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SupportSoft Inc. (NASDAQ:SPRT)

Q3 2008 Earnings Call Transcript

October 29, 2008 4:30 pm ET

Executives

Anne-Marie Eileraas – VP and General Counsel

Shelly Schaffer – CFO and EVP of Finance

Josh Pickus – President and CEO

Analysts

Jon Maietta – Needham & Company

Dan Rice [ph] – Northern Securities [ph]

Gregg Speicher – Moss Creek Capital

Stephen Silk – C. Silk & Sons

Ted Ketterer – TK Associates

Jim Kennedy – Marathon Capital Management

Operator

Good day, ladies and gentlemen, and welcome to your third quarter 2008 SupportSoft earnings conference call. My name is Francine and I will be your coordinator for today. (Operator instructions) I would now like to turn the presentation over to your host for today’s conference, Ms. Anne-Marie Eileraas.

Anne-Marie Eileraas

Thank you, Francine. Good afternoon. This is Anne-Marie Eileraas, General Counsel of SupportSoft. Joining me here in Redwood City are Josh Pickus, our Chief Executive Officer; and Shelly Schaffer, our Chief Financial Officer.

Before we begin, I’d like to remind everyone that our remarks today will include forward-looking statements about our financial results and other matters. There are a number of risks and uncertainties that could cause our actual results to differ materially from expectations.

These risks are detailed in today’s press release and the reports we’ve filed with the SEC, all of which can be found through the investor relations page of our website. I would also like to point out that we will present certain non-GAAP information on this call. The reconciliation of GAAP to non-GAAP financial measures is included with today’s press release and is available on our investor relations web page. The statements we’ll make in this conference call are based on information we know as of today and we assume no obligation to update any of those statements.

With that, I’ll turn it over to Shelly.

Shelly Schaffer

Thanks, Anne-Marie. I’m going to cover our financial highlights and then turn it over to Josh, for additional comments regarding our business progress, as well as guidance.

Revenue of $12.8 million exceeded our guidance, driven by substantial growth in our consumer segment. Non-GAAP loss per share of $0.07 was smaller than expected, driven primarily by strong growth in consumer revenue, coupled with spending discipline.

Cash usage of $2.6 million was down significantly, with strong collections in both enterprise and consumer. In the enterprise segment, revenue of $10.7 million was consistent with the prior quarter. All revenue lines, license, maintenance and service revenue, were in line with the second quarter.

Q3 marks the third consecutive quarter of non-GAAP profitability for our enterprise segment. In our consumer segment, revenue of $2.1 million represents an increase of 137% as compared to Q2. The majority of our consumer revenue was driven by our major partners and we continue to expect that partnerships will deliver most of the consumer revenue for the year.

As expected, we had higher costs in Q3 associated with the hiring of new agents to serve our existing and pilot programs. While consumer gross margin remained negative, it did improve meaningfully over the prior quarter, as substantial revenue growth covered a greater percentage of our investment.

Looking into the fourth quarter, we anticipate higher cost of consumer revenue as we carry the full quarter cost of the agents we added in Q3 and add incremental heads to support our existing and planned programs.

In addition, given the startup phases of several pilots and the timing of partnership rollouts, we expect the cost and operating margin performance of the consumer segment to likely fluctuate significantly on a quarter-to-quarter basis.

Our operating expense lines, sales and marketing, research and development, and G&A, were all consistent with the prior quarter. We are making certain targeted investments which may increase OpEx in Q4.

Finishing the statement of operations, other income and expenses for the quarter was $158,000, down from $721,000 in the second quarter. This decrease has three separate components.

Interest income in Q3 of $479,000 was down from Q2, reflecting lower yield due to a shift to treasury securities. This income was offset by approximately $248,000 in exchange rate fluctuations and approximately $73,000 real live losses stemming from the early Q3 sales of securities issued by government-sponsored enterprises.

As we look into the fourth quarter, due to the current interest rate environment and our focus on capital preservation and liquidity, we expect other income in the range of $300,000 to $350,000.

Turning to the balance sheet, we ended the quarter with cash and investment balance of $98.3 million compared to $100.9 million at the end of June 30, 2008. The change in cash and investments reflects approximately $1.7 million used for operations and $853,000 of incremental unrealized loss for auction rate securities.

