Atrinsic, Inc. Q3 2008 Earnings Call Transcript

Atrinsic, Inc. (NWMO)

Q3 2008 Earnings Call Transcript

November 13, 2008 8:30 am ET

Executives

Brett Maas – IR, Hayden Communications

Andrew Zaref – CFO

Burton Katz – CEO

Analysts

Jim Renee [ph]

David Bench [ph]

Andy Horwick [ph]

Larry Cheng [ph]

Bill Solomon [ph]

Pea Sload [ph]

Presentation

Operator

Welcome to the Atrinsic third quarter 2008 earnings conference call on November 13, 2008. Throughout the day of recorded presentation all participants will be in a listen-only mode. After the presentation there will be an opportunity to ask questions. (Operator instructions)

I will now hand the conference over to Mr. Brett Maas. Please go ahead, sir.

Brett Maas

Thank you. Good morning and welcome to the Atrinsic third quarter fiscal 2008 conference call. I'd like to point out that during the course of the conference call there may be statements made relating to the future results of the company that are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results, performance, or achievements could differ materially from those anticipated in such forward-looking statements as a result of certain factors including those set forth in the Company's filings with the Securities and Exchange Commission.

It also should be noted that the webcast of today's conference call may be found on the internet by visiting Atrinsic corporate Web site at www.atrinsic.com and then selecting Investor Relations at the top of the web page, and then clicking on “Events and Presentations.” Also on the Web site, you will find a link to the news release we issued to announce the Company's fiscal 2008 third quarter financial results and webcast. An archived version of the webcast will shortly be accessible from our Investor Relations site and will be available for the next 12 months pursuant to SEC guidelines.

Finally, those interested in reviewing the Company's recently filed 10-QSB, which contains all the financial information being discussed today, you can find this document also via Atrinsic's corporate Web site by selecting Investor Relation and under that heading “Financial Reporting,” where all the Company's recent SEC filings can be found. You can also search the Edgar database directly at www.sec.gov and then search for Company filings.

Joining us on the call today is Burton Katz, Chief Executive Officer of Atrinsic, and Andrew Zaref, the company's Chief Financial Officer.

I'd like to now turn the call over to Mr. Zaref.

Andrew Zaref

Thank you, Brett. Thanks to all of you who joined us this morning to discuss the Company's third quarter results. Let me start off again by mentioning that the press release has been made available for your review prior to the call. The 10-Q is on the Edgar database. If not there already, it will be there shortly. I hope that you have had the opportunity to review those documents.

I'm going to take a few minutes to review for you some of the materials, which have been made available, and then provide certain highlights, financially of the quarter. And then I'm going to turn over the call to Burton, who will provide some commentary and color on the many operating matters, strategic initiatives, including our recent investments and governing matters, including some recently announced changes to our Board of Directors.

You will notice that the press release is very much the same in form and content as to that which was issued for the second quarter. We're trying to simplify and clarify our communication, standardize our quarterly press release, and put a comprehensive amount of information right into the press release.

Let me take a moment to walk through the overall construct of the press release, and explain what's in there, since there's a lot of information presented in a variety of ways and some very specific vernacular.

First, we've included information regarding our reported operating results on GAAP or as reported basis. There is a complete balance sheet, income statement, and statement of cash flows, included within the press release. A commentary in the press release generally refers to the reported amounts "as reported" means the inclusion of the operating results of the acquired entities from the date of acquisition, US GAAP accounting principles based methodology. That means December 4, 2008 in the case of Traffix and June 30, 2008 in the case of Ringtone.com.

Second, we've included certain non-GAAP financial measures with the corresponding reconciliation to the related GAAP amounts that some of you might look at for comparative purposes. Please pay attention to the definition, where we compute EBITDA and take into consideration certain non-cash and non-operating type items and further compute adjusted EBITDA to include an add back for the non-cash equity based compensation.

We have also provided both GAAP and non-GAAP amounts on a pro forma basis. Pro forma meaning the inclusion of the operating results of the two recently consolidated business combination for both Traffix and Ringtone as if they had been acquired at the beginning of the earlier periods presented. Some think that this is a comparative analysis of a similar business, so trying to get everything apples-to apples.

Now let me review some financial highlights of the third quarter. First, on a pro forma basis, so including Traffix and Ringtone as if they occurred at the beginning of the period, revenues for the third quarter and first nine months of 2008, totaled $30.8 million and $105.5 million resulting in pro forma adjusted EBITDA of $1 million and $6.8 million on a year-to-date basis. On a year-to-date basis pro forma revenues increased $19.9 million or 23% over the comparable year and that's on a comparable basis, so that's comparative as if year-over-year.

Pro forma adjusted EBITDA increased 97% on a year-to-date basis from $3.5 million in 2007 to $6.8 million in 2008. These results were accomplished during the period of post merger integration, coupled with all of the other marketplace challenges faced in our growing and dynamic company.

On an as reported basis for the third quarter and nine months ended September 30^th reported revenues totaled $30.8 million and $91 million resulting in adjusted EBITDA of $1 million and $4.5 million respectively.

Operating expenses totaled $9.7 million and $36.5 million for the three months and nine months periods presented. We believe that sizable efficiencies totaling almost $4 million annually are being achieved following the transaction with Traffix and the related integration.

Prospectively, we are continuously monitoring the marketplace and our operating performance and will make investment where necessary to accomplish our long-term goals but the current reduced run rate, excluding the non-cash equity-based compensation and depreciation and amortization is reflective of many of those efficiencies we've seen.

