Interactive Intelligence, Inc. Q3 2008 Earnings Call Transcript

Interactive Intelligence, Inc. (NASDAQ:ININ)

Q3 2008 Earnings Call Transcript

October 27, 2008, 4:30 pm ET

Executives

Don Brown – Chairman, President and CEO

Steve Head – CFO, VP of Finance and Administration, Secretary and Treasurer

Paul Weber – VP of Sales for North America

Analysts

Varun Chadha – Raymond James

Irit Jakoby-Elrad – Susquehanna

Tavis McCourt – Morgan Keegan & Co

Gramy Rein [ph] – Bears Capital

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Interactive Intelligence third quarter 2008 earnings conference. As a reminder, today's call is being recorded. At this time, all lines are in a listen-only mode, later we will announce the opportunity for questions and instructions will be given at that time on how to signal (Operator instructions).

At this time, I would like to turn the conference over to Dr. Don Brown, President and CEO of Interactive Intelligence. Please go ahead, sir.

Don Brown

Okay thanks for joining us everybody. Presenting with me on the call today is Steve Head, our CFO, and we also have on the phone Paul Weber, our VP of Sales for North America. After our discussion and concluding remarks, we will have a Q&A session at which time we will available to answer your questions and for any of you not able to ask questions today, you can follow up with Steve after the call.

Hopefully you've received the Q3 earnings release by now. If not it's available up on our Web site. Before we get any further into the call, Steve will present the standard legal disclaimer.

Steve Head

Thanks Don. Over the course of this conference call, we will make predictive statements about our results, performance, plans and objectives in an effort to assist you in understanding our company. The enterprise software industry combined with the rapidly evolving uncertainties in the economic environment makes predictions challenging and problematic. These predictive statements are forward-looking statements under Federal Securities laws. Our actual results could differ materially as a result of a variety of potential risks and uncertainties. For more information, you should look to our 2007 Form 10-K, which we filed with the SEC and which describes factors, risks, and uncertainties that could cause our actual results to differ. The company disclaims any obligation or undertaking to update or revise any forward-looking statements. Also, during this call, we may refer to non-GAAP financial measures. These non-GAAP results eliminate the impact of non-cash stock option expense and non-cash income tax expense and benefits. Management uses these non-GAAP financial measures in analyzing the business.

Now Don will provide some overview comments on the just completed quarter.

Don Brown

Thanks Steve. As usual I will hit the highlights and then Steve will dig into the numbers and I will come back for some more comments. For the third quarter, we recognized revenues at $30.1 million, up 3% over last year. We received orders from 81 new customers with one exceeding $1 million and 14 others over a $0.25 million. As we reported in the release, our lower overall revenue growth is associated with a lower dollar amount of orders received from existing customers. The dollar amount was less than our historical trends, our conclusions continue to be the same as in the second quarter of this year that we are seeing no evidence that the add-on orders from our installed base are going away or being replaced by competitors however customers are obviously being cautious in the current economic environment and their business may be affected by likened demand for their services.

We achieved record service revenues in the quarter of $15.4 million, an increase of 12% from the third quarter last year and we are reporting non-GAAP income and EPS in the earnings release on a non-GAAP basis. Earnings for the third quarter were $2 million or $0.11 per diluted share, this compares to $3.8 million or $0.19 per diluted share in the third quarter last year.

I will now turn it over to Steve.

Steve Head

As usual, I'll comment on our operating performance, then the balance sheet and cash flows. Regarding the operating performance, I want to point out two major items that impact information that we will discuss. First on a GAAP basis, we recorded income tax expense of $699,000 in the third quarter of 2008 which compares to a benefit of $37,000 in the same quarter last year. As we discussed in prior calls, we recorded a large tax credit in the fourth quarter of 2007 to recognize differed tax assets related to tax operating loss and credit carry-forwards. As a result of recognizing that asset, we are now recording tax expense most of which does not require cash payments. On a non-GAAP basis our tax expense was only $64,000.