Q3 DSOs improved to 57 days as compared to 74 days in the prior quarter and 67 days in Q3 of 2007. Accounts receivable decreased by approximately $1.4 million sequentially. We continue to focus on our collection efforts and we are pleased with our progress in the third quarter.

The third quarter revenue decreased from $8.9 million at June 30 to $8.7 million at September 30, consistent with our historical experience. We continue to expect deferred revenue to be at the highest at year end due to the seasonal nature of our maintenance renewals.

As a final note, I’d like to give you an update regarding our auction rate securities. At September 30, we held a par value of $24.6 million in auction rate securities. Of this amount, 85% or $20.9 million is held with UBS.

In October, we received a rights offer from UBS, which will allow us to sell our auction rate securities back to UBS at par beginning in mid 2010. In addition, prior to June 30, 2010, SupportSoft also has the option to receive a no cost loan from UBS up to the par value of the securities covered by this rights offering.

We are very pleased with this development, as it offers a definitive liquidity solution for us and we are currently reviewing the terms of this offer prior to acceptance.

Now, I’d like to turn the call over to Josh.

Josh Pickus

Thanks, Shelly. I’m going to provide color on our business during Q3, perspective on the macro environment, and guidance for Q4.

Starting with Q3, we had a strong quarter across the business. In our enterprise unit, the results were consistent with the first two quarters of the year. We completed a number of transactions with existing customers. In addition to expanding usage at these customers, we added an important new customer in the outsourcing arena. The customer is Wipro, one of the largest Indian outsourcers.

Wipro joins a substantial number of North American firms, including CGI, CSC, EDS and Lockheed Martin IT, who rely on our software to meet cost and quality commitments for desktop support. As you know, Wipro and the other Indian outsourcers play a substantial role worldwide and we are pleased to have broken in to the Indian outsourcing community.

Services activity was consistent with the first half of the year and included projects for a large number of customers, such as Dell, EDS, KPMG, AT&T, Time Warner Cable, Carphone Warehouse, and TeliaSonera.

While we are pleased with our enterprise performance in Q3, we foresee a very difficult environment for enterprise technology spending in 2009. In preparation for this environment, we are doing two things.

First, we are looking hard at every element of the costs in our enterprise unit to make sure our spending is appropriate for the environment we expect in 2009. Second, we are bringing to market products tailored for tight IT spending environments. This product strategy starts with the installed base, which is especially critical during economic downturns. For these customers, we are adding new capabilities that leverage their existing investment in our solutions.

The key product in this area will be the dynamic agent, which builds on the desktop software agent our customers have deployed to more than 50 million users worldwide. In its new incarnation, the agent will allow customers to offer content that is targeted and personalized for specific users based on diagnostic information gleaned from their computers.

When combined with new e-commerce functionality, the dynamic agent will transform a pure support platform into one capable of revenue generation. As an example, the dynamic agent could detect the absence of antivirus protection on a machine, alert the user to the risk of infection, and enable the purchase and download of antivirus software. Discussions with customers indicate substantial interest in these expanded capabilities.

To win new customers in a time of tight IT budgets, we need to offer products that are easier to trial and deploy. Our first offering of this type will be remote control software delivered in a hosted software-as-a-service model.

Remote control software enables one computer user to control another’s machine. It is used heavily in technical support and remote infrastructure management. According to IDC, the remote control software market is over one billion worldwide and growing.

We have had remote control in our product portfolio for some time, but the new product, which will be available in 2009, has been redesigned for SAS delivery and will be offered on a standalone basis rather than as part of a larger suite. Our hope is that these changes will make it easier for new customers to do business with us, even when their spending is constrained.

Turning to consumer, revenue grew 137% sequentially to $2.1 million. From an operational perspective, we continued rollouts of existing programs, launched new programs announced last quarter, and established an additional partner relationship.

Starting with existing programs, we completed the national rollout of Office Depot and are now in 1,275 stores. In our Q2 call, we indicated that the full rollout would be complete by the end of the year, but the store deployments proceeded faster than expected and we are now in all of Office Depot’s North American stores.

In the OD program, we currently offer three types of services – attached services, primarily software installation in connection with new PC sales, diagnosis and repair services, including removal of viruses and resolution of other computer problems, and setup services for wireless networks, digital cameras and the like.