Now, turning to the balance sheet and liquidity. The Company ended the third quarter with approximately $29.8 million in cash and marketable securities and over $33 million in available adjusted working capital. If you were to include the entire calculation of our marketable securities, you will note that there have been some balance sheet reclassifications from June 30^th surrounding of marketable securities as about half.

So therefore about $4 million of the total population of our portfolio of auction rate securities, which is approximately $8 million, so far they were redeemed and converted to cash as of today. We are obviously looking forward expecting to redeem the remaining portion, although we've classified that as long-term to be cautious as that to our best estimate.

The primary usage of the cash during the third quarter included approximately $1.5 million in share repurchases and another $1 million to fund some of the post merger integration activity resulted from the Traffix acquisition with some limited capital expenditures which were necessary to complete our consolidated facility here in New York and to the technology necessary to improve our product and operating efficiencies.

We believe our capital resources are sufficient, coupled with our belief in the Company's ability to generate positive cash flows, to execute on our goals and objectives for the remainder of this year and beyond.

Like you would expect, we will continuously monitor our capital structure and deploy our capital on a prospective business combination or investment, organic growth initiatives and activities or continued share repurchase which ever yield the highest prospect for the creation and maintenance of long-term shareholder value.

To-date under our previously deployed purchase program, so that's to-date, the Company has repurchased approximately 1.7 million shares at a cost of a little bit more in $3.7 million.

Some commentary on the prospective goals of the Company, turning to the fourth quarter, 2008 has been a transformative year for the Company. This Company was designed in its earlier stages to be a platform for both organic and acquisitive growth. Two such transactions were consummated so far this year and numerous internal initiatives to improve operating results were effectuated.

These initiatives will continue into the fourth quarter. We are approaching the fourth quarter with realigned assets and a very refined focus on the core operations in our transaction and integration.

We are controlling the operation serving as steward of your capital but the market place is volatile. A few further specific comments. The near-term business climate is challenging. Some of our products directly or indirectly rely on consumer demand. Consumer demand from a macro perspective is weak.

However, we have very specific initiatives to come back to more obvious trends which we can control, including new products, initiatives to retain the subscribers we have, continue the initiatives to reposition ourselves with business partners and vendors. We are not necessarily replenishing, but rather continuing to squeak up improved performance wherever possible.

As for advertisers, they are cautious. We have a backlog from our key accounts. They are watching their own progress on a day-to-day basis and making modifications to their plans as they see best. It's very unpredictable.

Seasonality

Some of our products and services catered to clients that are particularly big spenders in the fourth quarter. The trends for this fourth quarter are not consistent with those in the past, in particular, the retail sector.

Number three, better day-to-day operating management. We've carefully been monitoring our customers, vendor relationship, product mix, service offerings with a renewed emphasis in these turbulent times on profitability. Better management of our existing relationships, more efficient procurement, cross-selling our product offerings, process improvements, are all allowing us to focus on operating margins. It's a balancing act.

Number four, we need to make the right investments in the right people, processes and systems to grow on a long-term basis. We continue to eliminate anything considered discretionary or wasteful, non-core or non-profitable, what does not meet our investment returning criteria.

That being said, we are still launching new products, not necessarily as we otherwise would be, but some. We are making strategic investments, including investment in an alternative landline billing company. Burt is going to expand down that a little bit in minute.

The benefits of that investment will become much more evident in 2009 and beyond. It's not an immediate return, but a particularly valued, long-term return. We are continuously improving our technology. We are hiring the right people in the right place, and we are training our existing staff, particularly retraining them in the sales, technology and product areas, in particular.

Our final comment regarding the fourth quarter, as required under generally accepted accounting principles, the Company will be performing its required annual impairment analysis, that analysis takes into consideration a variety of estimates and operating factors, both internal and external, and may result in the need for the Company to report a non-cash impairment charge in the fourth quarter.

At this time, we don't know if there will be a charge, the amount of the charge or the related tax attributes, but please note that there is approximately $145 million of intangible assets on the balance sheet along with the associated tax attributes.

I know what you are thinking. Burton and Andrew translate that into dollars, but here is what we are prepared to say. Number one, the guidance previously provided, was some time ago, contemplated incremental business combinations was provided before the macro economic environment became so volatile, was during the period of significant post-merger integration and transformation, which caused instability and executional risk.

Number two, we find ourselves at September 30th, with $29.8 million in available cash. Having generated a significant amount of cash, above and beyond the capital requirements, and that's above and beyond the share repurchases, which is significant, executed to-date.

Possible fourth quarter uses of cash may include debt [ph] investments, above and beyond what have been announced today, the investment we made in the billing resources, which has already been announced and hereby announced in this press release, incremental share repurchase, and reinvestment into our operations, including people, process, products, and media, if we are comfortable with the associated profitability on those investments and the expected returns we can achieve.

Number three, we generated positive pro forma adjusted EBITDA during the third quarter of $1 million, $6.8 million for the nine months ended September 30th, that's almost a doubling over the comparable period of the prior year. We will generate pro forma adjusted EBITDA that is positive for Q4. We are committing to afore [ph], it will be positive.

As for revenues the company produced $30.8 million during the third quarter. The fourth quarter might be sequentially less than that, but as I previously mentioned, we're focusing our energies on higher marketing initiatives, the quality of those revenues over the quantity.

We are faced with dynamic and a challenging marketplace, and more importantly, we want the flexibility to make an investment for 2009 and beyond if we can identify those opportunities.

A perfect example, we may choose to invest in our mobile subscriber database, that costs money today, impacts operated margins today, but will promulgate appropriate returns and compounds into the future.