Second we recorded non-cash stock-option expenses of $439,000 for our third quarter of 2008 compared to $812,000 from the third quarter of 2007. During the third quarter of this year, we reversed option expense recorded earlier in the year. This expense related to stock options which could be earned based on annual company performance, financial performance. The expense is reversed based on it being improbable that the options will be earned.

Turning to orders, our (inaudible) continued to generate the majority of orders with 57% of the orders coming from the channel during the third quarter. As Don stated, we signed 81 new customers in the quarter for our contacts center enterprise messaging, and IP PBX solutions. The overall average new customer order in the quarter was $110,000, with an average new contact center customer order of $125,000. North America provided 75% of the orders which is up from a more typical 67% while EMEA was 15% of the orders down from a more typical 22%. The shortfall in EMEA orders is due in part to the seasonally slow summer holiday period. Also we were involved in several large opportunities which were not closed in the quarter as we saw opportunities outside have somewhat longer sales cycles.

The timing of revenue recognition for orders is dependent on a number of considerations and only a portion of the orders were recognized in the quarter with some of the unrecognized amounts reflected in the balance sheet. For the third quarter of 2008, services revenue increased as the number of users and related support fees increased. Services revenue includes professional services and education. Support revenues were 77% of services revenues for the quarter. Product margin was 75% in the third quarter of 2008, up from 73% in the third quarter a year ago. As discussed in previous calls, the product margin varies from quarter to quarter based on the number of media server gateway appliances and third party software and IP PBX handset sales in the quarter.

Cost of services increased principally due to an increase in staffing and general corporate expenses. Our services margin in the third quarter of 2008 was 61%, which is up from 60% a year ago. Gross profit was $20.3 million for the third quarter with a margin of 68% of total revenues which compares to 67% last year. Total operating expenses on a GAAP basis for the third quarter were $18.9 million, a sequential decrease of $430,000 over the second quarter of 2008. A significant contributor to this decrease was the reversal of stock-option expense as I described previously. These operating expenses were 63% of total revenues in the third quarter compared to 58% in the third quarter a year ago.

Non-GAAP operating income, which excludes stock option expense, was $1.8 million or 6% of revenues this year compared to $3.3 million or 11.3% of revenues in the third quarter of last year. This change reflects operating expense increases relatively greater than the revenue increase. We are taking actions to minimize expense increases in the near term until we see revenue acceleration. The relatively constant expenses in Q3 compared to Q2 reflect the fact that we have been addressing costs. Other income, principally interest income was $258,000 in the third quarter of this year which is a decrease primarily as a result of lower interest rates earned on cash and investments. As I've mentioned, we only had $64,000 of income tax that requires cash most of that related to foreign and miscellaneous taxes.

We continue to have about $20 million of tax operating loss carry-forwards which will offset about $8 million of taxes, otherwise payable plus tax credit carry-forwards to offset an additional $1.5 million of taxes. The effects of these amounts are included in the September 30 balance sheet deferred tax balance of $11.6 million. Also because of stock option exercises, there are additional compensation deductions for tax purposes of $23 million, which will result in reduction of taxes otherwise payable of approximately $9 million. The value of these compensation deductions are not recorded as an asset, and will only be recognized in the financial statements when they are realized. Since we recognize the deferred tax assets in the fourth quarter of 2007, we recorded income tax expense for GAAP purposes beginning in the first quarter of this year. We are now recording taxes based on an effective rate of 43.9%. This rate decreased 1.1% since June 30 due to the reinstatement of research and experimentation tax credits. Our global staffing at September 30 totaled 630 people.

Our outstanding shares for basic earnings per share calculations increased because of stock options exercise. We did repurchase 353,000 shares in the quarter but most of the purchases occurred late in the quarter and had a minimal impact on the calculation of average outstanding shares. Our outstanding shares per diluted earnings per share calculations in this quarter decreased as a result of the decline in the stock price with the resulting impact on the calculated diluted shares.

