring. By automating and integrating essential elements of PR functions, our solutions help organizations communicate directly with key reporters and with the public, identify and analyze relevant news stories and manage relationships with the media and other key stakeholders.

As a part of our solution, we provide a proprietary information database of over 800,000 journalists, analysts, media outlets and publicity opportunities. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand modules that together address the communications life-cycle from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics.

We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our software. We were an early pioneer in hosted, multi-tenant, on-demand software, launching our first version in 1999. Our on-demand software is offered primarily as an annual or multi-year subscription, with press release distribution also offered primarily on a per-transaction basis. As of December 31, 2007 we had 2,427 active subscription customers representing organizations of all sizes across a wide variety of industries. Our solution is currently available in five languages and is in use by customers around the world. Since 1999, we have achieved 34 consecutive quarters of revenue growth.

Industry Background

Public Relations

The process of managing relationships and communications with journalists, analysts and the public is central to an organization’s reputation, profitability and, ultimately, shareholder value. As organizations recognize the growing importance of effective PR to their success, they increasingly rely on public relations to manage and analyze critical information and to deliver quick and consistent communications. Public relations professionals handle organizational functions such as media, government, consumer, industry and community relations. Every organization, large and small, engages in public relations, whether as an organized department, a single employee’s responsibility or simply a result of public interactions by its executives.

No formal published market studies exist which size the market for on-demand software for public relations management. However, based on the most recent Public Relations Client Survey prepared by Thomas L. Harris/ Impulse Research in 2004, the average PR budget for responding organizations in 2004 was approximately $3.1 million. This budget includes spending for both internal and outsourced PR functions, and includes corporate communications, product PR, online communications, public affairs and government relations. Based on the Thomas L. Harris Survey, we estimate that the annual PR budget for these organizations increased at a compounded rate of 15.5% per year from 2001 to 2004. Based on data included in the Survey, we estimate that, for organizations with annual revenues of at least $10 million, the aggregate annual PR budgets for programs and activities that our solutions address were approximately $59 billion in 2004. To calculate this amount, which we do not believe represents the size of the market for our solutions, we first estimated the aggregate PR budgets in 2004 for these organizations, based upon the Survey’s breakdown of average PR budgets by categories of organizations’ total annual revenues, and the number of organizations in each of these categories as reported by Dun and Bradstreet. We then multiplied this amount

by the portion of the overall average PR budget in 2004 reported by the Survey which corresponds to programs and activities that our solutions address — corporate media relations, government relations, internal communications, investor relations, product media relations and public affairs. Based upon our target market of over 5 million organizations, which we obtained using data collected by the US Census Bureau, and the current pricing of our solutions, we believe that the potential market for on-demand software for PR exceeds $6 billion.

Although the most basic elements of PR are practiced widely across organizations of all types, sizes and geographies, the specific objectives and complexity of a PR practice will often vary based on the size of an organization and its PR department.

For small and mid-sized organizations, traditional PR is often prohibitively expensive and time consuming. These organizations are typically faced with a decision to either use external consulting agencies, or to commit internal staff and resources, both of which often exceed available budgets. In addition, PR responsibilities for these resources are often assigned to only one or two dedicated staff or, in many cases, shared across non-dedicated staff with other full-time responsibilities. The objective for small and mid-sized organizations is typically to leverage limited resources in order to deliver the PR capabilities commonly found in larger organizations.

Larger organizations are typically well staffed and have dedicated budgets and resources. These organizations are faced with the challenges of managing large amounts of information, delivering consistent and well-executed communications, collaborating among large or geographically-dispersed teams and analyzing and reporting on the effectiveness of their PR. The objective for large organizations is typically to maximize effectiveness and ensure consistency of message, while delivering measurable results and improved efficiency.

Trends in business communications and the media are directly impacting the practice of PR. Technologies including the Internet, cable, satellite and wireless communications allow commercial and public media to access audiences almost instantaneously. In addition, these technologies are leading to a rapid expansion of media outlets, media channels and news sources including the rapid emergence of new social media channels such as blogs, podcasts and online communities. As a result, organizations now face broader and more diverse audiences who are informed in real-time by these media, and also face a growing volume of critical business information that needs to be identified, analyzed and managed. An organization can no longer rely on a few relationships with key journalists to achieve PR objectives. As these trends continue, it will be more challenging for organizations to provide a consistent corporate message, gain public support, respond to crisis situations and achieve their public relations goals.

Outside of traditional PR agencies, the public relations market is generally underserved, with few solutions to address the PR business process in a comprehensive, integrated and cost effective manner. A number of vendors offer one or more software products that each address a single problem or process within PR, such as contact management, news monitoring, distribution or analytics. Other than these discrete, stand-alone solutions, PR processes are generally performed by internal departments or designated staff either manually or with generic desktop software. In addition, while organizations may purchase a variety of these stand-alone products and services, the resulting combination is usually more expensive and less efficient than an integrated software suite that addresses the complete PR life-cycle.

Public Relations and the On-Demand Software Market

Information technology has created opportunities to deliver software applications directly to users over the Internet in a subscription-based, “on-demand” business model. This model is made possible by the proliferation of high-speed, broadband Internet connectivity, open standards for application integration and advances in network availability and security. On-demand software is generally delivered over the Internet via a secure, multi-tenant, scalable application and system architecture, which allows the provider to concurrently serve a large number of customers and to efficiently distribute the workload across a network of servers. For the user, on-demand software eliminates the need for expensive hardware, software and internal information technology, or IT, support. In addition, the hosted architecture helps ensure that the software and vendor-supplied content is kept current and secure without user involvement. Additional benefits include rapid deployment and training for new applications, resulting in faster product adoption and increased productivity. This typically results in a lower total cost of ownership and an increased return on investment. The on-demand model also provides operational efficiencies for the software provider in the areas of development and customer support. Traditional enterprise software vendors must develop, maintain and support multiple versions of their software on multiple hardware, operating system and database platforms. On-demand software vendors, by contrast, generally support and maintain a single version of software across all customers that is developed, maintained and supported on a single technology platform. This typically results in lower development and support costs, and allows the vendor to more rapidly develop and release new versions of the software and more efficiently support existing customers.

The characteristics of the PR market make it well-suited for the on-demand software business model. As news distribution and communication services continue to move from manual, paper-based systems to automated digital services, the Internet and the on-demand software model provide an efficient and collaborative platform for PR professionals to access, manage and share information and resources. The simple user interface and rapid deployment of web-based software make it ideally suited for users with little or no technology background. On-demand software provides a dedicated, modern and sophisticated technology infrastructure to PR departments that would otherwise typically receive limited internal IT resources. Finally, in contrast to sensitive customer or financial data, organizations are generally comfortable with PR content residing on an external hosted platform. Currently, the customer-specific information we store includes PR collateral pieces, notes regarding customers’ contacts with journalists and media outlets, journalist contact information and similar data. We protect our customers’ information by requiring the use of user identifications and passwords to access our on-demand software.