Regarding 2009, we're in the midst of our strategic planning, realigning our resources to service our clients, making an assessment of our product offerings, and the timing, which is probably the most important, of our new product launches.

For example, you just saw our investment in the billing resources, which is the alternative billing investment that Burton is going to get into. At this point we are not comfortable accessing the risks, and required returns, and as a result we are not prepared to make specific remarks about 2009.

Let me turn the call over to Burton. He will discuss our strategic operating and new product offerings.

Burton Katz

Thank you, Andrew. During the third quarter Atrinsic achieved a 23%, nine-month, pro forma top line, and a 97%, nine-month, bottom-line growth on a comparative year-over-year basis. In what is certainly a challenging business environment, the company was able to maintain profitability and produce cash flow during this period, net of investments we made in purchasing our new stock.

As Andrew previously noted, we ended the third quarter with almost $30 million in cash and marketable securities, and expect our Q4 operating activities to produce positive cash flow.

In the current quarter, we expect to maintain profitability on a slightly lower revenue base as we delay certain capital outlays and eliminate some commercial activities with lower associated gross profit margins.

Looking ahead to early 2009, we do anticipate continued headwinds from the macroeconomic environment, but believe our order book, our sales pipeline, refocused service offering, and key new product launches will lead to renewed sequential growth and a strengthened leadership position in the competitive market.

The past quarter-and-a-half has been a busy one for the company and I want to walk you through the key highlights, relevant updates, and the current business outlook. First, we moved to strengthen the leadership of the company represented in yesterday's announcement of our new board of directors which I will detail shortly.

We also amidst the current external environment, continue to make lucrative and appropriate investments in our organic business including new product launches, expanded billing capabilities, and development of our next generation technology platform.

Finally, we have repurchased a significant amount of common stock to-date under our $10 million authorized stock buyback program and continue to evaluate transformative business combinations on an ongoing basis. I will now take the time to address each of these mentioned points.

Yesterday, we announced significant changes to our Board of Directors. The post merger and the motion Traffix Board of Directors was intended to be transitional to oversee the integration of the two businesses. Now with the integration is nearing completion, the company is focused on developing the new Atrinsic, a leading internet and mobile content distribution network.

In doing so, we have enhanced our Board with strong experienced operators, digital content and media expertise at inside ownership. A new chairman for board, Jerome Chazen, former Founder and Chief Executive Officer of Liz Claiborne brings years of experience of a skilled entrepreneur and a public company operator who oversaw a myriad of global acquisitions. His background and experience will be invaluable to the company's next stage of growth.

Mark Dyne, a significant Atrinsic investor who was an early investor of Skype and he's a board member of Joost.com will join our board as a non-independent director. Mark brings a wealth of entrepreneurial and international experience to the company with a unique background in active content and digital product through services. His appointment demonstrates his commitment to the long-term prospects of our business.

Finally, the Board has appointed Jeffrey Schwartz and yes, a different Jeff Schwartz, Traffix's previous CEO, former CEO of Autobytel.com and VP of Corporate Alliance at the Disney as an independent Director. Jeffery's strong background in digital content and performance based marketing will be instrumental in supporting the build out of our business model.

Again, I believe the incoming board of directors reflects a diverse step of successful entrepreneurs, past public company operators, digital content experts, and equity ownership aligned with all of our shareholders. I look forward to working with all of the new members.

Within and subsequent to the third quarter, we continued to prudent investments to support the next phase of growth for this company. Over its formative years, Atrinsic invested heavily building a large scale domestic media and distribution network that generates nearly 25 million visitors per month, is acquiring approximately 20,000 new free user registrations each day and has over 80 million cell phone and e-mail records in its database.

The company is beginning to transition its investment focus for mostly distribution to vertical content categories and new products which will increase the lifetime value and associated gross profit of the impressions we serve each day. We are making strong progress in this area and with many accomplishments and future initiatives underway.

During the third quarter, we launched an enhanced casual game site where consumers can play online games and download games to their mobile phones. On this site, GatorArcade.com, consumers are encouraged to play for loyalty point redeemable for items that will help them lower their bills. The initial results of this product are quite promising.

In addition, we launched in partnership with Music Choice, a legal interactive music television network and innovative text to screen service where users are able to communicate via text and photo messaging from the cell phone directly to a live television. A further rollout of this service is planned for 2009.

There are also many products and content based initiatives underway that will be launched during the current fourth quarter of 2008 and the first quarter of 2009.

First, the long awaited Kazaa music service will be launched with our partner Brilliant Digital, delivering a full track music subscription service with associated mobile content. This service will be built to either consumers mobile or to a landline phone on a subscription basis and eventually delivers array peer-to-peer network.

Second, we finalized a partnership with a leading coupon distributor, where we will create and promote an online mobile gift certificate and coupon. We believe this membership rewards program will be attractive to a specific demographic particularly during the current economic climate, and phone based billing will provide a robust monetization vehicle.

Third, we will be re-launching Ringtone.com as an ad-supported content property loaded with user-generated content and community tools. We believe the strength of the Ringtone.com domain name coupled with our search engine optimization capabilities will enable the company to fuel the growth of this media property in terms of both audience size and content quality.

Fourth, we are launching the first phase of PlanningTown, an organically developed website. This site is a collection of editorial on major life events, providing consumers useful entertaining articles about the stuff that affects their daily lives.

The site provides online consumers ways to keep life simpler around finance decisions, personal family activities and their careers. This ad-supported content site, which will be both in Spanish and English, will be supported by relevant highly targeted advertising and a weekly newsletter called News Around Town.