Turning to the balance sheet, at September 30, we had $49.3 million of cash and short-term investments. This is down slightly from $49.7 million at June 30. The decrease in cash is primarily a result of cash flows from operations, offset by the treasury stock purchases and by the additions of equipment, and we continue to be debt free. Accounts receivable day sales outstanding were 76 days the same as the end of last quarter. Totaled deferred revenues at September 30 were $39.9 million, an increase of about $800,000 since June 30. We have those broken down in two pieces on the balance sheet. Deferred service revenues had a sequential increase of $1.1 million. This reflects support renewals and we also had orders with multiple years of support which increased to non-current deferred revenue. Deferred product revenues decreased a little over $300,000 compared to June 30. These deferred revenues are primarily related to term-based licenses with long time customers but the lower dollar amount of term license orders in the quarter from existing customers contributed to the decrease in the deferred product revenues.

We have included a statement of cash flows in the earnings release. I'll make a few comments on those numbers that we had not already mentioned. Third quarter 2008 cash flow from operations was $4.6 million compared to $2.9 million in the third quarter of 2007. Other major uses and sources of cash included the purchase of property and equipment of $2 million in the third quarter. During this year, we are expanding into two floors of a building that is next to our existing corporate offices which is resulting in various property additions. In July of this year, the board approved a share repurchase program to facilitate repurchase of our common stock of up to a maximum aggregate purchase price of $10 million. As of September 30, 2008 shares have been repurchased for an aggregate cost of $3.4 million.

That wraps up my comments on the financials.

Don Brown

Thanks Steve. Before shifting to the Q&A part of the call, let me cover a few other things. Earlier this month we hosted our annual partner conference here in Indianapolis. As mentioned in the press release, we had 190 attendees including 24 consultants and analysts. We covered a lot of topics at the conference but the most exciting event was the first public demonstration of our new business process automation product. We demonstrated the automation of a car loan application process that involved accessing public Web services for looking up the vehicle history and performing a credit check, our system automated the application from end to end even providing a Web site that the audience could use to submit applications from their Blackberries and i-phones. The reaction was extremely enthusiastic and partners can’t wait to begin selling this new product when it becomes available in the second quarter of next year.

On the product front, we put the final touches on our integration with Microsoft Office Communications Server or OCS. Microsoft continues to make significant marketing noise around OCS and its role is the basis for their unified communications strategy. Our integration adds significant value to OCS including the addition of Call Center and IP PBX capabilities, synchronized presence, and a company-wide directory for all users. We are working closely with Microsoft and as an example we recently held a joint webinar with them entitled adding the contact center to a unified communications mix with Microsoft. We are nearing completion of Interaction Feedback, our add-on automated customer feedback module. The nice thing about this product is that it automates a typically manual time-sensitive critical process of gathering customer feedback. We are able to do this in a very straightforward, cost-effective way that makes us think that the product is going to be quite popular. During the quarter we also released version 4 of Interaction of SIP Proxy which includes features for increased reliability, improved security, and simplified deployment.

I'll wrap up with a few additional items. As we've reported at the end of last quarter, our slowdown in revenue is mainly attributable to add-on orders from existing customers. The more we look at this, the more it makes sense given the economic uncertainties that everybody is facing. New customers are typically replacing legacy equipment that is obsolete, at the end of life or has high maintenance cost. Additionally, an initial move to our Interaction center platform is the time that customers realized the greatest ROI. Much of our add-on business comes from expansion, customers adding more seats [ph] and obviously in the current environment there aren’t nearly as many expansions. So, the mix that favors the initial purchase makes sense given the market conditions. We don’t seem to be losing business to competitors but instead are seeing delays in purchases even when we have verbal approvals because of the more cautious buying environment.

