iPass Inc. (F3Q08) Earnings Conference Call Transcript

iPass Inc. (IPAS)

F3Q08 Earnings Call

November 3, 2008 at 5:00 pm ET

Executives

Ken Denman - President and Chief Executive Officer

Frank Verdecanna - Chief Financial Officer

Analysts

Neil Weiner - Foxhill Capital Partners

Fred Ziegel - Soleil Securities

Ed Einbodin - W.M.Smith & Co.

Kevin Dede - Morgan Joseph

[Lily Woo - TDRA Capital]

J.D. Abouchar - JRT Capital

Justin Orlando - Dolphin Management Company

Presentation

Operator

Good day, ladies and gentlemen and welcome to the iPass Inc. third quarter 2008 financial results conference call. At this time, all participants are in listen-only mode. We will conduct the question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today's call, Mr. Frank Verdecanna, Chief Financial Officer. Please proceed.

Frank Verdecanna

Good afternoon. Thank you for joining us to discuss our financial and operating results for the third quarter of 2008. I am Frank Verdecanna, Chief Financial Officer or iPass. I am joined by Ken Denman, President and Chief Executive Officer.

Before I turn the call over to Ken, I would like to bring the following to your attention. The date of this call is November 3, 2008. Our presentation today contains forward-looking statements about events and circumstances that have not yet occurred. Statements regarding our projected financial results for the fourth quarter of 2008, statements containing words such as will, expect, believe and should and other statements in the future tense are forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. These risks and uncertainties are set forth in our press release of today as well as in our quarterly report on form 10-Q under the section "Factors Effecting Operating Results" in part one, item two of that report filed with the Securities and Exchange Commission on August 11, 2008 and available at www.sec.gov.

iPass undertakes no responsibility to update the information in this conference call under any circumstances. The press release announcing our financial results is available on our website at www.ipass.com in the Pressroom section under Press Releases. The current report on form 8-K furnished with respect to our press release is available on our website in the Investor Relations section under SEC filings. In addition, in this earnings call we will provide non-GAAP financial results. The press release on our website includes text and tables that explain our reconciliation of these non-GAAP results to GAAP results.

This earnings call is also being recorded for replay and is being webcast and will be available on our website for one quarter until the next quarter's call. This webcast is a property of iPass and any copying or rebroadcast of this webcast without the expressed written consent of iPass is strictly prohibited.

I will now turn the call over to President and CEO, Ken Denman.

Ken Denman

Thanks Frank. Good afternoon everyone and thanks for joining us today. Let me start with a note about the third quarter. We continued our progress towards profitability. We improved both our gross margins and our operating profit despite the seasonal pressures associated with summer which has been a slow season as users take their vacations. We still did well on our bottom line however because of our lower network access cost and our lower operating expenses in the quarter. Frank and I will return to the results in a few minutes.

First, though, I want to touch on the management transition that we announced this afternoon. Late in 2007, I told the Board I was interested in exploring other business opportunities that had been coming my way. In the event that I did determine to leave the Company, the Board and I wanted an orderly and smooth transition and we wanted to make the handoff while iPass was traveling a real smooth path. At a minimum, I agreed that I would stay through the strategic review process.

Before mid 2008, the Board had already spent a lot of time reviewing the business from the inside. We have looked carefully at our opportunities to reduce our operating cost and we had talked at length about the steps toward our biggest opportunity to improve margins namely our network access cost. By mid 2008, the Board turned its focus outward. We retained an investment banking firm that was involved in our IPO and knows our space and our Company. The bank helped the Board to look at a wide range of strategic alternatives. The entire process has been frankly very helpful to the Board. It helped sharpen the Board's vision of how it can create value for shareholders and for customers. We have now concluded the most important phases of that process when the Board determined unanimously that the best course at this time was to remain independent then the Board turned its attention to the process of a possible management transition. I have been very pleased with the outcome of that process.

First, as you will see from our results, iPass is traveling on a smooth path. This is a great time for handoff. Second, I was very pleased that we were able to attract Evan Kaplan. I and others of our management team worked closely with him at Aventail, an NSO VPN company which was one of our good partners for many years. I am convinced he will work well with our team and we know he understands our markets, our customers, our technology issues and our partners. I will work with Evan during a transition period so we can meet the Board's other objective of a smooth and orderly transition.

Now, turning to our quarterly results starting with our top line; our total revenues continue to erode but the rate of erosion was slower than we have become accustomed to. In fact, the rate of erosion in the third quarter was 7% which is substantially less than our second quarter rate of 18%. While a single quarter does not make a trend, there is a possibility that we maybe approaching a more stable quarter of dial usage. We also continued to make progress in expanding our unified mobility value proposition to 3G mobile broadband.

In Japan, we signed a relationship with IIJ. This will give our customers access to three of Japan's leading 3G networks. In Sweden, we signed an agreement with 3 Scandinavia that gives us access to their award-winning network in Sweden as well as in bundle access across Denmark. Once deployed, these networks will expand our coverage to 12 networks across nine countries.