Our Solutions

We are a leading provider of on-demand software for public relations management. Our web-based software suite helps organizations of all sizes manage local and global relationships and communications with both the media and the public. Our integrated, on-demand software modules provide extensive features and broad functionality that address the critical functions of public relations including media relations, news distribution and news monitoring. Specific modules include contact management, collateral management, project management, newsrooms, PRWeb online newswire, email campaigns, analytics & measurement and news on-demand. By automating and integrating essential elements of PR operations, our solutions allow our customers to improve effectiveness, reduce costs and measure results. We deliver our solutions to customers through a suite of on-demand applications that reduces the cost and risk associated with traditional enterprise software deployments. We believe, based upon our market research and analysis, that the use of on-demand software helps customers reduce risk and increase the predictability of software management costs, as compared to traditional enterprise software.

As a part of our solution, we provide a proprietary information database of over 800,000 journalists, analysts, media outlets and publicity opportunities. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand software modules that together enable our customers to address the communications life-cycle, from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics. We have developed significant domain expertise and have designed on-demand software solutions and best practices tailored specifically for public relations. As a result, our on-demand offerings meet the PR needs of a broad range of organizations regardless of their size, geography, industry or type.

Our comprehensive suite of integrated, on-demand software modules provides the following key benefits:


• Improved effectiveness of public relations. Our on-demand software helps organizations maximize effectiveness through the automation and integration of disconnected processes. Our solutions help organizations manage large amounts of information, deliver consistent and well-executed communications, collaborate among large or geographically dispersed teams and analyze and report on the effectiveness of their PR.

• Increased productivity of PR functions. Our on-demand software incorporates features and best practices that automate PR functions to reduce or eliminate manual, paper-based and discrete business activities. Our solutions allow customers to maximize the investment in their PR resources and often lead to a redeployment of PR professionals from repetitive, low-value tasks to high-value strategic initiatives. In addition, we provide capabilities that help our customers significantly reduce the time it takes to monitor, analyze and summarize large volumes of news and other information.

• Enhanced collaboration. The growth of global brands and large or geographically dispersed PR teams has increased the need for organizations to quickly and easily share critical business information and plan well coordinated communications. Our web-based solution provides shared, real-time access to a central repository of information related to media contacts, relationship history, PR activities, news, documents and reporting. We believe that by improving the management, control, retention and sharing of this information, our solutions enable companies to deliver more effective and consistent communications.

• Lower total cost of ownership. Our on-demand delivery model enables our customers to achieve significant savings relative to a traditional enterprise software model. Our customers do not spend time installing or maintaining the servers, network and storage equipment, security products, or other infrastructure hardware and software necessary to ensure a scalable and reliable service. In addition, because all upgrades are implemented on our servers the product enhancements automatically become part of our offering, allowing customers to immediately benefit from the upgrade.

• Rapid deployment and scalability. Our on-demand software can be deployed rapidly and provisioned easily, without our customers having to make large and risky upfront investments in software, hardware, implementation services and dedicated IT staff. The delivery platform for our software allows the solution to scale to suit customers’ needs. Additional users with defined privileges can be provisioned with minimal implementation time and new modules, such as analytics & measurement, can be deployed quickly and transparently to existing customers.

Our Strategy

Our objective is to be the global leader of on-demand software for public relations management. Key elements of our strategy include:


• Maintain focus on our core market. We believe that the public relations market represents a large and growing opportunity that will allow us to continue our growth for the foreseeable future. We expect that there will continue to be substantial business spending on the processes that our solutions automate, and that competition is fragmented and specialized. As a result, we believe that our focus on producing a suite of integrated applications for this market will allow us to capitalize on this opportunity.

• Expand direct and indirect distribution channels. We intend to expand our direct sales force and our indirect distribution channels to increase our coverage and penetration of the PR market particularly to small and mid-sized organizations. We believe there are opportunities to market and sell our solutions, through partnerships with select third parties, to reach small to mid-sized customers that would take longer or be more difficult to target with a direct sales force.

• Expand international market penetration. We believe that the public relations market represents a significant global opportunity. We intend to expand our international distribution channels to increase our international business, which accounted for approximately 9% of our 2007 revenues. To suit individual markets, our software is currently available in five languages — English, French, Spanish, German and Italian. We expect to deploy our solution in additional languages in the future.

• Selectively pursue strategic acquisitions. The fragmented nature of our market provides opportunities for selective acquisitions. We have acquired and integrated several private companies to date, and we intend to continue to identify and acquire companies which would either expand our solutions’ functionality, provide access to new customers or markets, or both.

Our Products

On-Demand Public Relations Management

Our integrated, on-demand software modules provide extensive features and broad functionality that address the critical functions of public relations. By automating and integrating essential elements of PR functions, our solutions help organizations manage large amounts of information, deliver consistent and well-executed communications, collaborate among large or geographically dispersed teams and analyze and report on the effectiveness of their public relations.

We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our on-demand software.

As a part of our solution, we provide a proprietary information database of over 800,000 journalists, analysts, media outlets and publicity opportunities. Our database contains extensive information about the media, including in-depth journalist profiles, contact schedules, podcast interviews, pitching preferences and other relevant information compiled by our dedicated media research team. Our database is integrated with our suite of on-demand software modules that together enable our customers to address the communications life-cycle, from identifying key contacts, to distributing information, to closing the loop with digitized feedback and management analytics. Our on-demand software for public relations management includes the following key modules:


• Contact Management. Allows customers easy access to our database of journalists, media outlets and publicity opportunities. Customers can quickly create targeted lists, send messages by email, fax or mail and track meetings, telephone calls and other important activities.

• Collateral Management. Provides a central and easily accessible repository in which to store all PR information that needs to be shared internally or externally throughout the organization. Can include documents or files of any type, such as media kits, photographs, videos, executive biographies, annual reports and other PR materials.

• Project Management. Helps organize PR projects, including press releases, speaking engagements, or publicity events. A graphical dashboard shows the status of all open projects, allowing users to check milestones, reminders, allocated and used resources, team assignments and other tasks from the planning stage through execution and follow-up reporting.

• Newsrooms. Provides journalists, analysts, public officials and other key audiences 24/7 access to an organization’s breaking news, press releases, digital collateral, grassroots advocacy tools and other critical

public information. Matches the look and feel of the organization’s website and allows PR professionals to quickly and easily update content when and where they want, without the need for IT support.


• PRWeb Online Newswire. Allows organizations to increase their online visibility by distributing their news directly to online news sites such as Google News and Yahoo! News and directly to the public through millions of daily RSS feeds and other social media tools. Optimizes press releases for search engines to help ensure that press releases are prominently displayed on search results and drive traffic to an organization’s website.