Since it is such a cautious time for software buyers, we are making adjustments to compensate will emphasize our contact centers’ SaaS offering given the fact that capital expenditures are becoming restricted and leasing options tightened, we will push more on the message of return on investment helping customers see the hard ROI our products deliver. We continue to manage our business for growth and profitability, we will scrutinize expenses but at the same time we are in this for the long haul. We believe that continued new product development is the smart thing to do and we will deliver increasing value to our customers and a good return to our shareholders. We will continue to gain ground against competitors by investing in product development that we believe will be successful.

We continue to have a strong balance sheet. We believe that the repurchase of our common stock is a good use of cash and will provide a good return to shareholders when markets strengthen. As we look at our business, services revenues are steady and continuing to increase. For product revenues, we have order forecast backed by specific opportunities. We have continued to receive orders from new customers as they adopt our technology based on the ROI and functionality. Although these factors do give us some visibility as to the expected revenues, forecast is more difficult given prospect and customer business deceleration and their reluctance to make purchase commitments.

With dramatic financial turmoil and uncertainties, our outlook can change quickly just as it has in the past six months. Evaluating the situation as we currently see it though, we expect revenues for the 2008 fiscal year compared to 2007 to increase between 8% to 10% and we anticipate non-GAAP operating income of between 6% and 7.5% for the year. Our near-term objectives are to build and execute on the current pipeline and to keep winning new logos as we take market share and expand our footprint for eventual follow-on business and also we continue to manage our expenses carefully. So, that’s the best guidance we can give you but again I will emphasize in caveat that these are just our best estimates based on what we know today given the uncertainties we all face.

With that, I will turn the call back over to the operator for the question-and-answer portion.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question today from Shyam Patil, Raymond James.

Varun Chadha – Raymond James

Good evening. This is Varun Chadha filling in for Shyam. Could you just talk about the level of visibility that you have into your product revenue at quarter out and a year out and what that is based on?

Don Brown

The biggest visibility we have, obviously roughly 50% of our revenue is coming from maintenance and other services that are pretty predictable and generally growing quarter to quarter. Beyond that, we have to go out and sell new software. We do have a small component of SaaS revenue that we hope to grow but that is why for us we are highly dependent upon the sales that we are able to close in a given quarter and talking about a year out becomes very difficult. I will let Paul talk about the conditions that he is seeing in the current market.

Paul Weber

Yes, this is Paul. Having somehow an overall visibility to new opportunities, we are seeing a decent increase in the new customer opportunities on a month-to-month basis. We measure that very closely. Looking into next year, I do think that the competitive landscape continues to work in our favor, some of the new product development we have, but just the scalability and the current architecture of our product becoming more and more difficult for the legacy vendors to compete with. So, we are seeing a lot of very positive momentum on our toughest challenge typically within the sales where it is new customer business. The add-on business I think is pent up demand. Our product does spread very well within customers and I think that at some point in the next year we are going to start seeing this revenue on add-on customers come our way. So overall, I think we are very optimistic from a sales perspective because again the competitive landscape continues to work in our favor and I think when we get through this tough time, we are going to be that much stronger of a competitor in the space we play in.

Varun Chadha – Raymond James

Alright. Could you talk about your maintenance renewal rate and how that has trended?

Don Brown

The renewal rate has stayed pretty strong up until now. The renewals are a year out. What we have seen as I mentioned in the earlier comments is multiyear has been included in some of the initial orders and that is one of the things that has contributed to an increase in the deferred service revenues. Overall the rates have been pretty good. What we have seen is what we refer to as down-sizes where customers are not using as many seats as they were and then when the renewal comes up, they will renew for a smaller number of seats but nothing all that dramatic at this point.

Varun Chadha – Raymond James

Okay. Just given your exposure to SMB, do you see the potential for a meaningful customer attrition going forward?

Don Brown

That’s an interesting question. Most of our customers are pretty good size. We do have some that are mid size and some that are small but we have a lot that are very, very large. Overall they have all been challenged in different ways compared to where they were six months or a year ago. So, I guess we are just going to be subject to whatever happens generally in the economy.