During Q3, we had total revenues of $48.4 million. Broadband represented $26.3 million. Software and service fee revenues representing $13.3 million. Our legacy dial business produced a mere $8.8 million of our revenues or 18% of total revenues. Over the last few quarters, we have been discussing the importance of stabilizing gross margin and the related impact on our business model. I am pleased to report that our gross margins for the quarter came in 58% or 1% higher than last quarter. For the fourth quarter, we expect gross margins to be in the range of 57% to 59%.

The primary drivers of the increasing gross margin were first, a full-quarter impact from the renegotiation of our largest mobile data provider in the US, a stronger US dollar during the quarter as we pay some of our network access charges in local currencies such as the Euro and finally, the continued shift of customers to enterprise flat rate pricing. Enterprise customers continue to be receptive to our message of helping enterprises deliver mobility while controlling cost. During the third quarter, we closed over $20 million, almost $24 million in fact, in new business and keeping with the range of bookings we have delivered over the past two years.

Our enterprise flat rate price plans continue to be a growth driver at iPass. New and existing customers see the value and versatility of this model. During the third quarter, the new mobility deals that we signed under this model accounted for 85% of all our deals. As we stated before, this pricing model delivers more balance and predictable revenues to iPass and it helps us deploy to more users within a given enterprise. We had 1.1 million users during the quarter through approximately 3500 enterprise customers. We continue to experience very low rate return. We have a strong balance sheet with cash and short-term investment of $68 million and no debt.

With that, I will turn the call back over to Frank.

Frank Verdecanna

Thanks, Ken. Total revenues for the third quarter ended September 30, 2008 were $48.4 million versus $48.6 million last quarter, a 1% decrease in the quarter. This was within our expectations of $47 million to $50 million.

Our total broadband revenues in Q3 were $26.3 million versus $26.2 million in Q2. Mobile broadband revenues came in at $19.4 million in Q3 compared with $19.5 million last quarter. The slight decrease from Q2 was a result of the seasonality we experienced during the summer months especially in Europe. Fixed broadband revenues were $6.9 million in Q3 compared to $6.7 million in Q2, an increase of 3%.

Software and service fee revenues in Q3 were $13.3 million versus $13 million last quarter, an increase of 2%. Dial revenues in Q3 were $8.8 million versus $9.4 million in Q2, a 7% rate of decline which is quite a bit less erosion than we saw in Q2 when dial eroded 18%. Our combined software and service fee revenues in Q3 were $39.6 million or 82% of our total revenues with dial representing the remaining 18%.

In the quarter, US revenues accounted for 61% of total revenues and international revenues accounted for the remaining 39%. Network access costs were $20.1 million in the third quarter or 41.7% of total revenues versus $20.9 million or 43.1% of total revenues last quarter. Our gross margin was 58.3% in the third quarter compared with 56.9% last quarter.

Now let us review our operating income and operating expenses. During Q3 our combined non-stock compensation expenses for network operations, research and development, sales and marketing, and general and administrative expenses was $27.4 million compared with $27.8 million in Q2. We had a GAAP operating loss of $1.7 million in the third quarter compared to a loss of $2.3 million last quarter.

We had a non-GAAP operating income of $822,000 in the third quarter versus non-GAAP operating loss of $123,000 last quarter. Improvement and operating profit both on a GAAP and non-GAAP basis was the result of our continuing focus on improving gross margins and managing our operating expenses. Now I would like to review our net income and earnings per share both on a GAAP and a non-GAAP basis. We had a GAAP net loss of $2.1 million or $0.03 per diluted share versus a net loss of $1.4 million or $0.02 per diluted share in Q2. We had non-GAAP net income of $467,000 or $0.01 per diluted share compared to $722,000 million last quarter or $0.01 per diluted share.

We ended the third quarter with $68 million in cash and investment and no debt. During the quarter, we had cash used in operation of approximately $1.2 million. The cash used in operating activities was primarily a result of the reduction in accounts payable from last quarter.

Now I would like to review our projections for the fourth quarter of 2008. The following statements are based on information available to iPass today. These statements are forward-looking and actual results may differ materially.

For the quarter ending December 31, 2008, we anticipate revenues of approximately $47 million to $50 million. For Q4, we expect gross margins in a range of 57% to 59%. We anticipate a fully diluted GAAP loss per share to be between a $0.02 and $0.05 per share. We expect fully diluted non-GAAP earnings per share to be between $0.00 and $0.03 per share.

Now I would like to turn the call back over to Ken.

Ken Denman

Thanks Frank. In the third quarter, we pushed through the slow summer period and delivered financial results that were inline with our expectations. During the quarter, we improved our operating profit and delivered strong bookings. Most importantly, we improved gross margins and we are reiterating our expectations that we have reached the point where we can expect gross margins to stabilize, if not improved, going forward.