• Email Campaigns. Enables organizations to deliver interactive communications that provide online access to related collateral material and to track and measure response rates and other campaign metrics. Provides a simple process for delivering information to journalists, analysts, legislators and other key audiences. Also provides valuable metrics on campaign initiatives, including emails opened, documents downloaded and options selected.

• Analytics & Measurement. Automatically transforms relevant data about news coverage, PR activities and online newsroom statistics into valuable insight about a PR department’s programs and results. Provides executive-level dashboards, allowing an organization’s senior management to better understand the impact of relevant news, monitor the competitive landscape and recognize trends emerging in the media.

• News On-Demand. Continuously monitors over 25,000 news sources, including print, broadcast, Internet news sites and key blogs to identify and deliver relevant news coverage to customers based on their individual criteria. News clippings are stored in a searchable database, for easy viewing, printing and sharing.

Due to our flexible architecture and modular design, we are able to easily combine these functional capabilities into pre-packaged editions with optional add-on modules, to meet the needs of a wide range of organizations, regardless of their size or specific PR management objectives. Currently we offer our on-demand software suite in the following pre-packaged editions:


• Public Relations Small Business Edition. Designed primarily for small organizations and includes online press release distribution and basic reporting capabilities.

• Public Relations Standard Edition. Designed primarily for small organizations and includes contact management and basic reporting capabilities.

• Public Relations Professional Edition. Designed primarily to meet the needs of mid-sized and large organizations and provides contact management, news management and expanded reporting capabilities.

• Public Relations Enterprise Edition. Provides increased flexibility and functionality typically required by large organizations. Enterprise Edition is our most fully featured edition and includes all of the functionality of the Professional Edition, along with project management, collateral management, comprehensive reporting and configuration capabilities.

• Government Relations Edition. Designed to meet an organization’s government relations needs, including communications with public officials and grassroots advocates, compliance reporting and issues and legislation management.

Additional functional capabilities are offered through a variety of add-on modules which include newsrooms, PRWeb online newswire, email campaigns, analytics & measurement and news on-demand.

Technology, Development and Operations

Technology

We were an early pioneer in hosted, multi-tenant, on-demand software, launching our first version in 1999. Our on-demand software is built on a single code base that leverages a highly scalable, multi-tenant application written in Visual Basic and C# for the .NET framework. We use commercially available hardware and a combination of proprietary and commercially available software, including Microsoft SQL Server and Microsoft Windows. We have developed proprietary core services such as user session management and full text indexing that are tuned to our specific architecture and environment, allowing us to continually scale our service. We have a seamless environment, in which a user is not bound to a single server but can be routed in the most optimal way to any number of servers.

Our on-demand software manages all customers as logically separate tenants in central applications and databases. As a result, we are able to spread the cost of delivering our service across our user base. In addition, because we do not have to manage thousands of distinct applications with their own business logic and database schemas, we believe that we can scale our business faster than traditional software vendors, even those that have modified their products to be accessible over the Internet.

Every page of our on-demand software is dynamically rendered for each specific user, including a choice of five languages. Our customers access our solutions through any web browser without installing any software or downloading Java applets, Microsoft ActiveX, or .NET controls. Performance, functional depth and usability of our solutions drive our technology decisions and product direction.

Development

Our research and development efforts are focused on improving and enhancing our existing solutions as well as developing new features and functionality. Because of our common, multi-tenant architecture, we are able to provide all of our customers with a single version of our solutions, which allows us to maintain relatively low research and development expenses, as compared to traditional enterprise software business models which support multiple versions.

Site Operations

We serve all of our customers from two third-party facilities located in Virginia and Washington. These facilities provide a combination of security personnel, photo ID/access cards, biometric hand scanners and sophisticated fire systems. The overall security of each data center (inside and outside) and network operations center are monitored by digital video surveillance cameras 24 hours a day, seven days a week. Additionally, redundant electrical generators and environmental control devices are used to keep servers up and running. We own or lease and operate all of the hardware on which our applications run in the third-party facilities.

We continuously monitor the performance of our service. Our site operations team provides all system management, maintenance, monitoring and back-up. We use custom, proprietary tools as well as commercially available tools to monitor our solutions. We run tests in one minute intervals to ensure adequate response from all of our sites. We also monitor site availability and latency from over 15 geographic points around the world in five minute intervals.

To facilitate loss recovery, we operate a multi-tiered system configuration with load balanced web server pools, standby database servers and fault tolerant storage devices. Databases are backed up every five minutes to a hot standby database and server, which are designed to provide near real-time fail-over service in the event of a malfunction with a primary database or server. Full backups of all databases take place nightly and are archived to tape. These tapes are rotated off-site two times per week to a separate third-party managed facility. We also maintain a fully redundant site for our Virginia facility, located within our headquarters, which would serve as our primary site in the event that a disaster was to render one of the third-party sites inoperable.

CEO BACKGROUND

Richard Rudman co-founded Vocus and has served as our Chief Executive Officer, President and Chairman since 1992. From 1986 through 1992, Mr. Rudman served as a senior executive at Dataway Corporation, a software development company. From 1984 through 1986, Mr. Rudman served as an accountant and systems analyst at Barlow Corporation, a privately held real estate development and management company. From 1979 through 1983, Mr. Rudman served in the United States Air Force. Mr. Rudman also serves on the board of directors of Avectra and Parature, privately held technology companies. In addition, Mr. Rudman serves on the board of directors of the Baltimore Symphony Orchestra, a non-profit organization. Mr. Rudman holds a B.S. degree in accounting from the University of Maryland and is a Certified Public Accountant.

Stephen Vintz has served as our Chief Financial Officer and Treasurer since January 2001. From November 1996 to January 2001, Mr. Vintz was Vice President of Strategic Planning and Analysis at Snyder Communications, Inc., a marketing services company. Prior to November 1996, Mr. Vintz was a manager at Ernst & Young LLP.

Mr. Vintz serves on the board of directors of Fishbowl Marketing, a privately held technology company. Mr. Vintz holds a B.B.A. degree in accounting from Loyola College of Maryland and is a Certified Public Accountant.

William Wagner has served as our Chief Marketing Officer since July 2006. From January 2000 to June 2006, Mr. Wagner served as Chief Marketing Officer at Fiberlink Communications, a global provider of security and mobility software. From 1989 to 2000, Mr. Wagner held various sales and marketing positions at AT&T. Mr. Wagner serves on the board of directors of M5 Networks, a privately held company, and the C. David Evans Foundation, a not-for-profit organization. Mr. Wagner holds a B.A. degree in history from Lafayette College and an M.B.A. degree from the University of Pennsylvania.