Varun Chadha – Raymond James

My last question, how shall we just think about expenses going forward?

Don Brown

I think we are trying to maintain or contain expenses to the extent we can. There is one piece of the expenses we know is going up and that is facilities cost, we committed to some leases a year and a half or so ago and those are coming online now based on the agreed upon terms. So, we will see some expenses continue to go up but in other areas we are doing what we can with staffing down to have it grow very rapidly at this point, watching our travel expenses and all those other things. So overall expenses I would expect to go up some but we are trying to contain them to the extent we can.

Varun Chadha – Raymond James

Alright. Thank you.

Operator

We’ll take our next question from Irit Jakoby-Elrad from Susquehanna.

Irit Jakoby-Elrad – Susquehanna

Hi, thank you, couple of questions about competition and partners. In terms of partners, do you expect to grow your partner base still this year or is that also becoming tougher in this environment.

Don Brown

We have seen the absolute number of partners continue to trend up. So, I would expect we will call this group as a group that is very involved in channel recruitments and all that, make a comment on what we are seeing in the market.

Paul Weber

Yes, our partner numbers will definitely grow and we have recently signed and are in the process of signing with some pretty significant partners we feel that are going to bring us both into specific vertical markets as well as just bringing us, moving us up market. But no, we don’t really see a softness in the partner recruitment side as a result of the economic times.

Irit Jakoby-Elrad – Susquehanna

Can you comment also on your win rates, are those changed either positively or negatively as a result of the economic times?

Paul Weber

I have not seen a significant change. We continue to win a good percentage of the accounts we are in. We have gotten a lot better at targeting the vertical and specific prospects that our systems do well in and we continue to win at a very high rate. I can’t name a specific number but we are seeing some significant weakness in one of our competitors, customer base that we are starting to take advantage of and we are relatively encouraged by the fact that we are seeing both employees from some of these companies looking to move as well as some of the customers looking to replace their equipment.

Irit Jakoby-Elrad – Susquehanna

Right and with respect to the newer business process automation features that Don mentioned earlier in the conversation that is just coming out in Q2, should we think of a different set of competitors for that or how does that factor in competitively?

Don Brown

There is overlap. Some of the communications competitors are talking a lot about process automation in particular Genesis but their focus is on integrating with existing processes. What we are doing is taking the next logical step which is to provide a complete environment for the automation of those processes, getting them automated in the first place. So, we certainly are able to leverage this in competitive situations against a buyer and some of the other communications companies but it does bring us into or it allows us to move beyond the contact center into the broader area of process automation where we do go up against a new set of vendors we think in a significantly stronger position because of our communications capabilities.

Irit Jakoby-Elrad – Susquehanna

Okay. Looking back to expenses, to follow-up on the earlier question about that, it seems like selling and marketing has always been a very high expense on your P&L especially (inaudible) and especially now that our revenue growth is somewhat halted, is that an area that you are rethinking in terms of spend maybe on marketing, incremental sales and other areas given the economy?

Steve Head

Sales cycle is a long process Irit and the marketing and other activities building awareness are things that have a payoff down the road finding prospects for lead generation, it takes a while to close an opportunity, so if we were to scale back significantly on sales and marketing today, it would start harming us more 12 months from now when we hope the economy is stronger. We will continue to manage those expenses but you should not expect to see us scale it back at this point a necessary part of continuing to win customers and we are still winning new customers at a pretty good rate and so we will continue to spend to do that.

Don Brown

Just to chime in on that, I think you have heard from both Paul and Steve, we really feel that we can emerge out of this downturn in a pretty strong position. We are sitting here with no debt, with a significant amount of cash, with our own organically grown suite, we continue to make strong investments in R&D as well as sales and marketing, I have these new product areas that we are moving into, some of the old guard is really suffering through a number of problems that is making them weaker. So, we want to remain profitable but our real focus is on being in a position over the course of the next year to three years to vault into the leadership position in this whole industry.