Contributing to this margin improvement was a long awaited slowing of our rate of dial erosion. We are cautiously optimistic about the stabilization of our dial business we saw in the third quarter. We will now be seeing the long awaited slowing of this erosion as the majority of those users who could move from dial to home broadband already have. We expect that increasingly, our dial usage will be coming from regions where broadband is not significantly penetrated. If that proves to be the case then a slower rate of erosion might become the norm. At the same time, we are of course busily focused on improving our broadband margins through aggressive contract renegotiation and continued deployment of flat rate pricing models to our enterprise customers.

We continue to improve our global broadband value proposition through new partnerships with 3G mobile broadband providers. Our partnership with IIJ announced in July makes Japan the second country after the US where we offer multiple 3G data networks and our partnership with 3 Scandinavia signed in the current quarter gives us two additional countries in Europe. One of our top priorities is to build our global 3G broadband footprint replicating the successful model we have employed in dial-up and Wi-Fi hot spot.

Now, I would like to shift gears and discuss the current economic situation and why we believe iPass can do relatively well in this environment.

First, I would like to point out that we have yet to see an impact on our business from the current economic turmoil. So, certainly that could change in the future. We draw comfort from the fact that we have a broad customer base, a base that is diversified across industries and geography. Importantly, when you service these customers make up a very small fraction of our revenues and while our recession might create problems for enterprise customers, in most cases, we have firm contractual revenue commitment that will give us predictability and limit our downside.

Second, we believe we have a value proposition that is well suited for these difficult times. Our ability to help our customers reign in mobility cost resonating to the market and position us well in a downturn. Industry analyst such as Gardner believe that the majority of our enterprise customers, mobility spins are occurring outside the normal budgeting process and expense management processes what we call the black budget. Our services help bring these expenses back into the purview of the IT department and can create significant financial value for customers especially those under heavy expense manager pressures.

Lastly, we believe we are well positioned financially. We have no long-term debt nor do we need to obtain credit in order to maintain our liquidity. Our adequate and stable cash position has helped insulate us from the recent tightening of the credit markets.

In summary, iPass continues to close new business at a steady rate, renegotiate our supplier relationships on favorable terms and drive down our expense profile and position the business for margin improvement. Our ability to save our customers' money and our lack of exposure to the credit market, positions us as a lead and effective competitor in a down economic cycle.

With that, I will turn the call back to our operator for your questions. Operator?

Question-and-Answer Session

Operator

(Operator's instructions) Your first question comes from the line of Neil Weiner - Foxhill Capital Partners.

Neil Weiner - Foxhill Capital Partners

I have several questions. Let me start with the first one. When you said the Board unanimously agreed for the Company to be standalone, can you tell me if all directors voted or are there any absentee or no-show directors?

Ken Denman

Unanimous decision.

Neil Weiner - Foxhill Capital Partners

That is not what I asked. I asked, were there any directors who abstained or did not show?

Ken Denman

This was a unanimous decision by the Board and beyond that, I do not have any comment.

Neil Weiner - Foxhill Capital Partners

Can you tell me how many bids there were and if any of the bids were higher than the stock price where it is now?

Ken Denman

We do not plan to disclose the confidence of details of the presentation. They were the basis of the Board's unanimous decisions, Neil.

Neil Weiner - Foxhill Capital Partners

Okay, let me move on to something else. Can you tell me, for your exit payment, the number of $400,000 to $600,000, was that contractually obligated to that number of iPass?

Ken Denman

Could you repeat the question?

Neil Weiner - Foxhill Capital Partners

Can you tell me if the number of $400,000 to $600,000 as the iPass is taking as a restructuring charge? Is that are you to receive that contractually under your employment agreement or how did the Board arrive at that number?

Ken Denman

It is inline with the employment agreement.

Neil Weiner - Foxhill Capital Partners

Okay and let me move on to third question. Is Mr. [Belitec] as new chairman, how was he selected and is he getting any additional compensation for being chairman?

Ken Denman

The Board followed all of the nominal governance processes lead by the nominating governance committee to make the decisions that it is made regarding the selection of a new chair and any information regarding compensation of that chair will be publicly available in the appropriate filings, Neil. So, I want to thank you for your call and your questions this afternoon and we are going to the next question.

Operator

Your next question comes from the line of Fred Ziegel - Soleil Securities. Mr. Ziegel, please proceed with your question.

Fred Ziegel - Soleil Securities

What was going on in broadband in the quarter because it was pretty flat?

Frank Verdecanna

Fred, we indicated in the Q2 that we did expect to see fair amount of seasonality in the third quarter and so much of what we see in the past few years as the broadband base gets a lot bigger, we do see quite a bit of seasonality on the usage side. The good news is that we did see the normal bounce back in September and October which leads to believe that it was really the kind of the summer month seasonality that we have seen in the past.

Fred Ziegel - Soleil Securities

And what is your sense, if you have one, on the dial side? We are getting the small numbers but what do you think?