Since our last call in Q3, the rate at which services are attached to new PC sales has climbed, largely because more regions are achieving their targets. In addition, sales of diagnosis and repair services have grown substantially. We suspect this growth is due, in part, to promotions run by Office Depot and, in part, to the consumers’ need to keep existing computers running.

In the past, we have hypothesized that difficult economic times would drive increased diagnosis and repair services, as people sought to extend the useful life of their machines, and we believe we are now seeing that play out. Looking at the program overall, in Q3, we benefited from increased store counts, improved attach rates, and increased diagnosis and repair sales.

In Q4, our key goal is to effectively manage the increasing service delivery volumes. Looking forward to 2009, we are gearing up for launches of OD.com and international sites and preparing to introduce new service offerings.

In our Q2 call, you will recall that we announced relationships with two additional retailers, one in the U.S and one in Europe. Pilots for both of these retailers are now in the market.

The European retailer began offering our services in September as part of a broad new technology services initiative. The U.S. retailer began offering our services in October as part of an expanded technology services program.

We are pleased to have gotten these pilots off the ground quickly and believe that each represents a major opportunity for us, given the size of these firms and the attention they are giving the pilots.

However, given the limited number of stores, the time necessary to ramp major retail programs, and the unexpected challenges we could encounter with new partners, our near term expectations remain modest.

In addition to retailers, I have previously identified a number of other potential channels for our premium technology services, including broadband providers, antivirus companies, and PC OEMs.

I am pleased that we have established a relationship with one of the five largest antivirus providers in the world. In this relationship, we are embedded in the partner’s overall support flow and will offer premium support to the partner’s entire user base. This is a new type of program for us and it may take some time to ramp, but we are delighted with the program design.

From an operations perspective, we now have over 200 work-from-home agents. We have expanded the agent pool rapidly to meet the demands of the OD rollout and the various pilots we are conducting, and we expect continuing growth in the fourth quarter. Improving the efficiency of this workforce is a key operational focus for us, but must be balanced against the rapid scaling required to support a continuing stream of new partnerships.

We are not certain yet what effect the economic downturn will have on our consumer unit. From a partner perspective, rollouts, pilot launches and pipeline development continue to proceed rapidly. Even more importantly, we have not seen any degradation in our daily sales this month, even with the significant deterioration in the macro environment.

These things provide early evidence that the business may hold up well in a down economy, but our dataset is too limited to venture any firm conclusions at this point. While maintaining our overall investment plan, we are scrutinizing our consumer unit costs to make sure every dollar is prudently spent.

Turning to guidance, our best estimate for the business in Q4 is that enterprise will be fairly consistent with the first three quarters of the year, while consumer will grow. Given the uncertainty in the macro environment, however, we are providing a broad guidance range that incorporates the possibility that enterprise spending contracts further at the end of the year. In all scenarios, we expect consumer revenue to grow in Q4.

Taking all of this into account, we expect revenue of $11.8 million to $13.4 million and a non-GAAP net loss of $0.11 to $0.14 per share for the fourth quarter.

With that, I’ll open it up for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Jon Maietta of Needham & Company. Please proceed.

Jon Maietta – Needham & Company

Josh, the first question I had was with regard to the Office Depot rollout, and may be too early, but how much does Office Depot’s store performance, sales performance in each store? How strongly does that correlate to what you’re seeing with Tech Depot, or do you not just have enough data points at this point?

Josh Pickus

I don’t have a lot of insights to the correlation between overall sales per store and Tech Depot services performance. What I do know is that across the chain, as OD indicated in their call earlier this morning, the Tech Depot services is a very real bright spot and for that reason, it’s getting a lot of attention and we’re very encouraged by that.

Jon Maietta – Needham & Company

Got it, okay and then in their call this morning, they also mentioned rolling out Tech Depot to Europe. I think it was France and Germany. How could that potentially impact you as you move into 2009?

Josh Pickus

We think that will add to the opportunity for Office Depot. We are going to do the international piece with them. We were hoping to do that on the last call and since then that’s firmed up. Exactly what countries they go into when is still a bit under discussion within OD and the other thing to note is much of what they do internationally they do through online sales.