Irit Jakoby-Elrad – Susquehanna

Okay, thank you good luck and I will pass it on.

Steve Head

Thank you.

Operator

(Operator instructions) Next we will hear from Tavis McCourt from Morgan Keegan & Co.

Tavis McCourt – Morgan Keegan & Co

Hi thanks Don and Steve. First, just a housekeeping question, Steve did you mention what the order growth was in the quarter?

Steve Head

I did not but it was down 4% year over year.

Tavis McCourt – Morgan Keegan & Co

Okay the support revenues were down a little bit sequentially, you talked a little bit about that in terms of folks renewing at a lower number of seats, does currency impact that as well and then can you talk about whether or not there was any currency impact in the quarter?

Steve Head

Yes there are a couple of good points. I think I want to go back to the first one, I don’t think support revenues were down as a percent of total services they were maybe 1% last but support revenues overall were up year over year and up sequentially. On foreign exchange rate, we did have compared to the second quarter about a $300,000 swing, we had a gain in the second quarter and a pretty significant loss, swing of about $300,000 impacted operating expenses just because of the rate at which the dollar changed late in the quarter.

Tavis McCourt – Morgan Keegan & Co

I don’t know if you have talked about this on your last call or not but it will be helpful to get some sense of as a percentage of your product revenues how much typical at this point is coming from new customers versus add-on to the existing customers?

Steve Head

I think in this quarter it was about 45%, 47% that were orders from new customers which are up from where we have been and is up. The new customer orders year over year are increasing but it is up as a percent more because of the add-on orders that we have historically had a very strong additional contracts in every quarter have weakened in the last couple of quarters.

Tavis McCourt – Morgan Keegan & Co

Got you and Don I was wondering if you could provide maybe an analogy to 2001, 2002, you are obviously positioned a heck of a lot better in this downturn but in terms of the overall selling environment, is it better, is it worse, is it different?

Don Brown

Actually I will turn to Paul to talk about selling environment.

Paul Weber

Yes, I think the most significant difference to this downturn versus right up to Y2K really just goes back to our architecture of the product and the scalability of the product. Back then, we were still really selling niche contact center type operations, we were just barely in the enterprise, we were doing a little bit in messaging. We just didn’t have the significant customer base and reference base to deal from that we have now. So, I think the difference right now is that we are not having to go out and prove ourselves all over again every time we are in a sales cycle. Our reference base, I will tell you, I don’t think you will find a more enthusiastic reference base of a software company in the space today as we have with our customers and they continue to sell on our behalf. So, right now, the sales people, there is no panic among the sales force, there is nobody seeing in the blues, they are all working on very significant opportunities. They all feel that they are going to have a strong finish and a good year next year. The difference we are just seeing right now is that add-on business is not as predictable. But overall, I think if you were to interview any of our reps or partners in the market, you would see that there is really no comparison to where we were back in ’02, that was a lot more difficult time for those reasons.

Tavis McCourt – Morgan Keegan & Co

That’s it, great, thanks a lot.

Operator

(Operator instructions) Next we will hear from Gramy Rein [ph] from Bears Capital.

Gramy Rein – Bears Capital

Hi Paul. Could you talk about any impact on the sales process from call encryption or you are getting into new verticals – are you getting into government contracts, you just kind of address that piece of it.

Paul Weber

We have got now some decent place on that. Most specifically obviously in the Federal space we had a couple of significant orders this quarter but we have also been awarded quite a few deals within the Federal space mostly around our JITC certification which has really been obviously very significant for the government vertical but also it kind of validates our overall level of security that we have in our platform and we have been promoting that in the commercial side as well. When we look at the Federal government would give us this high level of security clearance certification, obviously it is ready for prime time on the commercial side. So, we have got some real good headway with a couple of the big integrators that work with us in the Federal space and again we have also seen some pretty good deals, call center opportunities specifically and then actually one messaging opportunity within the Federal space that was a result of us crossing those hurdles.