Frank Verdecanna

We are getting a very small numbers and I think Q3 was a pretty good indication that we had a bit of a reversal of the trend that we saw in the first two quarters of the year. We have 14% erosion in Q1 and 18% in Q2 and then it dropped to 7% in Q3. So we are hopeful that we may feel little bit of the softening of that erosion trend but as we have seen few times before, dial does kind of bounce around a little bit but I think to your earlier point, the important thing is that dials are only 18% of our total revenues now so even a significant erosion quarter had less of an impact on the business.

Fred Ziegel - Soleil Securities

And where with other platforms like iPhone and Blackberries?

Ken Denman

Well, as we have mentioned before, we have been working on an iPhone client which we will be bringing to market on the consumer side initially as we test and get familiar with that new platform and customers' acceptance and how they want to use. So potentially on the iPhone is you should expect and we expect to see something on the market in the fourth quarter on the iPhone platform. On the [rim] platform, we continue to work. We got some good things going on from a prototyping perspective and we are continuing to work. We are not quite where we want to be and I am thinking that that is an '09 deliverable.

Fred Ziegel - Soleil Securities

Do you have a consumer partner for iPhones or that platform?

Ken Denman

At this point, the only thing that we can really talk to is that we do expect to have an iPhone capable client and offering and that will initially be on our iPassConnect offering. Excuse me, Fred, so that will be really more consumer pushed. We do not have any other partnerships to announce at this moment.

Operator

Your next question comes from the line of Ed Einbodin - W.M.Smith & Co.

Ed Einbodin - W.M.Smith & Co.

Ken, first of all, good luck in your future endeavors and I just want a good luck on whatever you are saying you are doing. I know it has been tough really here and good luck in the quarter on the gross margin side as well.

But I was just kind of looking at the software and services. I guess could you maybe us some color as to say gross rate in Q4 and kind of going forward in that line specifically. I know it is a nice margin contributor and additional growth will definitely be beneficial. So, can you give some more color on that?

Ken Denman

I will start and then I will hand over to Frank. First of all, let me say thanks to the kind words and I would just characterize my time here at iPass as being great. It has been a phenomenal experience and while there have been some tough times I think in any endeavors we are tackling on, you really have to compound it through tough issues. Frankly, we have done that. I think we got a market leading product, great customer base. There is a lot of good news and a lot of good times here so, but that thanks for that and I truly appreciate that.

Now, moving on to the software and services base, what I would like to say just starting off is that we typically see some seasonality in software and services depending upon the overall growth rate in that that we see in the business and the kinds of deals that we close within the quarter. So, with that as a lead end to kind of the software services growth rate, I will turn it over to Frank for some details.

Frank Verdecanna

Sure, Ed. We do expect to see consistent growth there on a general trend basis. Like Ken said, any one quarter could be up or down just depending on the types of deals we had in the quarter because about 10% to 15% of that bucket does relate to things like professional services or license agreement so nonrecurring items that do go up and down quarter over quarter but we feel pretty good about the general direction just being and an increase there because of the enterprise flat rate pricing model and if you look at what we have done in the past few quarters really over the last year, 85+% of our new deals have been under the enterprise flat rate pricing model and so now we are also focused on moving some of the existing customers over to that model and that does absolutely increase our software and service fee revenues because we are now monetizing some of those off-net users.

Ed Einbodin - W.M.Smith & Co.

Okay great and I guess, I know you mentioned that the financial services segment contributed a roughly low portion of your customers. Can you talk about maybe some of the other areas as in transportation kind of what is going on with the overall environment there and whether you can quantify or qualify any of the discussions that are going on into maybe next year, I do not know if you much visibility as to where these companies are looking at trimming cost and addressing some of the cost.

Ken Denman

Sure thing, first of all, it has been an interesting challenge with the financial services segment. One of the things that we found with that segment for our business is that IT organizations tend to be pretty large at the financial services companies. Historically, they have been very large. They have not done as much outsourcing as we would have like to see and they tend to have a lot of proprietary systems in the background or in the back office and that has been a real barrier to the entry. Again, we have some great financial services customers but it is not as broad as we look like and as a result, we do not have the exposure that we might have had. So it is sort of bittersweet there. Having said that, we will continue to try to kick in the door with the financial services business going forward because we have great tools for that market segment.

The market segments that are tending to do very well for us, continuing to do very well for us are the pharmaceutical industry and the extraction industries, oil and gas. We have made great progress in the software industries, software customers. Manufacturing continues to be our most successful segment by the way. That is where we are, we have the broadest penetration both in terms of the customers and in terms of revenue and then we are beginning to see some nice headway into the federal government segment now and not just in the US but actually overseas in sort of sea or cross border government organizations like [NADO] is one example but I think that the federal government sector is one that we would like to continue to see making some progress and we had a good year with agencies like the alcohol, tobacco and firearms bureau just to name one particularly on our sort of combined mobile office 3G offering.