Norman Weissberg has served as our Senior Vice President, North American Sales since June 2006. From August 1998 until June 2006, he was our Vice President, Account Sales. From March 1997 to August 1998, Mr. Weissberg was a Major Accounts Manager at Xerox Corporation. Mr. Weissberg serves on the board of directors of Formatta, a privately held technology company. Mr. Weissberg holds a B.S. degree in business from the University of Maryland.

Andrew Muir has served as Managing Director, Vocus International, since January 2003 (from January 2003 to April 2004, in a consulting capacity). From January 2002 to December 2002, Mr. Muir was self-employed as a consultant. From August 1999 to December 2001, Mr. Muir served as Managing Director of Cyveillance International (UK) Ltd. Mr. Muir also serves on the board of directors of Highgate Associates and Derringtons Ltd. Mr. Muir holds an H.N.D degree in computer science from Coventry University (Lanchester Polytechnic).

William Donnelly has served as our Senior Vice President, Corporate Development since June 2006. From April 2002 through June 2006 he was our Vice President, Sales. From August 2000 to April 2002, Mr. Donnelly served as Vice President, Sales and Customer Care for Careerbuilder, Inc., a provider of web-based human resources solutions. From April 1995 through April 2000, Mr. Donnelly served as Vice President, Sales and Business Development at Best Software, Inc., a software company. Mr. Donnelly also serves on the board of directors of Regent Education, Inc., a privately held corporation. Mr. Donnelly holds a B.S. degree in business administration and communications from Ramapo College of New Jersey and an M.B.A degree from George Washington University.

Darren Stewart has served as our Senior Vice President, Customer Services since February 1996. From January 1994 through February 1996, Mr. Stewart worked for Information Systems Group, a software consulting company. From September 1992 through January 1994, Mr. Stewart was Manager of Customer Service for Job Files Corporation, a privately held HR software and services company. Mr. Stewart holds a B.S. degree in business administration and finance from the University of Colorado.

Mark Heys has served as our Vice President, Development since joining Vocus in 1998. Mr. Heys was promoted to Chief Technology Officer in February 2008. From February 1996 through November 1998 Mr. Heys served as Development Manager at T4G Limited, a privately held company. Prior to T4G, Mr. Heys was the founder and CEO of Definitive Ideas, a software company focused on Point-of-Sale applications.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We are a leading provider of on-demand software for public relations management. Our web-based software suite helps organizations of all sizes fundamentally change the way they communicate with both the media and the public, optimizing their public relations and increasing their ability to measure its impact. Our on-demand software addresses the critical functions of public relations including media relations, news distribution and news monitoring. We deliver our solutions over the Internet using a secure, scalable application and system architecture, which allows our customers to eliminate expensive up-front hardware and software costs and to quickly deploy and adopt our on-demand software.

We sell access to our on-demand software primarily through our direct sales channel, and to a lesser extent through third-party distributors. As of December 31, 2007, we had 2,427 active subscription customers from a variety of industries, including financial and insurance, technology, healthcare and pharmaceutical and retail and consumer products, as well as government agencies, not-for-profit organizations and educational institutions. We define active subscription customers as unique customer accounts that have an active subscription and have not been suspended for non-payment.

Additionally, we are a leading provider of online distribution of press releases. We enable our customers to achieve visibility on the Internet by distributing search engine optimized press releases directly to various news sites and the public. We offer an on-demand solution which allows our customers to widely distribute press releases containing important elements of rich media such as images, podcasts and video messages to drive Internet traffic to websites and increase brand awareness.

We plan to continue the expansion of our customer base by expanding our direct and indirect distribution channels, expanding our international market penetration and selectively pursuing strategic acquisitions. As a result, we plan to hire additional personnel, particularly in sales and professional services, and expand our domestic and international selling and marketing activities, increase the number of locations around the world where we conduct business and develop our operational and financial systems to manage a growing business. We also intend to identify and acquire companies which would either expand our solution’s functionality, provide access to new customers or markets, or both.

Sources of Revenues

We derive our revenues from subscription agreements and related services and from the online distribution of press releases. Our subscription agreements contain multiple service elements and deliverables, which include use of our on-demand software, hosting services, content and content updates, implementation and training services and customer support. The typical term of our subscription agreements is one year; however, our customers may purchase subscriptions with multi-year terms. We generally invoice our customers in advance of their annual subscription, with payment terms that require our customers pay us within 30 days of invoice. Our subscription agreements are non-cancelable, though customers typically have the right to terminate their agreements for cause if we materially breach our obligations under the agreement. Additionally, we derive revenue on a per-transaction basis from the online distribution of press releases. We generally receive payment in advance of the distribution of the press release.

Professional services revenue consists primarily of data migration, training and configuration services sold separately after the initial subscription agreement. Typically, our professional service engagements are billed on a fixed fee basis with payment terms requiring our customers to pay us within 30 days of invoice. Revenues from professional services sold separately from subscription agreements have not been material to our business. During 2007, professional services sold separately accounted for less than 2% of our revenues.

Cost of Revenues and Operating Expenses

Cost of Revenues. Cost of revenues consists primarily of compensation for training, editorial and support personnel, hosting infrastructure, press release distribution, acquisition and amortization of content, amortization of purchased technology, amortization of capitalized software development costs, depreciation associated with computer equipment and software and allocated overhead. We allocate overhead expenses such as employee benefits, computer supplies, depreciation for computer equipment and office supplies based on headcount. As a result, indirect overhead expenses are included in cost of revenues and each operating expense category.

We believe content is an integral part of our solution and provides our customers with access to broad, current and relevant information critical to their PR efforts. We expect to continue to make investments in both our own content as well as content acquired from third parties and to continue to enhance our proprietary information database and news on-demand service. We expect that in 2008, cost of revenues will increase in absolute dollars but will remain relatively consistent as a percentage of revenues, as we incur expenses to expand our content offerings and our capacity to support new customers.

Sales and Marketing. Sales and marketing expenses are our largest operating expense, accounting for 46% of our 2007 revenues. Sales and marketing expenses consist primarily of compensation for our sales and marketing personnel, sales commissions and incentives, marketing programs, including lead generation, events and other brand building expenses and allocated overhead. We expense our sales commissions at the time a subscription agreement is executed by the customer, and we recognize substantially all of our revenues ratably over the term of the corresponding subscription agreement. As a result, we incur incremental sales expense before the recognition of the related revenues.

As our revenues increase, we plan to continue to invest heavily in sales and marketing by increasing the number of direct sales personnel in order to add new customers and increase sales to our existing customers. We also plan to expand our marketing activities in order to build brand awareness and generate additional leads for our growing sales personnel. We expect that in 2008, sales and marketing expenses will increase in absolute dollars but will remain relatively consistent as a percentage of revenues.