Finally, over the next two quarters, we will be launching a bundle of products and initiatives where we can build on a recurring business model to a consumer's landline phone rather than their mobile phone only.

Our minority investment and a joint venture where we are one of the only three U.S. companies to own premium billing contracts context with fixed-line carriers gives us a strong position with these proprietary direct-to-consumer offers.

The contracts we are acquiring, which provide the ability to bill consumers for direct-to-consumer entertainment products like games, music or membership clubs through their home phone bills, typically take years and cause a million to obtain.

Access to these contracts gives Atrinsic a significant barrier-to-entry against competitors, while providing us the fastest, least expensive and low-risk ways to enter this market. With these assets, we will be able to further monetize our existing audience with limited additional investments, taking advantage of the fixed-line phone data we already capture from so many of our customers.

Just as important, we will broaden the demographics we can target, reaching customers we'd otherwise not be able to capture with new proprietary products and services. We plan to update you on the specific launch products over the coming two quarters during our next conference call, but expect them to contribute to reenergizing growth in our direct-to-consumer entertainment business.

Now, I would like to turn to our most relevant capital investments during the next six months. Over the past two and a half years, Atrinsic grew quickly through both organic means and business combination. Through this process, the company has built and inherited several technology platforms to support and operate its core operating business.

Recently, we began development on our second-generation Open Source technology platform that will give us a 360-degree view into all our content, media and distribution assets, making it easier and transparent for advertisers to work with us, to provide support of all types of performance-based media metrics and be more efficient in how we deploy our technology resources.

We expect the first phase of the platform to be operational and in production in early 2009 and serve as a catalyst to integrate our multiple-technology application into a common single framework. Doing so will not only enable the company to operate with faster speed to market, but do so while decreasing the ratio of technical resources when compared to sales and marketing personnel.

As I previously noted, the macroeconomic environment we are operating in poses challenges to our near-term business. Subsequently, we're focused first and foremost on maintaining EBITDA profitability and generating cash.

While increasing our cash position during the third quarter, we were able to strengthen our balance sheet, giving the company strong tool in operating its business through any future economic headwinds. Notwithstanding, we intend to use our capital to invest in organic growth, acquire external assets and businesses and from time to time in our own company's equity.

I believe we've demonstrated our ability to successfully deploy capital across all three of these areas, and we will continue to evaluate where we will achieve the best returns on future growth.

Most of my comments have described many of our organic investments we are making that preserve our mid-term cash position, help to find the company's future business and return it to sequential top line growth. Now, I want to turn the attention to prospective business combination, asset purchases and mergers and acquisitions.

The company has created a formidable customer acquisition and monetization platform here in the domestic U.S. market. We believe international distribution, owning proprietary online content and deploying innovative products and applications will allow us to scale our business while improving its operating margins.

We continue to actively seek commercial partnerships and business combinations that support the three aforementioned focal points, driving our analysis of the M&A market. The current business climate is creating unique opportunities to acquire valuable media properties as well as simply inexpensive valuations, and we will continue to review this.

As a final note, let me briefly discuss the stock repurchase program previously approved by our board of directors. As I mentioned on the last call, our Board continues to believe our current stock price is not reflective of ongoing business performance and growth prospects for a leading company within a growth sector.

To date, meaning common stock we've repurchased by the end of the third quarter and subsequent to it, during this fourth quarter, we have repurchased over 1.6 million shares of common stock, leaving the company with approximately 21.9 million common shares outstanding. We still have over $6 million available under the Board approved plan for additional repurchases, and we will continue to evaluate investing in the company's own equity on a go forward basis.

In summary, we believe the macroeconomic environment will remain challenging during the fourth quarter and into early 2009. While we have posted a 23% year-over-year growth in our nine-month pro forma revenue and 97% year-over-year in nine-month pro forma adjusted EBITDA, we assume a decline in our sequential growth. Subsequently, we have moved aggressively to reduce our fixed cost infrastructure, remain focus on our most profitable areas of business, generate positive EBITDA, and protect our balance sheet.

The digital media market we operate in, alongside our competitive position within it, offers a strong long-term opportunity. Even as current trends in the external environment create near-term challenges. During this period we continue to make prudent investments in areas of entries towards the company's sequential growth by the first quarter of 2009. We remain confident in doing so with the formidable franchise we have created.

I want to thank you for your time and attention this morning. And we now will be happy to answer any and all questions you may have. Operator?

Question-and-Answer Session

Operator

(Operator instructions) We have a question from Jim Renee [ph]. Please go ahead with your question.

Jim Renee

Thank you. Did I get the math right? I'm looking at almost $30 million in cash and marketable securities and 22 million shares of stock outstanding, so we're looking at over a $1 dollar in cash per share, is that correct?

Andrew Zaref

You're 100% correct, so let me just walk you through in detail, to make sure you got the math right.

Jim Renee

Okay.

Burton Katz

$29.8 million. Let's call it cash and marketable securities, which include all $8 million of the auction rate securities. As I mentioned, subsequent to the balance sheet date $4 million of that total $8 million has already converted to cash, and even though the remaining $4 million is down in your long-term assets on the balance sheet, we have not taken any reduction in value and we are confident that, yes, we are still getting our interest. It will ultimately convert to cash hopefully in short order. So, yes, you get the $29.8 million in cash. To just review for you, real quick, because there's a lot of numbers lets go to-date, so if you want to do it as of today, the company has repurchased almost 1.7 million shares. So, yes, you would need to deduct another $1 million of the $22.9 million that's sitting on the balance sheet. You get to just under the $22 million, which is really $21.9 million as of today. So, yes, you get than a $1, significantly more than a $1 in cash as of today. The only thing to be fair, just to warn you, you're comparing cash at September 30th, and shares as of November 14th, so there has been activity and working capital changes, we made incremental investments in the billing resource company that Burton referred to. So, yes, the cash balance is changing a little bit, but I will say, it is not material.