So, that is a quick summary of some of the factors that we expect that will continue to do well and again, I will just remind you that we are a productivity tool at the end of the day. So while I would not say we are countercyclical, we kind of lean in that direction. When time get tougher and organizations want better reporting on their cost and expenses, they want more tools to help make their people productive, we really tend to shine in those environment. So, we are seeing one about the opportunity going forward.

Operator

Your next question comes from the line of Kevin Dede - Morgan Joseph.

Kevin Dede - Morgan Joseph

I am just curious about your guidance for the fourth quarter. If third quarter represented seasonal slowness, what is implied in flat guidance for the fourth quarter?

Ken Denman

I will jump in first and I will turn over to Frank. Given the economic times that we are in right now and most of you are on a lot of calls these days, I am guessing what I would like to say is not a hair difference from what most CEOs are saying on calls these days which is given the overall economic environment around the world, not just for this country in where we worry about around the world because we are a global company, it feels like while we have confidence in the business, we believe everything that I have said in terms of the solidness of our customer base, the solidness of our value proposition, it just feels inappropriate to do anything other than say neither rough times macro and economically around the world, we like our business but we do perfectly, we are not perfect suit players and given that, we provide guidance that I think represents a prudent look at the world. It is not conservative. It is not aggressive. It is based on what we see and we just think this is the prudent way to approach it given all of the unknowns that are out there.

Kevin Dede - Morgan Joseph

Ken, can you just take it like one step deeper and give us some feeling for what your customers are actually telling you and what you expect to happen with dial-up? Do you think this $8 million to $9 million range is in sort of the low-end asymptote and that is what you baked in to fourth quarter?

Ken Denman

Well, I think that the, first of all is in regards what our customers are telling us. We are seeing customers that are in some case, not all cases and I would not even say yet in the majority of cases but in some cases, we are seeing customers who are talking about things like travel freezes. We are seeing customers who are being very prudent and sort of thinking about their budgeting process. We are not seeing things that cause us to be deeply morose. We are not hearing things that cause us to be deeply morose but we are hearing our customers say they are being very prudent. They are examining their budgets. They are looking for areas to cut things that they do not need. We have not yet seen that extend into our business in large scale. We have seen a couple of deals be delayed as additional reviews are being required but we are coming off at $24 million TOV, total order value quarter.

So, I am trying to walk a fine line here and say that we are hearing cautious things from our customers. We are not yet seeing those cautious things directly in our business but whenever your customers start talking about travel freezes and things like that, you really begin to sort of, you put your ears on and pay more careful attention.

Now to dial, we have been waiting, as you well know, we have been waiting for this asymptote in dial for a long time and I think all of us, if we are all honest and I will start with myself, we have all sort of at times thought that asymptote would take in sooner. I am not yet willing to say it has kicked in now. I think, given if you sort of miss it multiple quarters in a row, I would not take this quarter and say, "Oh, yes! I got it now." So, what I think we have seen, we are seeing it as slowing. I need another data point or two before I call it an asymptote. We are hopeful but I think what is reflected in our numbers is the really data of what we have, we have data points from many, many quarters that show it going down at 7% to 15% and it would be wrong for us to make any other assumptions. We are not making any other assumption.

Kevin Dede - Morgan Joseph

Can we take a step back and sort of look at the broad picture from the 20,000 foot view, just assume we are on this one for a second but if you were to sit through in our seat and try to project things out in '09, can you draw some sort of a parallel, maybe slightly more tier one piece of the way iPass reacted to sit to '01 and '02 downturn?

Ken Denman

Yes, let me just, if you go back to the '01 downturn after 9/11 for instance, what we saw was that we really did not have a down week after 9/11 even though people were, we were largely seen at the business traveler tool and our fear was that if people are not flying, that is going to be really bad news for us. What we saw was that we did not have a down week from a usage perspective and the reason for that was because we that we have even more usage that we knew who are actually using iPass from home, doing dialup from home. Now, if we sort of shot forward to current times, we have a lot less people using dialup from home. We are much more a broadband tool and we are much more, fortunes are more tied to mobile travelers.

Now, the counterpoint to that is we have been aggressively instituting our enterprise flat rate pricing mode for about a year and a half now, really, really aggressively. So, even though we are probably more susceptible to a downturn associated with less business travel, we have mitigated that risk by pushing enterprise flat rate as aggressively as we have which will tamper our risk especially when combined with the general nature of our contracts which are based on minimum commitment. So the combination of those two enterprise flat rate and minimum commitment I think put a really nice floor under us so we are not going to see, we do not believe we see the bottom fall up by any stress imagination. We can see growth tamper at that but we think we protected the downside pretty good and again, if we can get our value proposition out there even more aggressively especially in counter with trade unless we were trying to help companies figure out how to manage our cost really well. I mean, who knows? There might some up sight but I think this is the right post, Kevin.