Research and Development. Research and development expenses consist primarily of compensation for our software application development personnel and allocated overhead. We have historically focused our research and development efforts on increasing the functionality and enhancing the ease of use of our on-demand software. Because of our hosted, on-demand model, we are able to provide all of our customers with a single, shared version of our most recent application. As a result, we do not have to maintain legacy versions of our software, which enables us to have relatively low research and development expenses as compared to traditional enterprise software business models. We expect that in 2008, research and development expenses will increase in absolute dollars as we upgrade and extend our service offerings and develop new technologies, but will remain relatively consistent or increase slightly as a percentage of revenues.

General and Administrative. General and administrative expenses consist of compensation and related expenses for executive, finance, accounting, administrative and management information systems personnel, professional fees, other corporate expenses and allocated overhead. We expect that in 2008, general and administrative expenses will increase in absolute dollars but will remain relatively consistent or decrease slightly as a percentage of revenues.

Amortization of Intangible Assets. Amortized intangible assets consist of customer relationships, a trade name and agreements not-to-compete acquired in business combinations.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and

related disclosures. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that of our significant accounting policies, which are described in Note 2 to the consolidated financial statements, the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.

Revenue Recognition. We recognize revenues in accordance with SEC Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements , as amended by Staff Accounting Bulletin No. 104, Revenue Recognition. We recognize revenues when there is persuasive evidence of an arrangement, the service has been provided to the customer, the collection of the fee is probable and the amount of the fees to be paid by the customer is fixed or determinable. Amounts that have been invoiced are recorded in accounts receivable and deferred revenue.

Our subscription agreements generally contain multiple service elements and deliverables. These elements include access to our software and often specify initial services including implementation and training. Our subscription agreements do not provide customers the right to take possession of the software at any time.

Our revenue recognition policy considers all elements in our multiple element subscription agreements as a single unit of accounting, and accordingly, we recognize all associated fees over the subscription period, which is typically one year. We recognize our revenue over the subscription period because the access to our software is the last element delivered to the customer and the predominant element of our agreements. In applying the guidance in Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables , (EITF 00-21), we determined that we do not have objective and reliable evidence of the fair value of the subscription to our on-demand software after delivery of specified initial services. When we sell this subscription separately from professional services the price charged varies and, therefore, we cannot objectively and reliably determine the subscription’s fair value. As a result, subscription revenues are recognized ratably over the subscription period. Professional services sold separately from a subscription arrangement are recognized as the services are performed.

We distribute press releases over the Internet that are indexed by major search engines and distributed directly to various news sites, journalists and other key constituents. We recognize revenue on a per-transaction basis when the press releases are made available to the public.

Sales Commissions. Sales commissions are expensed when a subscription agreement is executed by the customer. As a result, we incur incremental sales expense before the recognition of the related revenues.

Stock-Based Compensation. Prior to January 1, 2006, we accounted for stock-based compensation using the intrinsic value method of accounting under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Our stock option awards have generally been granted with an exercise price equal to the estimated fair value of the underlying common stock on the grant date, and accordingly, any stock-based compensation related to stock option grants was not material under APB No. 25. We applied the disclosure provisions under Statement of Financial Accounting Standard No. 123, Accounting for Stock-Based Compensation and related interpretations (SFAS No. 123) as if the fair value method had been applied in measuring compensation expense. As a result, stock-based compensation expense, based upon the fair value method, was included as a pro forma disclosure in the notes to our financial statements for the stock-based compensation awards granted after we became a public entity.

On January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standard No. 123(R), Share-Based Payment (SFAS No. 123R), using the modified-prospective transition method for the unvested portion of stock-based compensation awards granted after we became a public entity. Because we did not complete our initial public offering until December 2005, we have applied the prospective method to the unvested portion of stock-based compensation awards granted prior to June 15, 2005, the date we first filed a registration statement with the Securities and Exchange Commission (SEC). Accordingly, we have not restated our financial results for prior periods. Under the prospective method, we will continue to account for stock-based compensation awards granted before June 15, 2005 using the intrinsic value method as prescribed by APB No. 25. Under the modified prospective method, stock-based compensation expense for all stock-based compensation awards granted after June 15, 2005, but not vested as of December 31, 2005, is based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Stock-based compensation expense for all stock-based compensation awards granted after January 1, 2006 is based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. We recognize compensation expense for stock-based compensation awards on a straight-line basis over the requisite service period of the award.

In accordance with SFAS No. 123R, we used the Black-Scholes option pricing model to measure the fair value of our option awards granted after June 15, 2005. The Black-Scholes model requires the input of highly subjective assumptions including volatility, expected term, risk-free interest rate and dividend yield. In 2005, the SEC issued Staff Accounting Bulletin No. 107 (SAB No. 107) which provides supplemental implementation guidance for SFAS No. 123R. We recently became a public entity, and therefore have a limited trading history. Accordingly, our expected volatility is based on the historical volatilities of similar entities’ common stock over the most recent period commensurate with the estimated expected term of the awards. The expected term of an award is based on the “simplified” method allowed by SAB No. 107, whereby the expected term is equal to the midpoint between the vesting date and the end of the contractual term of the award. The risk-free interest rate is based on the rate on U.S. Treasury zero coupon issues with maturities consistent with the estimated expected term of the awards. We have not paid and do not anticipate paying a dividend in the foreseeable future and accordingly, use an expected dividend yield of zero. Changes in these assumptions can affect the estimated fair value of options granted and the related compensation expense which may significantly impact our results of operations in future periods.

Stock-based compensation expense recognized is based on the estimated portion of the awards that are expected to vest. We apply estimated forfeiture rates based on analyses of historical data, including termination patterns and other factors.

As of December 31, 2007, we had $14,833,000 of total unrecognized compensation cost related to nonvested stock-based compensation awards granted under our equity plans. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.5 years.

Business Combinations. We have completed acquisitions of businesses that have resulted in the recording of identifiable intangible assets based on the estimated fair value of those assets. Intangible assets consist of acquired customer relationships, a trade name, agreements not-to-compete and purchased technology. Intangible assets are amortized either on a straight-line or accelerated basis over their estimated useful lives ranging from two to seven years. Accounting for these acquisitions requires us to make determinations about the fair value of assets acquired, including intangible assets, and liabilities assumed that involve estimates and judgments.

Impairment of Long-Lived Assets. We assess the impairment of our intangible and other long-lived assets when events or changes in circumstances indicate that an asset’s carrying value may not be recoverable. An impairment charge is recognized when the sum of the expected future undiscounted net cash flows is less than the carrying value of the asset. An impairment charge would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset being evaluated for impairment. Any resulting impairment charge would be included in our results of operations. Impairment charges for the year ended December 31, 2007 were not material.