In fact, when they talk about Tech Depot for Europe, they’re often talking about an online presence they have that’s been very effective for them. So we do expect to do that. We’re very excited about the way in which that can expand the opportunity and we expect it to begin to become present in the beginning of ‘09, but not in Q4 of this year.

Jon Maietta – Needham & Company

Got you, okay; and just the last question Josh, on the enterprise side; what are you seeing there in terms of demand from the DSP community?

Josh Pickus

The DSP community so far, appears to be taking very hard looks at all their spending, but in the end, going on and proceeding with purchases that you would have expected them to make. It’s a funny quarter to give guidance in, because so far in the quarter, things have been fairly encouraging and things are moving in the way I would hope they would.

You just don’t know whether that will change if there’s more bad economic news going on. So, I guess the way I’d summarize it, Jon, would be to say so far, so good, but it’s such a volatile macro environment that, from a guidance perspective, you need to be more cautious to incorporate that possibility.

Jon Maietta – Needham & Company

I think that makes sense, okay. Thanks very much, Josh.

Operator

Our next question comes from the line of Dan Rice [ph] from Northern Securities [ph]. Please proceed.

Dan Rice – Northern Securities

Good afternoon. Just regarding the enterprise business in Q4 and, I guess, the current macro environment, did you see any trouble closing license deals towards the end of the quarter and obviously changing the current spending patterns?

Josh Pickus

We did not see a problem at the end of Q4 and we have not seen a problem so far in Q4. As I’ve said, it’s anyone’s guess whether that will continue to be the case and that’s why we’re giving the unusually broad guidance range, but so far, what we’re experiencing is that even with very, very large firms, purchases are getting scrutinized at an unusual level of detail.

But so far, the trigger is getting pulled as we would have forecast that it would.

Dan Rice – Northern Securities

Okay, just another question regarding the Office Depot roll-out progress. I guess what I mean is how should we view consumer revenue of $2.1 million this quarter versus a full quarter of 1,200 stores being up and running?

Josh Pickus

I think that you will see an increase in Q4, because you will have a full quarter of those stores up and running rather than a quarter in which they were ramping and you will see the productivity gains, that there is a ramp period for any store and you’ll have those stores going through that ramp cycle that is fairly well understood.

And then the final point would be because of the excellent focus that OD is giving this project, the attention that the stores are feeling is very real and I’m hopeful that that will continue to drive revenues from that program up.

Dan Rice – Northern Securities

Okay, great, one last question. What is the timing of, I guess, potential of – to consumer pilot programs and what has the feedback been from those pilots?

Josh Pickus

So far, I guess the first point I would make is its early, right? We launched one this month and one the month before. So anything I say has got to be qualified by “I have a limited dataset.”

Beyond that, what I’d say is I’m very encouraged in different ways by the two programs. In the US one, as I noted, we’re fitting into an existing services program. We’re just adding the remote capability, and that suggests to me that the time for that to actually work may be shorter than it was with OD, where we had to really view a whole new program. So I’m encouraged by that, but it’s too early to say.

In Europe, the stores are different in the sense that they are very large and they’re more of a cash-and-carry environment, less of an assisted sale environment, and that’s a new dynamic that we’re working through, but we’ve taken some steps to make it work and we’re really encouraged by, just over the last couple of weeks, the way in which the performance is responding to that.

Overall, I guess what I’d say is that both of the retailers view these initiatives as very important and as things that they plan to do, notwithstanding the economic downturn, and I think in getting these programs to be successful, that level of support is very important.

Now, in terms of rollouts, and when that might actually happen, I think it’s too soon to speculate. I think that in Q1, we’ll get some data about that is my best guess, but before then; I think we’re just in the process of making these pilots as successful as we can.

Dan Rice – Northern Securities

Okay, thanks. That’s helpful.

Operator

Our next question comes from the line of Gregg Speicher from Moss Creek. Please proceed.

Gregg Speicher – Moss Creek Capital

Hey, guys. I wanted to ask about the average price on the diagnosis and repair versus kind of the when they buy the PC in the store and you do the downloading and install and all that good stuff, is there a big price difference so far?

Josh Pickus

Yes. Diagnosis and repair services are meaningfully more expensive than the attached services. They also take longer to perform, but from a revenue perspective, those are higher and, as I mentioned, one of the really interesting developments that we saw at the end of Q3 and even more so in October is that the sales of those kinds of services have accelerated dramatically.