So I think the real underlying question here, I think can we make any assumptions or can we sort of look at what is going on and say anything about '09 based on history and I think what I am comfortable saying is I think we got a pretty good floor under the business, I really do and if we continue to execute, maybe there is some up sight.

Kevin Dede - Morgan Joseph

So, I am glad you blow it down for me. Ken, thanks. I am still sort of hazy about how to look at '09 and I guess from what you are telling me, it is probably safest to assume sort of a no gross scenario despite the fact that dialup should not decline too much further from here.

Ken Denman

No, Kevin. It did not go there.

Frank Verdecanna

I would assume that I think if you look at the various line items, we do expect software and service fee revenues to continue to increase. We absolutely expect broadband revenues to continue to increase and dial will be [crip] as of this year but it is coming off the base of $8.8 million in the quarter. So, we are hopeful that we see more growth in '09 than we saw in '08 and I think we have a pretty good foundation for that because we still have the growth drivers of the business seeing broadband and software and service fees and we are still adding a lot of new customers but virtually no churn. So even with the economic climate, the way it is, we feel good about our chances in having a very solid '09.

Ken Denman

Exactly. If you tamper the dial erosion a little bit based on history and show this solid growth in broadband and software services that we remodeled that out prudently, I think it still get to solid growth over '09, over '08 as Frank just laid out. So, we will leave it there. I think that is probably about as much prognostications that we should do.

Kevin Dede - Morgan Joseph

Fair enough. Just one other question along those lines; however, granted that it is still a marking environment, do you have sort of plan B in mind where you might be able to look back at the cross structure, the fix cost structure and recalibrate if you need to?

Ken Denman

We always have a plan B in mind and again our goal is to drive this business, delivers some big and well profitable growth and within some ranges, you have to be able to and willing to take the appropriate actions when necessary and I know Frank and the team absolutely are and I do not want to speak for Evan but I know him pretty well and absolutely he is kind of leader. He is great.

Kevin Dede - Morgan Joseph

So, congratulations on landing the three contract in Scandinavia and I have learned that this company has three that has broad reach around the globe as this ['02] but I guess what I have not really seen is you leverage your iPass rather leverage those worldwide connections through some of the carriers that you struck agreements with and I am just kind of wondering when we might be able to see certain more of those 3G arrangements coming from iPass.

Ken Denman

Well, first of all, I will take a little bit exception. I think we have done a pretty good job with the T-Mobile as one example of sort of building relationship with them around the world and I would also agree with you that we have a nice opportunity with 3 Scandinavia and their sister company as we take that broader. We did not focus on a prioritized and segment with the list of countries that we had to get to as we go our 3G network. So we have not gone out in the shotgun approach because these agreements and the network integrations are relatively expensive so we want to prioritize where we know we are going to get customers and users the soonest and now, we are starting to hit some of these other countries where it tends to be.

So I think we got a pretty good strategy. I think you are going to see more of us leveraging the relationships that we are building where people like we have other operations in other countries but again thanks for your great questions and we will see you down the road, Kevin. Take care.

Operator

Your next question comes from the line of [Lily Woo - TDRA Capital].

[Lily Woo - TDRA Capital]

I also have a couple of questions. To start off with, I have been covering the software a number of years now and I think this is the first quarter I have ever seen the broadband user base number actually decline sequentially. I think as long as I have been tracking, it has always gone up sequentially but third quarter, the 311,000 is down from the second quarter and I know earlier you said that there was some usage decline with the seasonality but the user decline, could you give me some insight as to what that is or what is going on there?

Frank Verdecanna

Yes, Lily. If we look at the monthly users, we can kind of see that we have a real significant drop off in July and August on the user number and then we saw both September and October bounced back. In October is a record broadband user number. So it is, you are right, to the first quarter that we had a decline but that is really due to the fact that our base of dial or base of broadband users is so much larger than in the past. If you take a look at the last two years, we had a significant drop in Q3 but what increase the users in the overall revenues was we would add a significant footprint in both last year and the year before with the team T-Mobile International and France Telecom footprint.

So, this quarter we did not really add any significant new footprint and that coupled with the seasonality did lead to a minor decrease in the quarter but again, we feel pretty good about Q4 because we have already seen that bounce back in both September and October.

Ken Denman

I guess the last thing I would add there is that over the, because of the phenomena that Frank mentioned around the footprint in Europe, we have actually seen our user base to be more evenly skewed between Europe and the US whereas before we hit the past year with more sort of US centric in terms of our user base. We now might have a much deeper base and frankly, it is riddling the US user base in terms of the thing to unique users. And so with that increasing quarter to quarter over time, you are watching a phenomena where Europe has become relatively more important and therefore more impactful to the results around users and so consequentially, we all understand that when Europe goes on holiday, it really goes on holiday. So the phenomena that Frank talked about in terms of July and August weakness is even deeper in Europe. So that is another reason why you might see some of that peaked ness in the October number. It is actually been getting, that trend has been getting stronger over time.