Goodwill. We test our goodwill for impairment annually on November 1, or whenever events or changes in circumstances indicate an impairment may have occurred. Impairment may result from, among other things, deterioration in the performance of the acquired business, adverse market conditions and a variety of other circumstances. We conducted the annual impairment test in 2007 with no resulting impairment.

Results of Operations

Years Ended December 31, 2007 and 2006

Revenues. Revenues for 2007 were $58.1 million, an increase of $17.8 million, or 44%, over revenues of $40.3 million for 2006. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 2,427 as of December 31, 2007 from 1,727 as of December 31, 2006 and the effect of the PRWeb acquisition, which closed in August 2006. The increase in active subscription customers was the result of adding sales personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers was $10.6 million, or 28%. The remaining increase in revenue is primarily the result of the full-year effect of PRWeb in 2007. Total deferred revenue as of December 31, 2007 was $35.0 million, representing an increase of $8.4 million, or 31%, over total deferred revenue of $26.6 million as of December 31, 2006.

Cost of Revenues. Cost of revenues for 2007 was $10.9 million, an increase of $2.6 million, or 32%, over cost of revenues of $8.3 million for 2006. The increase in cost of revenues was due to an increase of $614,000 in employee related costs from additional personnel, $512,000 in stock-based compensation, $291,000 in hosting infrastructure costs related to the support of our subscription-based customers and $268,000 in third-party license and royalty fees related to the increase in revenues from our subscription-based customers. Our cost of revenues also increased over the prior year by $410,000 for press release distribution costs and $65,000 for hosting infrastructure costs reflecting the full-year effect of PRWeb in 2007. We had 107 full-time employee equivalents in our professional and other support services group at December 31, 2007 compared to 94 full-time employee equivalents at December 31, 2006.

Sales and Marketing Expenses. Sales and marketing expenses for 2007 were $26.5 million, an increase of $7.6 million or 40%, over sales and marketing expenses of $18.9 million for 2006. The increase was primarily due to an increase of $2.8 million in employee related costs from additional personnel, $1.5 million in sales commissions, $1.6 million in marketing program costs and $968,000 in stock-based compensation. Our sales and marketing headcount increased by 34% as we hired sales personnel to focus on acquiring new customers and increasing revenues from existing customers and marketing personnel to expand our marketing activities to build brand awareness. We had 162 full-time sales and marketing employee equivalents as of December 31, 2007 compared to 121 full-time employee equivalents as of December 31, 2006.

Research and Development Expenses. Research and development expenses for 2007 were $3.8 million, an increase of $926,000, or 32%, over research and development expenses of $2.9 million for 2006. The increase in research and development expenses was primarily due to an increase of $636,000 in employee related costs including the full-year effect of PRWeb personnel and an increase of $329,000 in stock-based compensation. We had 29 full-time research and development employee equivalents as of December 31, 2007 compared to 27 full-time employee equivalents as of December 31, 2006.

General and Administrative Expenses. General and administrative expenses for 2007 were $14.7 million, an increase of $5.1 million, or 53%, over general and administrative expenses of $9.6 million for 2006. The increase in general and administrative expenses was primarily due to an increase of $2.2 million in employee related costs, $467,000 in rents and facility costs relating to expansion of our offices and our acquisition of PRWeb and $1.9 million in stock-based compensation. Our general and administrative headcount increased by 26% as we hired additional personnel to support our growth. We had 43 full-time employee equivalents in our general and administrative group at December 31, 2007 compared to 34 full time employee equivalents at December 31, 2006.

Amortization of Intangible Assets. Amortization of intangible assets for 2007 was $2.9 million, an increase of $1.2 million, or 68%, over amortization of intangible assets of $1.7 million for 2006. The increase in amortization expense reflects a full year of amortization attributable to the intangible assets acquired with PRWeb.

Other Income (Expense). Other income for 2007 was $2.5 million, an increase of $763,000, or 44% compared to $1.7 million for 2006. Higher average balances of cash and short-term investments resulted in increased interest income.

Provision for Income Taxes. The provision for income taxes for 2007 was $674,000, an increase of $489,000, or 264%, over the provision for income taxes of $185,000 for 2006. The provision for income taxes in 2007 consists primarily of deferred income tax expense resulting from a full-year of amortization of tax deductible goodwill related to PRWeb and to a lesser extent, state income taxes and Federal alternative minimum tax. The provision for income taxes in 2006 consisted of deferred income tax expense resulting from the amortization of tax deductible goodwill related to PRWeb.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended June 30, 2008 and 2007

Revenues. Revenues for the three months ended June 30, 2008 were $19.1 million, an increase of $5.0 million, or 36%, over revenues of $14.1 million for the comparable period in 2007. The increase in revenues was primarily due to the increase in the number of total active subscription customers to 2,911 as of June 30, 2008 from 2,004 as of June 30, 2007. The increase in active subscription customers was the result of additional sales personnel focused on acquiring new customers and renewing existing customers. Revenue growth from the increase in active subscription customers was $4.2 million, or 37% of revenue from active subscription customers for the comparable period in 2007. The remaining increase in revenue is primarily attributable to the online distribution of press releases. Total deferred revenue as of June 30, 2008 was $37.5 million, representing an increase of $9.3 million, or 33%, over total deferred revenue of $28.2 million as of June 30, 2007.

Cost of Revenues. Cost of revenues for the three months ended June 30, 2008 was $3.6 million, an increase of $822,000, or 29%, over cost of revenues of $2.8 million for the comparable period in 2007. The increase in cost of revenues was primarily due to $456,000 in employee related costs from additional personnel, $300,000 in third-party license and royalty fees and $123,000 in stock-based compensation. We had 131 full-time employee equivalents in our professional and other support services group at June 30, 2008 compared to 105 full-time employee equivalents at June 30, 2007.

Sales and Marketing Expenses. Sales and marketing expenses for the three months ended June 30, 2008 were $8.5 million, an increase of $1.9 million, or 28%, over sales and marketing expenses of $6.6 million for the comparable period in 2007. The increase was primarily due to $560,000 in employee related costs from additional personnel, $555,000 in sales commissions and incentive based compensation, $232,000 in marketing program costs and $306,000 in stock-based compensation. Our sales and marketing headcount increased by 30% as we hired additional sales personnel to focus on acquiring new customers and increasing revenues from existing customers and marketing personnel to expand our activities to build brand awareness. We had 193 full-time employee equivalents in sales and marketing at June 30, 2008 compared to 149 full-time employee equivalents at June 30, 2007.

Research and Development Expenses. Research and development expenses for the three months ended June 30, 2008 were $1.4 million, an increase of $384,000, or 39%, over research and development expenses of $976,000 for the comparable period in 2007. The increase in research and development expenses was primarily due to $287,000 in employee related costs from additional personnel and an increase of $31,000 in stock-based compensation. For the three months ended June 30, 2008, we did not capitalize any employee-related costs for internally developed software used in our subscription services. For the three months ended June 30, 2007, we capitalized $94,000 of employee-related costs for internally developed software. We had 41 full-time employee equivalents in research and development at June 30, 2008 compared to 28 full-time employee equivalents at June 30, 2007.