Jim Renee

Okay. Thank you.

Operator

The next question comes from David Bench [ph]. Please go ahead with your question.

David Bench

Hi, guys. Impressive in light of the economic conditions here. I want to ask you some questions and detail here. First of all, can you give a little bit more color in terms of gross margins, they are obviously down significantly, but where you see those gross margins going over the next couple of quarters? Also, you discussed a lot of the new initiatives. Can you quantify any of those new initiatives that you talked about, such as Music Choice and what kind of revenue that will represent over the next few quarters, Music Choice, and also of course, Kazaa and I think you have a few more in there as well? Thanks a lot.

Burton Katz

I'll start with a few comments. If you talked about gross profit margin, I believe it runs to about 31% for the quarter, it's 41% for the nine months. So, yes, the gross profit margin has sequentially decline within the nine-month period of time. As we've talked about though going into the fourth quarter, we have taken a very controlled and a very focused initiative to reconsider all of our relationships with customers, with vendors and all of the associated products, as you appreciate there is a somewhat disparate mix, some are on a transactional in our business-to-business product offerings, which is more of our network business, traditionally the Traffix business. That's more transactual in nature and can be effectuated on more of short-term basis, the mobile subscriber base is a little bit more of an LTV subscription based model so changing those models obviously takes a period of time.

When you look at the margins though comparatively relative to the prior year, unless you look at it on a pro forma basis, you're not nearly talking apples-to-apples. What I certainly can say, our initiatives are to preserving gross profit margin ensuring that we're focusing on the highest and best resources towards every dollar that leads to building. We want to generate the highest incremental return. We are certainly going through a process of selectivity of our resources to ensure that we're not expending any resource on anything that doesn't need sort of a minimum criteria.

Andrew Zaref

David, to address your question regarding can we quantify some of the new initiatives that are underway. I think we can bifurcate those into technology investments we make and product and monetization investments that we have made during the third quarter subsequent to it and we head into early 2009. While we don't breakout specifically what the impact both from a gross profit and more importantly or view it from a top line perspective will remain as we head into 2009. Let me adjust the principle of each one of the categories I just went here. Number one, it's technology – our investment in technology. What the whole principle there is, is that we can do more with less. We can do it faster with time of – in terms of time for revenue and actually time to market. So those are the principle there which all translates into an expanded gross profit margin on a sequential basis of where we are today.

Second to that, many of the new products we are launching such as you mentioned Kazaa, we are doing in a partnership program within a commercial framework that ensures we are profitable from day one on the application and with the marketing investments we make on it. So, to reflect what Andrew said before that even the product development and the commercial agreements that we are putting together investing in some of these new products take into account the ability to expand our gross profit straightaway from time zero rather than our traditional life time value model where we're expensing everything upfront and then getting the benefit of that on a compounded basis over the long-term.

Finally, the monetization investment we made and the ability now if you want to control what are the only three pillars in the contrary that I contrast with fixed line carriers will further monetize our existing demographic to give you an idea of all the invalid phone numbers we receive from customers who are trying to order our services; 20% to 30% of them actually are providing us a valid six points on number. So from my existing audience, I'll be able to further monetize them which will translate into higher gross profit margins as well as we believe products that are specifically built to be delivered on a direct to consumer basis and billed on a fixed line, you would know your home bill actually have a higher life time value in mobile subscribers. So, all of these things, whether it's investments we're making in technology, investments we're making in our products, or investments we're making in further monetizing our audience, all go toward expanding our gross profit margin on a sequential basis. That's what I am prepared to layout for you.

David Bench

Great. Just one follow-up. Can you describe a little bit about the share repurchases, you've been aggressive and want to see how aggressive you're going to be going forward, especially in light of the stock down all way here? Were you basically buying your own return?

Burton Katz

Look, the company has a $10 million authorized stock buyback program from its Board of Directors that is still in place. As you said – as Andrew stated to-date, we have bought back already 1.7 million shares which today will leave us with some where around 21.9 million common stock outstanding. During this period when macroeconomic challenges pose both risk and uncertainty to our quarterly operating results, we'll continue to use our balance sheet prudently. I would say we'll evaluate capital investments to restore top line organic growth on a sequential basis first and far most, but we will continue to evaluate the repurchase of our own equity as a property proceeds – as a proper use of our cash. We've obviously committed to doing so. We have demonstrated that we have the wherewithal energy to do so and we still have it in place and from time-to-time we will make those investments.

David Bench

Thanks guys, I appreciate it.

Operator

The next question comes from Andy Horwick [ph]. Please go ahead.

Andy Horwick

Hi. First I want to commend you on the cash generation I think that's, probably the most impressive thing in this environment that we are seeing. What I would like to understand better here actually is you're selling actually a little bit low cash, if you do direct intake and I think Andrew you would agree with me on that. And my question is from your perspective, we know what Traffix is bought for with stock and obviously that's proving to be a very good acquisition from a cash perspective. I am wondering, what is the rest of the business worth, because clearly your stock is not reflecting that value, it's only reflecting cash and even negative cash. So, what in your opinion is the value of the other assets of this business and especially now in this environment where many of your competitors are not as financially fit to weather the storm?