Now on the other hand as Frank said, it goes back the other direction as well and that is why we think we saw a record quarter in October as in Europe and the US go back to work and numbers sort of move back in the normal trend and we think we are…I am sorry, go ahead.

[Lily Woo - TDRA Capital]

So, if I could just then I guess what I have misunderstood before, I guess I call it users so basically the definition of a user for that number is somebody who actually use that over that month even if there is a, because I always thought because of like to some degree was counted so we go overriding corporate long-term contract say for 500 seats so all 500 for example in that company would be considered broadband user even if in any given month, they did not use it. So my overriding understanding of user base I guess was incorrect. A user is just somebody who used it that month.

Ken Denman

Yes.

[Lily Woo - TDRA Capital]

They made in a contract.

Ken Denman

Yes, Lily the metrics that we get out for broadband users is the distinct users that actually use the service in the month. So, we do not count nonact or non active broadband users that are still getting build.

[Lily Woo - TDRA Capital]

Okay, okay well then that is great because that makes the number much more temporary in nature as oppose to…well.

Ken Denman

That is right.

[Lily Woo - TDRA Capital]

Yes, exactly. Okay another thing is that you mentioned that there was a slight gross margin benefit in the quarter due to the strengthening US dollars because some of the network cost are in local currencies globally. Is that cost of viable like on a constant currency basis? What was the gross margin would look like?

Frank Verdecanna

It is probably about a quarter to a third of a percent of benefit within the quarter.

[Lily Woo - TDRA Capital]

Okay so not hugely significant.

Frank Verdecanna

No, it will likely be we are hoping to be a little more significant in Q4 because of the dollar really strengthened kind of the last half of September and early October. So, who knows how it plays up the remainder of the quarter but as of now the dollar being where it is at does benefit up from the OpEx side and on the network access side.

[Lily Woo - TDRA Capital]

Okay and ongoing you mentioned that there will be renegotiations or attempt to more permit where you lower the cost on the broadband side. What is the likelihood of that being realized how significant are we talking about and if that does occur with that, how soon are we likely to see the benefits of it?

Frank Verdecanna

Lily, we have had a long history of being able to continue to renegotiate with existing providers as our volume increases and as we add competitive networks to the footprint. So we feel very good about our ability to renegotiate those agreements and frankly we were in the process of renegotiating agreements. Pretty much every quarter, we are renegotiating some portion of our network access agreement so we feel confident that we will continue to do that and continue to be able to lower the cost there. I think one of the things that does benefit us is the ability to continue to add to the footprint.

So when we had 3G mobile broadband providers to the footprint, we then provide a competitive threat to some of the Wi-Fi networks that we have in our footprint.

[Lily Woo - TDRA Capital]

Okay and I guess the last question is, what is the status of the share buyback? I guess looking at the operating cash flow and the cash on hand situation, there is no activity in the third quarter, is that right? And is the buyback plan, I thought there was over $20 million left there, what is the status going forward?

Frank Verdecanna

There is still rather a $27 million left in the buyback plan. We did not do anything in Q3 because of the some strategic review process that we had going on in the quarter and at the end of Q4, we will announce if we have done any thing in Q4.

Operator

Your next question comes from the line of J.D. Abouchar - JRT Capital.

J.D. Abouchar - JRT Capital

Ken, I do want to give my thanks for managing the Company at difficult revenue transition period. It was not easy and you have hold it off. So, thank you very much.

Ken Denman

Thank you. It is very kind.

J.D. Abouchar - JRT Capital

Just couple of questions. One, you said churn was the minimal. Has there been any change or kind of assume it has been constant at the same low number.

Frank Verdecanna

It has been constant at the same low number. We have gone out and been a little bit more stringent about disconnecting some of the older customers and partners that had not adopted to the new version of our client and maybe were not as up-to-date on their payment. So we have forcefully disconnected some smaller customers over the last six months but there really has not been any voluntary churn to speak of.

J.D. Abouchar - JRT Capital

Okay so I can assume that that has been at the same low level it has been at.

Frank Verdecanna

Correct.

J.D. Abouchar - JRT Capital

Other income went from positive to negative this quarter. Can you walk me through what is going on there especially in line of our cash balances?

Frank Verdecanna

Sure, so in other income, we did have about a little over $600,000 of foreign exchange loss in the quarter due to the strengthening of the dollar so we do have some hedging forward contracts in place so there was a mark-to-market adjustment at the end of September that we did take a foreign exchange loss in the quarter but we also did have savings on the OpEx and network access side.

J.D. Abouchar - JRT Capital

Is that something that we see through a reverse if the dollars stay constant or it is going to still continue to bounce around? Is there any way to sort of mitigate that?

Frank Verdecanna

Not really I mean the hedging that we put in place is really to try to mitigate the effect on our network cost and our OpEx so in our anticipation of that, we will get to more normalized pattern going forward. I think Q3 was a pretty big spike in the dollar than we have seen historically and it did have an immediate impact but again that is going to be ongoing benefit to us if the dollar gets stronger because we do have significant amount of expenses and network access cost in pounds and euros.