General and Administrative Expenses. General and administrative expenses for the three months ended June 30, 2008 were $5.4 million, an increase of $1.7 million, or 46%, over general and administrative expenses of $3.7 million for the comparable period in 2007. The increase in general and administrative expenses was primarily due to $182,000 in employee related costs from additional personnel, $368,000 in professional fees and $780,000 in stock-based compensation. We had 44 full-time employee equivalents in our general and administrative group at June 30, 2008 compared to 42 full-time employee equivalents at June 30, 2007.

Other Income (Expense). Other income for the three months ended June 30, 2008 was $501,000, a decrease of $202,000, or 29%, compared to $703,000 for the comparable period in 2007. The decline in interest rate yields for debt and fixed income securities resulted in decreased interest income in 2008.

Benefit from Income Taxes. The benefit from income taxes for the three months ended June 30, 2008 was $5.6 million. No provision for or benefit from income taxes was recorded in the three months ended June 30, 2007 as such amount was not material.

At each balance sheet date, we assess the likelihood that we would be able to recover our deferred tax assets. We consider all available evidence, both positive and negative, including historical levels of profitability and estimates of future taxable income, to determine the need for the valuation allowance. At June 30, 2008, we concluded that it was more likely than not that we would be able to generate sufficient future taxable income to realize our deferred tax assets. As a result, we reversed the valuation allowance against our U.S. deferred tax assets and recorded an income tax benefit of $5.6 million. Our effective tax rate differs from the U.S. Federal statutory rate primarily due to the reversal of the valuation allowance and, to a lesser extent, state income taxes, certain non-deductible expenses and operating losses in foreign jurisdictions for which no tax benefit is currently available.


CONF CALL

Steve Vintz

Good afternoon. We are very pleased that you could join us today to discuss Vocus' results for the third quarter of 2008. Now I'll cover the Safe Harbor statement and then turn the call over to Rick Rudman, Chairman, President, and Chief Executive Officer. During the course of this conference call, we will discuss our business outlook and make other forward-looking statements regarding our current expectations of future events and the future financial performance of the company.

We want to remind you that these forward-looking statements are based on information available to us today, as of today's date, and are subject to risk and uncertainty. We assume no duty or obligation to update these forward-looking statements, even though our situation may change in the future. We encourage you to review our filings with the Securities and Exchange Commission, which are available at www.sec.gov for additional information on risk factors that could cause actual results to differ materially from our current expectations.

We also intend to discuss some non-GAAP measures. A reconciliation of GAAP and non-GAAP results is also available in the press release we issued today, which is available on our website at www.vocus.com.

I will now turn the call over to Rick Rudman. Rick?

Rick Rudman

Thanks, Steve, and welcome everyone to our Q3 earnings call. I'm pleased to report solid financial performance for Vocus in Q3, with strong growth across our key financial metrics, including revenue, profitability and cash flow. Revenue came in at $20 million, up 32% compared to Q3 last year. Non-GAAP operating income for the quarter was $3.7 million, up 52% year-over-year. And free cash flow followed suit at $4.6 million, which represents 49% growth.

Now I’ll take you through some of the highlights for Q3 and conclude with our read of key market dynamics. In Q3, we added 233 net new customers with balanced growth in both US and Europe. Our mix of business was also well balanced in terms of order sizes in industry segments. During Q3, we signed subscriptions with smaller organizations such as HometownQuotes.com and Yankee Magazine, and larger organizations including CIGNA, Eli Lilly, Safeway and the Bill & Melinda Gates Foundation. I think the important takeaway here is that Vocus is a valuable solution for any size organization, small, medium or larger, and we have the product, packaging and pricing to meet their needs and budgets.

I’d like to take a minute to provide an update on our emerging small business market. Our current small business target market is comprised of over 5 million organizations with revenues of less than $5 million. We’ve been selling into the small business market since our acquisition of PRWeb in 2006. PRWeb is fundamentally changing the way organizations create publicity and improve online visibility through the use of direct consumer news releases that are optimized for the Internet. PRWeb is primarily sold through an ecommerce platform on a per-transaction basis and currently has over 20,000 customers.

Less than a year ago we also launched our Small Business Edition or SBE, which is sold as an annual subscription starting at $29.99 per year and going up to 7,500 per year with add-on modules. We are extremely pleased with the continued success of PRWeb and now with the great results of our SBE pilot program. And we believe this small business market represents a large untapped and expansionary market opportunity for us. Because of our mix of ecommerce sales for PRWeb and low-cost sales and service for the Small Business Edition, this market segment is not only one of our fastest growing, it’s also one of our most profitable.

In summary, we believe this market segment will continue to grow at a fast pace as it becomes a larger part of our overall business. In terms of the economy, while we saw no impact on our business in the first half of the year doing most of Q3, in the final few weeks of Q3, we did for the first time see some impact on our business related to the global economic crisis. Going into Q3, we modeled our typical conversion rates, which held through to the last two weeks of the quarter when we saw those rates soften somewhat due to the economic crisis in September. Due to our financial model, this type of variance had minimal impact on Q3 financial results, but did cost us in terms of our ability to raise revenue guidance for Q4.

In a down economy, there will always be organizations that make indiscriminate budget cuts across the board. However, there are also many organizations that actually increase spending on PR, which has proven to be one of the more cost-effective channels in the marketing mix. Many organizations today also understand the importance of communication more, not less, during times of economic uncertainty.

So overall, we continue to see Vocus as well positioned against economic risk due to our strong quantifiable value proposition, our diversified market segments, and a relative low price points. We believe our experience in September had some unique economic elements at work. However, we will continue to monitor the impact of the economic on our business and reflect that appropriately in our business outlook. And while the economy is certainly important, it is only one important of our success. Regardless of the economy, Vocus will continue to focus on what it does best, delivering innovating products, scaling the direct sales organization and providing a great customer experience, all while working to achieve our financial objectives and operating model.

In addition, Vocus has almost $90 million in cash, no debt, and exceptional cash flow. So we see no changes going forward to our overall strategic direction or in the investments we continue to make in sales, service, development, and other areas of the business. We believe we are favorably positioned not only from a competitive standpoint, but in terms of our overall ability to extend our leadership position in an important, large and growing market.

I’ll now turn the call over to Steve Vintz who will provide us with some additional information on the business. Steve?

Steve Vintz

Thanks, Rick. I’d like to start today by covering some detail on the income statement. I’m very pleased to report that the third quarter of 2008 was our 37th consecutive quarter revenue growth. Revenues for the quarter were $19.95 million, which represents a 32% increase year-over-year and a 5% increase over the prior quarter.