Gregg Speicher – Moss Creek Capital

Well, that’s good to hear. So if PC growth slows down dramatically, you’d think you’re somewhat protected because people, obviously, will spend more possibly?

Josh Pickus

Well, as I noted, one of our theories about this business has been just that, that if PCs are selling well, you’re going to have a lot of good attach and if PCs are selling less well, you may get good attach rates, but the overall numbers are going to come down, but that’s likely to be counterbalanced by people needing more assistance keeping their existing machines running.

So far in October, that is very, very much the way it’s playing out. It’s early enough days and there’s been an important OD promotion running that I can’t be definitive, but that sure is the way it looks right now.

Gregg Speicher – Moss Creek Capital

Okay. That’s good to hear and how did the OD rollout proceed faster than you thought? Was it just that the training was quicker or Office Depot put a huge push on to get it done? How did that happen?

Josh Pickus

Well, to be fair, it proceeded faster than we thought it would. OD had been very clear in their last call that they were going to get it all the way done, and we tend to take whatever forecast they have and discount them a little bit, just out of conservatism.

They did exactly what they said they were going to do, which is roll it in Q3 and I think that is a function of the fact that in a difficult retail environment, this is incremental revenue, attractive margin business that they’re trying to grow rapidly.

Gregg Speicher – Moss Creek Capital

Okay, great. Thanks a lot.

Operator

Our next caller comes from the line of Stephen Silk of C. Silk & Sons. Please proceed.

Stephen Silk – C. Silk & Sons

Good afternoon, everybody. My questions are kind of slicing up the same questions that have been asked on ODP. So, on their call this morning, they said that they were very pleased with all the rollouts and the results that they are getting.

If you were to walk into an Office Depot and go to where the Tech Depot service is, is everything there what SupportSoft offers or is it there are a wide variety of services that are parts of SupportSoft and supports others so that when they say they’re happy with it, they’re saying that they’re happy with SupportSoft or they’re just happy with the whole concept?

Josh Pickus

Well, Tech Depot, broadly speaking, in the United States, refers to a big section of a store that’s related to technology. So it relates to the sale of technology products and it also relates to the sale of services associated with those technology products.

So we’re obviously not selling the products and we’re doing a piece of the services, which is the stuff that’s done remotely rather than onsite. So when they talk about it generally, they are really talking about that whole program.

I think I can say that our remote services are a very substantial piece of that and if you walk into one of the stores these days, you’ll see that in addition to the Tech Depot, there’s an enormous amount of signage about the services element of the program, and we couldn’t be more pleased with the way in which that’s being merchandised and marketed.

So that’s kind of how I think you can interpret their comments.

Stephen Silk – C. Silk & Sons

Looking at it from the point of Office Depot, what are the margins that they would get on selling a computer as opposed to the margins they would get incrementally on adding an attached service?

Josh Pickus

Well, I obviously can’t give any OD specific data, because that’s highly proprietary for them. What I can tell you is that for retailers generally, the margins on these services are dramatically higher than the margins on the sale of PCs, and that’s one of the reasons that this is a very important addition to their business.

Stephen Silk – C. Silk & Sons

If we were to back up to the end of the trial in Florida at the end of the year, do you get numbers from the established stores? I can’t imagine the total number of stores that were added in the third quarter, but you wouldn’t think that they would have ramped up.

So have the attach rates in the established stores maintained what they thought they wanted to, so we could look forward to, as these stores mature, having similar results?

Josh Pickus

Well, what we think is that the early stores that performed well are very much still performing well. We tend to think about this not in terms of the individual store, but the various OD regions and the good regions have been good and recently some of them have been doing even better in selling the remote services. The new stores do take a ramp period and it is reasonable to expect that they will improve if their performance is anything like the other bits of the chain that we’ve ruled out.

The only contra evidence or concern would be what’s this macro environment going to do and might that blunt it, and the short answer is that we don’t know. The October evidence is that this is going to work notwithstanding that, but that’s 30 days of data and so we’re hopeful, but we’re not certain as we go into the rest of the quarter.