J.D. Abouchar - JRT Capital

Got you, okay. Final question is we can assume that the minimum tax rates for '09?

Frank Verdecanna

Correct.

Operator

Your next question comes from the line of Justin Orlando - Dolphin Management Company.

Justin Orlando - Dolphin Management Company

Ken, this maybe a difficult question to answer but what should we expect in terms of differences in the business plan or in the way of operating the assets that we have got under Evan's leadership here on a going forward basis? What changes should we be expecting to see?

Ken Denman

Well I think I definitely want to leave that to Evan to answer at the right point. I should not project what changes he is going to commend. I worked with Evan on the transition period and then he is going to commend and do his assessment and decide and make some decisions working with the Board on a go-forward strategy. I would say this that there are certainly and always are differences and opportunities for different decisions, different direction. In general, the standalone plan that the Board was looking at was something that we build together and that is largely inline with the strategy that we have for the business and that standalone plan represents some value that the Board feels very good about. Of course that plan could change whenever you bring a new leader in and we are very focused on driving forward and getting our next generation client into the market place. We think it is going a very powerful change for our business, a change for our customers. So getting the next generation of our platform to the market that include effective priority which is getting our service delivery platform move to the next level, think about this in terms of our portal present to customers partners except for the users and that in the first year are very much connected that the client and the portal then finally, driving mobile data, driving our mobile broadband, driving our 3G business hard and fast because that is going to be a big revenue driver over the next couple of two years for sure and then there will be [wire max] and other things that will help add additional revenues further out.

Those are the three big hitters that we are very much focused on. There are other new onset of strategy that will be looked out, study and we can make different decisions about but that is the focus at the highest level right now and I expect the business to continue to drive those forward; 30 days, 60 days from now, a new leader after having nimble to get his nose under the tent and the stingers and the pie will come out and say if that needs a change. That is really the best guide that I can give you right now, Justin.

Justin Orlando - Dolphin Management Company

Thank you for that. Do we have a schedule time when the shareholders are going to get a chance to meet this new person who is taking the ring?

Ken Denman

Well be working on that and we do not have a scheduled time at this point but we will definitely be looking for opportunities at the right time for him to meet the marketplace more formally and share his vision.

Justin Orlando - Dolphin Management Company

Lastly, well I thank you for you efforts running this Company. These last few years, I do think that the Board has made several critical mistakes, it is obvious from the fact that we had a failed sale process here starting in June that we waited way too long to try and sell this Company and you had numerous shareholders, us included, who saw this possibility coming asking many, many quarters ago and many Board meetings ago to sell this Company and this Board has not done what it is needed to do and has not done what is should have done to protect shareholders from the stock trading here at a $1.93 with a $1.10 in cash.

Ken Denman

Justin, the Board continues to do its job and I think has done a great job and will continue to do the job of focusing on building long-term value and that is not going to be measured in a quarter or two or even a year or two. I think that we have a platform here that have an opportunity to play in some really interesting way and there are number of forces that are coming together that will make this platform more valuable over time. I think the Board is absolutely focused on its share duty to look out for the long-term interest of all shareholders and I feel, I have been very privileged to work with the Board that I think had really worked out very hard in a difficult transition but they have never sort of taken the short term or the easy approach. I think they always look for the long term and I think they will continue too and as a result, I do think that this Company is going to deliver on its promises.

I appreciate your comment and good luck to you, Justin. I am done.

Operator

There are no further questions in the queue.

Ken Denman

Alright, ladies and gentlemen, thank you for joining us for the third quarter 2008 iPass earnings announcement. It has been a real pleasure to work with all of you, the amazing employees as well of iPass maybe most importantly the amazing employees of iPass, our customers and our partners. I am very proud of the market leading position that we have earned and still holds and our growing list of world class customers is a testament to that. iPass does have a world class work and a topnotch management team with a very talented new leader, Evan Kaplan. All the right positions are in place to see this business continue to returns you its path of sustainable growth which is our goal and I think that is where we are heading and I would say sustainable profitable growth.

While there had been difficult points as we vantage this sort of almost 100% change, I think we are now at 83% or 84% change out of our revenues and just few short years which is unheard of, we have been able to keep this business moving forward, keep it leg width and have no real impact to the customer base and I think that is the greatest testament to the employees of this Company and their staying power.

Evan Kaplan in particular is a person that I have a lot of respect for as a leader, as visionary and a capable communicator who also have the technology aptitude to take the business forward. So I am really happy that he has chosen to join the team that I mentioned by the way that is the [husky], only those of you have followed the [Pack 10] will get that one. I wish you all well and at either very exciting times for the world and the country, I think this business has an opportunity to continue to have an impact all around the world and that is the very cool and great thing about iPass.

So, with that I bid you good days and good luck.

Operator

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

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