Total active subscription customers increased by 233. Please note this number represents our gross customer adds during the quarter less non-renewing customers. We ended the quarter with 3,144 active subscription customers compared to 2,214 at the end of Q3 2007 and 2,911 at the end of Q2 2008. As we've mentioned before, our customer accounts do not include any transaction-based customers from our PRWeb Service nor does it include any customers whom subscribe to our on-demand software indirectly via third-party channels.

On the cost side, our non-GAAP gross margin for the quarter, which excludes amortization of intangible assets and stock-based compensation expense, was 83%, which is the same as last year and last quarter. As we look ahead to Q4 and the rest of the year, we expect our gross margin to be 83%, which is better than our gross margin for the full year in 2007 and our initial gross margin of 82% for the full year 2008.

We are pleased with our ability to expand our gross margin in ’08 while absorbing higher cost in the second half of the year, associated with investments in building content in the United Kingdom. The expansion in our gross margin over the prior years has put us well within reach of achieving our target long-term range of 84% to 86%, and demonstrates our leverage as a pure-play software-as-a-service company whose delivery and performance costs are primarily fixed or semi-fixed.

Operating expenses for the quarter before amortization of intangible assets and stock-based compensation expense were $12.9 million, an increase of 27% year-over-year and 1% over the prior quarter. As a percent of Q3 revenue, sales and marketing costs were 40%; R&D was 6%; G&A was 19%. Sales and marketing expenses were $8 million this quarter, which is up from $6.3 million last year and $7.8 million last quarter. The increase in sales and marketing costs over the prior quarter is attributed to the continued expansion in our sales force and investment in marketing to more effectively build our brand.

We ended the second quarter with 131 quota-carrying sales reps compared to 83 this time last year and 124 last quarter. As discussed during our last call, we expect the number of quota-carrying sales reps at the end of the year to range between 130 and 135. The midpoint of this range puts us at 45% growth for the full year. We think this investment reflects the continued confidence and visibility we have in our business underscored by what we see as a large, important and untapped market opportunity.

R&D expenses were approximately $1.1 million this quarter compared to $914,000 last year and $1.2 million last quarter. R&D costs were marginally lower this quarter compared to last quarter due to the launch of our UK Media database and consequently the reclassification of R&D related costs to cross the revenues. G&A expenses were $3.8 million this quarter, which is flat from last quarter and up from $2.9 million last year.

Now in terms of profitability, Q3 non-GAAP operating income before amortization of intangible assets and stock-based compensation expense was $3.7 million, a notable increase compared to $2.4 million for the same period last year and $3 million last quarter. Our operating margin was 19% for the quarter, a record for us, compared to 16% last year and last quarter.

The expansion in our operating margin over the past few years is certainly noteworthy and worth highlighting on the call today because it does demonstrate our ability to drive leverage in our business. In fact, if you look at our trend line since going public, you will see that our operating margin was negative 2% in 2005. We increased our operating margin to 7% in 2006, 13% in 2007, and now estimate 17% for the full year 2008.

Vocus is one of the most profitable SaaS companies in the market today, and we believe the ability to balance significant top-line growth with margin expansion demonstrates the strong financial discipline that we’ve maintained over the years and certainly is a proxy for potential leverage in our model going forward.

Non-GAAP net income before amortization of intangible assets, stock-based compensation expense, and the reversal of the valuation allowance was $4.1 million for the quarter compared to $2.7 million last year and $4.2 million last quarter, which includes approximately $700,000 tax benefit. Non-GAAP diluted earnings per share was $0.20 for the quarter compared to $0.14 last year and $0.21 per share last quarter, which again includes a tax benefit.

Now onto our balance sheet and cash flow statement. Our balance sheet remains very strong. We closed the quarter with $89.6 million in cash, cash equivalents and marketable securities, up from $81.4 million at the end of Q2. We generated $4.6 million of free cash flow this quarter compared to $3.1 million last year and $5.9 million last quarter. Investments in property and equipment were $204,000 this quarter and capitalized software costs were $23,000.

Our cash receivable increased to $10.7 million from $10.4 million last year, and DSOs for the quarter were 49 days. Deferred revenue totaled $37.9 million at the end of the quarter, which represents an increase of $8.5 million over the last year. The impact of foreign exchange rate on our deferred revenue at the end of Q3 was approximately $300,000. So please note that our deferred revenue would have been higher by this amount have we not seen such a precipitous drop in the exchange rate during the quarter.

Now let's turn to the guidance for the third [ph] quarter and full year 2008. The fourth quarter 2008 revenue is expected to be in the range of approximately $20.5 million to $20.7 million. Non-GAAP EPS, which excludes the amortization of intangible assets and stock-based compensation expense, is expected to be in the range of $0.20 per share to $0.21 per share, assuming an estimated weighted average 20.3 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 2%.

Amortization of intangible assets and stock-based compensation is expected to be $0.17 per share. GAAP EPS is expected to be in the range of $0.03 per share to $0.04 per share, assuming an estimated weighted average 19.5 million diluted shares outstanding. The impact of the exchange rate, specifically the stronger dollar against the British pound which is our primary FX exposure is worth noting because it is impacting our guidance for Q4.

To give you some context, the fluctuation in the exchange rate has been dramatic since we last provided guidance on July 22. We assume exchange rate for the British pound has dropped from 1.97 to what we now model to be 1.5 by quarter-end. This resulted in a $300,000 reduction in revenue, a $900,000 reduction in deferred revenue, all of which aggregate a $1.2 million reduction in bookings for the quarter.

For the full year 2008, revenue is expected to be in the range of $77.4 million to $77.6 million. Non-GAAP EPS, before amortization of intangible assets, stock-based compensation expense and the reversal of the valuation allowance, is expected to be in the range of $0.75 per share to $0.76 per share, assuming an estimated weighted average 20.1 million diluted shares outstanding and an estimated non-GAAP effective tax rate of 1%.

Amortization of intangible assets and stock-based compensation is expected to be $0.69 per share, and the reversal of the valuation allowance is expected to be $0.26 per share for the full year. GAAP EPS is expected to be in the range of $0.32 per share to $0.33 per share, assuming an estimated weighted average 19.2 million diluted shares outstanding. Free cash flow is expected to range from $19.7 million to $20.7 million, which includes investments in property and equipment of $1.8 million for the full year.

As I discussed earlier, our non-GAAP EPS does not include stock-based compensation expense, amortization of purchase intangible assets and the reversal of the valuation allowance. In the press release that we issued today, we provided our guidance both on a GAAP and non-GAAP basis for earnings per share for the fourth quarter and the full year 2008. Please refer to the press release for details.

At this time, I'd like to turn the call over to the operator so we may take your questions.


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