Gramy Rein – Bears Capital

Okay and competitively is there anyone that can kind of go toe to toe with you in security?

Paul Weber

No, they are really in it. As a matter of fact at General Dynamics recently where a whole group who obviously had been through a lot of different vendors going through these certification, they were really floored by the speed and level of efficiency that we went through with the certification. I think early on you have heard a lot of people talking about the security and encryption and stuff and it is down quite a bit but we have not seen anything from the big guys as far as having some kind of unique or significant gain in that space.

Gramy Rein – Bears Capital

Okay, great. Steve, a couple of questions, the CapEx, I know you are building out an adjacent office, how close is that to being complete and then also the cash balance, the short-term investments, where is the cash held, any option rate securities or any bad debts that you might see on the horizon?

Steve Head

On the build out, we are virtually done at this point. We do have some additional space that will come online next year into the terms of the lease and so lease payments will go up at that time but we are doing minimal build out in that space given the slowdown in hiring we have. We don’t have a need to build it out right away. So, at this point most of the costs related to those activities are done. We always have an ongoing need for new computer equipment and things like that. So, it is not the capital expenditures will go to zero but I expect it will decelerate significantly. From a cash standpoint, we moved a lot of our cash in the quarter over to treasuries. We are in various different securities, money market funds and things and in talking to our investment advisors just made a decision in things they were basically doing with a lot of other companies were just moving money given a lot of uncertainties into treasuries, just to eliminate risk. It also eliminates a lot of interest income but it eliminates the risks. So, we feel very safe there. There were some things that we did own in bonds that have a maturity of up to a year all are rated very well and we don’t feel we have any risks there. We have continued to purchase shares and I mentioned $3 million or so at the end of the quarter and we are now up to just over $8 million that we repurchased so that is where we are using some cash but the $10 million authorization is close to being completed and we don’t expect to authorize any more. So, this should leave us a strong cash balance and a very secure cash balance.

Gramy Rein – Bears Capital

Then in the AR is there any bad debts that might be out there that you have reserved for?

Steve Head

No, here we have our typical reserve but at this point we don’t have any major accounts that we are concerned about. We are monitoring them closely like we have always have but our DSO was better at the end of September than it was for – it was as good as June and that is better than it has been for the last few quarters and from an aging standpoint it is better than it has been as a percent of the different categories than it has been in quite a while. So, our collections guys have been working it very hard and staying on top of it and they continue to monitor it but we don’t see any issues right now.

Gramy Rein – Bears Capital

Don, the last thing on the buybacks, it seems like you have bought 30% a year authorization at 960 [ph] is there any changes that you have seen that would give you pause in terms of buying a bunch more at 650 [ph]?

Don Brown

Well as Steve said, on the current authorization we are going to have a couple of million bucks left and at 650 we are certainly happy to use the balance of that authorization to buy those shares and anything beyond that would have to be approved by the board.

Gramy Rein – Bears Capital

Okay but you have not seen anything that would make you think that that is not the best use of your cash right now?

Don Brown

No. We are very happy, I am glad we have been able to pick up these shares and we have always been focused on the long term of our business. We don’t know what the market is going to do for the next few quarters or years but we do feel awfully good about the long term success of our business and feel that it will ultimately prove to be a very good investment for our shareholders.

Steve Head

I think from our standpoint Gramy that we accept a balance, what a strong balance sheet means in continuing to sell to new customers and that is what we want to make sure is that we continue to have a strong balance sheet and $40 million is a plenty of money and hopefully it is a little bit more than that. There is a point that we just don’t want to go below and that is something that we will have to discuss at the board to see if there is any further action we want to take on repurchases.

Gramy Rein – Bears Capital

No definitely understood, thanks a lot guys.

Operator

As there are no further questions at this time, I would like to turn the conference back over to the speakers for any additional or closing remarks.

Don Brown

That’s it. Thanks for coming; we’ll talk to you next time.

Operator

That does conclude today’s conference. Thank you all for joining us.

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