Burton Katz

As you mentioned, a lot of different things in there. It is true that our focus and I think a lot of attending this conference call was we got ahead of the curve and have seen what was going on and why to really protect our balance sheet and the investments we make. And you think in a little bit more of a prudent fashion. But I think we got ahead of things a little bit earlier than many of our competitors. It is also true particularly on the private side that there are a lot of people on the mobile content space as well as the internet media space that are having problems in terms of financing their businesses and are starting to make certain cuts, et cetera. And it is also true that we are trading at not much above our cash.

So, you do the numbers whether it is at the end of the Q3 or you actually skew the subsequent event. Either way, we are obviously not at the enterprise value. It's not reflective of the current business performance, and more importantly, the future growth outlook of the company. What I will say to you is that if you look at all the assets we have, the replacement value alone I believe would be somewhere near $150 million to just try to get to where we are today. So, that would be the gap what I think our assets are today and versus the gap of what is actually our enterprise value in reality in the open market. But again, I think the other thing I could say is it would take about $150 million to replicate the infrastructure that we have built today and that we are currently operating.

Andy Horwick

Okay. How much cash do you need to operate the business? In other words, how much of this is excess on the balance sheet and how much is it to give you a comfortable cushion to weather the storm?

Andrew Zaref

We did ultimately generate positive cash flow. If you look at the statements of cash flow on a GAAP basis, I mean that to me is the ultimate indicator of the fact that over a period time, this will generate positive cash flow. We do have a chargeable launching. On any day, you could have swings of a couple of million bucks, as you have seen over the past couple of quarters. Particularly as it relates to the mix of our businesses in the mobile subscriber or even the online subscriber type initiatives, you have to spend money upfront in order to lend a subscriber who is going to generate incremental margin in each period they stay after that it all just holds to the bottom-line, as opposed to some of our more transactional businesses where it's a more immediate turn where you have to pay for something at value and then you get paid quickly. So far, over a period of time, which I think is not all that long, you've been able to generate positive cash flow. So, when Burton talks about some of the products and talks about, for example, Kazaa or any one of the products that Burton mentioned, well, I have labor costs, I have some incremental volume-based technology costs. But overall, those are variable costs that we think we've been able to manage, preserve margin, and they don't require a lot of capital investment.

Andy Horwick

Okay. But I still didn't get an answer. In other words, to run this business for the next year, how much cash would you need to run this business for the next year and how much of it is excess?

Andrew Zaref

I think I am very comfortable with the $25 million that we have set. I am very comfortable – well, I am not looking for more. Whatever I deploy it whether I buy something or build something the $25 million I have today, which is the $29 million minus a couple of million for investments in incremental share repurchase, that's what I'm uncomfortable.

Andy Horwick

Okay.

Operator

The next question comes from Mr. Larry Cheng [ph]. Please go ahead.

Larry Cheng

I have a few questions on nature of your subscription revenue. What is the percent of your revenue right now from numerous subscription services and how many AOL [ph] subscribers do you have and how does that compare with time and how do you think about renewal or return of those subscribers?

Andrew Zaref

The SKU is about 50-50 as far as the mix goes. At the moment, it's about 750,000 subscribers. So, the way we think about the business, well, we are a little bit different than some of the other lead gen type companies out there. In that, we are very precisely controlling the mix of highly procured media. We, unlike many others, have the choice of creating leads from our own content and our own product offerings. We don't just buy them, turn around and create a subscriber. So, that is important to understand from a mix perspective. At the same time, we turn around the distribution side, and we control in many ways how many of those leads we choose to monetize on a subscription basis relative to the immediate demand of our advertisers, who are willing to pay for those leads on a transactional basis. So yes, the number of subscribers, we always want that number to be more, but in our view, if I add a subscriber I'm sacrificing an immediate dollar that I could otherwise get from an advertiser, and if I choose to not add a subscriber, its because I think I could sell that lead to an advertiser on a more immediate basis. We're constantly trying to maximize that mix over the long-term.

Larry Cheng

And how do you have the renewal rate of those subscribers or churn rate.

Andrew Zaref

We don't break those out specifically for competitive purposes.

Larry Cheng

Okay. What is the organic, apples-to-apples growth rate between the network services and the entertainment services?

Andrew Zaref

Well on a pro forma basis or an as reported basis?

Larry Cheng

Pro forma?

Andrew Zaref

I only do consolidated pro forma. I think offline I could go and try to compute that for you. I mean we don't look at that, so I don't have that handy. If you really wanted to look at it on an as reported basis, you could see the apples-to-apples, you will see that both numbers are showing growth, more than double-digit, compounding to a significant growth number on an as reported basis.

Larry Cheng

Okay. And then my final question is, it looks like you added about $4.6 million in cash from the June 30th, balance sheet. Am I reading that right and does that carry from operations or is there something else going on there?

Andrew Zaref

We did not borrow anything, and we did not issue any securities, but a minimum amount, in fact we net repurchased, remember that $4 million incremental cash is after buying back more stock in the quarter.

Larry Cheng

So that's all from operations. Okay. Thank you.

Andrew Zaref

Correct.

Operator

The next question comes from Bill Solomon [ph]. Please go ahead.

Bill Solomon

Good morning just two questions, one, what is company doing for new initiatives to increase our audience and subscribers? And the second part, I would you like to outline your financial PR plans for the next quarter to help tell the world that this company is tremendously undervalued and do you plan some road shows to let the investor public know about this great company and this opportunities?

Burton Katz

I'll answer the first part of question, and let Andrew answer the latter. On the distribution and media side, so that we can increase our audience, remember we have two types of distribution, one is our own media where, we own a network of web properties that generate somewhere around nearly (inaudible) visitors combined. And we also have our own third party distribution in the form of search marketing that we do on the major search engines, as well as an affiliate network that has somewhere around 9,000 to 10,000 independent web publishers in it. Our focus is again on gross profit. And where we get the best gross profit is with our own media. So that is where the majority of focus is right now. Many of the initiatives I laid out for you were content focused initiatives, and content means our wholly owned contents.

So the real focus for us, yes with third party distribution we continue to invest there, but on the content side, is really where the majority of our focus is in terms of buying media, developing more content sites, and driving traffic and larger audiences to that media. In addition to that, 2009 will be a year where we really even intend to take the business global. And from that perspective we believe there is a major opportunity to gain efficiencies and economies of scale, and doing what we do today online, and bringing that to international markets.

Third are the technology investments we are making. Our new technologies platforms will allow us to buy media at a higher margin and in a more efficient manner, to drive, to allow us to spend more and drive larger audiences. So a combination on focusing on more on content and on our own media, with international distribution, and a technology that enables and supports the ability to buy media more effectively. It will all contribute to increasing our audience, both in the fourth quarter, and more importantly, in 2009.

Andrew Zaref

And just to address your comments of IR, I hope we demonstrated that we have lot of initiatives going on in the company, which is taking the time and the attention of everybody, including Burton and myself. And we philosophically believe that we need actual positive operating performance metrics of products, plus initiatives, to talk about, our investor relations they make it as most substinate in as possible. That being said, as we approach the holiday season, with the markets being particularly volatile, and the audience that we typically are talking to not particularly receptive, to take meetings, we're a little bit tempered here in the fourth quarter, considering where the world is and where we are. And what we're saying publicly, we are going to be very transparent and provide as much information as possible, but as far as road shows and conferences, I don't think we have a lot of available opportunities between now and let's say Christmas. But I certainly think that you will see Burton and I on the road, and I think sort of conference season really starts later in January. February, you will certainly see us out there and more active meeting with people and obviously we all have our fingers crossed that particularly in the small cap world there are a lot of deceptive ears wiling to listening to our story.

Bill Solomon

Thank you.

Operator

Your next question comes from Pea Sload [ph]. Please go ahead.

Pea Sload

Hi, good morning. Can you guys hear me okay?

Andrew Zaref

Yes.

Pea Sload

Great. Thanks for taking the call. First, I just had two questions. The first one is specifically relating to accounts receivables. Can you just give us an idea of the types of accounts that are on there; big companies, small companies that kind of thing?

Andrew Zaref

That's really, really goes to Spectrum. In our network business advertisers could be small despair, wide spread more of a short-term type of approach. But we certainly do have a population depending on the service offering of significantly large and sizable advertisers that I would consider to be, well, in today's world I haven't seen a fortune list, so I don't know but I want to quote. You would think of them as a Fortune 500ish, maybe even Fortune 100ish type company or two that are in our portfolio. Remember on the mobile side of our business, our cash ultimately comes through a carrier which may go through an aggregator which ultimately gets to our bank account, but those are all sizable company with a shared interest and I think the collection risk is – it's a lot of people and a lot of different ways with pretty sizable companies and the risk there we think is pretty minimal.

Pea Sload

So, I mean you have little more than 20 million, can you give me an idea of what of that 20 million, may be what percentage is coming from the "Fortune 400", the big guys that aren't going default on you.

Andrew Zaref

I'd sort of rather not do that. On any given day, I can tell you that changes a lot, right? Because if I had to get one big casket swings all over the place.

Pea Sload

Okay. Let me ask you this question –

Andrew Zaref

I can't break that out.

Pea Sload

Okay. Fine, let me ask you this question. How do you feel about your account receivables to-date in terms of your collection? Are you satisfied with the rate at which you've been collecting them and do you see any problems in that going forward?

Andrew Zaref

Being CFO and being the one who extends credit, I can tell you it watched a lot. I think the net results which you can see, if you focus on the Sub D [ph] series of balance sheet in a sequential basis, you are seeing a $1.8 million-ish allowance for doubtful accounts. I can tell you, I am 100% comfortable that the net realizable value of that balance is reflective of that. I think you are seeing the DSO is actually down. So, we are very focused on that and listen I got a balance, right? On one hand I don't want to expose this company to any unnecessary risk but right in today's world I got to do it, I got do it not stride for growth.

Pea Sload

Okay, great, thanks. So my other question back to kind of we're trying to be in here which is the cash value relative to the stock price. First, I do want to say that there are many small cap stocks that right now are trading at cash value or even below cash value. So while it does hurt while it is awful to see, people are going to sell it, people think that your company is not worse and then you don't let them. We'll buy it and you are buying your stock obviously you guys are confident in it.

But I just did want to ask you, have you guys at all talked about the possibility with tender offer? I believe right now when you are buying shares in the open market, I think there is a cap of I think it can only be 25% of volume, the daily volume things like that. How are you going to discuss the tender offer if per se your stock got especially they got below low cash value because at that point in time it's in actual arbitrage? Your stock went to a buck, you should be buying your stock all day because it's a natural arbitrage and it's a guarantee added shareholder value regardless of economic conditions.

Burton Katz

Yes, a couple of comments. I guess first, thank you for the commentary. And the stock we agree, that's why we are buying back stock as well, so we feel the same way you do. As far as the crosschecks we undergo to execute on our share repurchase activities, so far let me just correct in one statement you said, our share buyback activities had not been on the open market for precisely the reason that you talked about. They have I think all been practically negotiated transaction which I got to tell you, Burton and I are using the most effective and efficient way to hold these and that's not necessarily our preference. So, yes, we have contemplated a tender offer. I think the reason why we had not actually executed a tender offer, because at the moment, and rightly or wrongly, we and the board, we have not set forth a specific price that we are willing to pay. It's been way too volatile, so we didn't – and I'm sure we could deal with that executionally but so far there has been no formal price, and there has been no formal projection of quantity that we would be willing to buy. It's been monitored by us in constant communication with the Board on a more short-term basis. We are considering a tender offer to perhaps effectuate this in a more formal sort of a way.

Pea Sload

One thing I would say considering the stock has declined so quickly; in these markets sometimes people are forced to sell stock as you know, and they don't have a choice in the matter, so they don't care what your cash value is, they need to sell. The one thing I would suggest is, I think you guys legally could also go out there and tender for a bunch of stock at $0.99 and if someone wants to sell it to you, great. It's a straight arbitrage. If you don't get billed on that buy, so what, but if you at least provide the opportunity for some desperate shareholders to get out of your stock, get a buck, so be it, that's great, right?

Andrew Zaref

We are just contemplating whether we want to be so public about that right.

Burton Katz

It's a fair point and well taken.

Pea Sload

Okay. That's I want to say. That's all guys. I appreciate it.

Operator

We have a second question from Andy Horwick [ph]. Please go ahead.

Andy Horwick

Hi. I was hoping that you could talk about this investments you made, what does it mean for you, how much money you put into it and what the potential returns of the investments would be?

Burton Katz

The investments that we've made, beyond stock repurchases, really focus on the billing resource, joint venture where we took a 36% minority interest in, as well as some technology platforms that we will launch in 2009. I will say that the investment around the technology platforms is a number, but it is nowhere near seven digits. Focusing on the billing resource, we invested $2.2 million subsequent to the third quarter. We will also invest $1 million of working capital over 12 to 15 months period in the billing resource, probably about $0.5 million of that we would estimate would occur during the fourth quarter. So if you add up the technology investments and the billing resource investments, we are talking somewhere around $3 million in the fourth quarter.

With that said, in our negotiations with our majority partners in the joint venture, buying the billing resource asset out of the bankruptcy court. There were certain reserves that were in the company or were associated with these assets. Our share of those reserves, that are guaranteed by the local exchange carriers i.e. Verizon, West, AT&T and so forth, it's somewhere around $2.4 million. We will actually receive a return on those investments over 12 to 18-month period from the signature date of the billing resource investment which would somewhere just after the third quarter ended.

Andy Horwick

So, essentially the release of money will overwrite whatever investment you are making essentially. So, it's really – you are actually making money net of investment of this.

Andrew Zaref

That is exactly what we expect. Yes.

Burton Katz

We're looking to double the money at least.

Andy Horwick

That's very nice. And there is no risk essentially?

Burton Katz

There's risk in running the business everyday but basically on our…

Andy Horwick

Yes, but okay.

Burton Katz

When we spend the money, we want we at least double it.

Andy Horwick

Okay. Just final question here is for Burt; maybe you could just talk because, I really am curios. Obviously, this is a rough time for everybody out there in terms of markets, but essentially let's get through this full period, where were you guys be on a competitive landscape. Are you going to see a lot of competition go out, are you seeing a lot of competitors go away right now or is this something down to road and as you emerge from this problem, from the economic problems out there. Where will your market shares stand?

Burton Katz

Yes, around here we're certainly happy about the stock price, what we certainly wish the economic environment allowed us to do things at a faster pace and at a higher growth rate. We believe that 2009 is going to be a really fine year for this company. There are many competitors out there that are having exceptional challenges. Many of the same challenges we have, only in that they don't have the financial resources, nor are many of them profitable to get through this time period effectively. I would tell you that when New Motion, NWMO, did a PIPE transaction to initially finance the business, which closed in February of 2007. The PowerPoint that I used went on the road in New York raising the money, showed about 15 competitors on a perceptual amount. About 10 of them either don't exist or aren't even on my radar screen as competitors anymore. That gives you a kind of idea of where we are today. We believe this is an opportunity not only organically for us to capture market share, but also to those principles I laid out, mobile distribution, innovative mobile products and applications, and most importantly, online content. There are many valuable assets out there that we believe over the course of 2009 we will be able to acquire or combine with at relatively inexpensive valuation. We still feel good about our competitive opportunity as we're headed forward.

Andy Horwick

Okay. I guess the only thing you have to watch out now is someone buying you.

Andrew Zaref

If the price is right, it's not a worry. In this market based on certain shareholder and cash structure we have, I believe that if somebody thought that they could acquire the company at a 50% or a 100% trading to a $1.35 or a $1.40; it may be difficult to do. Having said that, if someone comes and the price is right, we're focused every day on building this business and building a competitive leadership opportunity moving forward.

Andy Horwick

All right. Thanks, guys, very, very good job. Really it gives me, I guess, an excellent cushion; excellent job on the cash. Thank you.

Burton Katz

I appreciate that. Thank you.

Operator

We now have a second question from Mr. David Bench. Please go ahead, sir. Mr. Bench, your line is open.

David Bench

Sorry, my questions have been answered. Thank you.

Burton Katz

Operator, I think we have time for one more question, if there is one.

Operator

No, I think we have no further audio questions.

Burton Katz

This does conclude our quarterly conference call for the third quarter. We appreciate the well attendance and all of your time on this early morning. Thank you very much.

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