Stephen Silk – C. Silk & Sons

Do you think there’s a lag of the amount of revenue that they would be getting from attach rates as opposed to diagnostics in the sense that if my computer broke today, I wouldn’t be thinking about going to Office Depot to get it fixed?

Conversely, if I had bought a computer at Office Depot and learned that I could get these things attached and had the knowledge of what they could do, if something happened, I would know to bring it back.

Josh Pickus

I’m not sure I see it that way. Probably the most interesting thing we’ve seen, and this is not just OD, but across our retail partners, when you put up a sign in one of these stores that says something like “we fix computers,” there’s an immediate response, because you have customers who have been coming in there and buying technology products and they’re a very logical place to go to get the products serviced.

But the consumers often haven’t known that that was available and so for both kinds of services, you find that simply increasing awareness leads to sales activity. That’s the main takeaway I’d give you in that area.

Stephen Silk – C. Silk & Sons

Now, jumping to the new stores, the new companies that are in test mode, is the model for that similar to how Office Depot has set it up? It’s an in-store kiosk, with giving the customer the knowledge of being able to attach it to diagnose?

Josh Pickus

There are a lot of similarities, but also some differences. So in the U.S. retail example, they do have a similar area, but most of the services in that program, at least right now, are coming through service cards. So what you would actually do is you would buy a card and you would take it and call in and get that service. That may evolve over time, but that’s how that one started.

In the European case, there is a kiosk, but it’s located in a different part of the store and it does some other things. So I would say both of those programs bear a lot of similarities to what we’ve done with OD, but neither is exactly the same.

Stephen Silk – C. Silk & Sons

Now, I’d like to jump over to the expense line and the revenue line of the consumer revenue. I understand that the increase has been because we’ve added agents and, right now, we’re in a mode of the exciting possibility of having new customers come online, so that you’d need to have new agents prepared to handle the expected demand.

But at what point do we say, okay, we have enough people and then how should we look at the utilization? Will there be metrics of utilization per agent to see if we have the correct number of people and then once you get to that level, and I know it might be a year or so away, what type of margins do you think you can drive in the consumer area?

Josh Pickus

That’s a great question and one that I hear from a lot of investors. Let me tackle it this way. We are really pleased with the way this opportunity is playing out and the number and magnitude of partnerships that are out there, and our dominant view is that where the partnerships are, A, both big enough to scale to very interesting levels and, B, have a deal structure where, over time, they can create attractive margins, we are going to staff for them, even where that creates a lot of near-term pain at the gross margin level.

So I can’t tell you when that ends, because it sort of depends on when those opportunities end or really, more likely, when the scale overall is so big that an incremental opportunity doesn’t really have the kind of effect it does today, because today, when we add one of these partnerships, we add a bunch of agent cost, because we want to do what we can to have a positive service experience, but they always take a while to ramp.

So you have this mismatch of revenue and expense that creates the very unattractive gross margin performance, but I think if you’re building a very substantial business over time, those are the kinds of investments that you have to make and I can’t tell you exactly when those will become less noticeable.

Now, the second part of your question is really about the efficiency at which we’re operating, and the short answer is we are not terribly efficient right now and we are not terribly efficient right now because we’ve scaled so quickly that getting efficiency is hard when you’re doing the kind of size of additions that we’re doing.

I will say, though, that there is no issue inside the company that has greater focus than trying to improve those efficiencies, because we think that there absolutely is an attractive long-term gross margin to be had here and, at this moment, we’re quite a distance from it.

So we are laser-like focused, when a program gets anywhere close to stability, to how we make sure that revenue per agent, services per day, services per hour, tic upwards and I expect that, as in the mature programs, we will see meaningful improvements on that, but it’s very difficult to give you sort of precision on this when every quarter we’re adding another major program or two major programs.

So it’s not an easy question to answer, but I can assure you that it’s an issue that’s really got our attention, because for the long-term model to work, we have to get the agent productivity to be dramatically different than it is today and we believe, over time, we’ll be successful at that.

Stephen Silk – C. Silk & Sons

Are you pleased with the results you’re seeing from the acquisition you made last quarter as far as getting the agents, the work-at-home model, so that the agents are performing well and are happy to be doing it the way that it’s been set up?

Josh Pickus

Yes, we are quite pleased. Your Tech Online team had some very powerful service insights, which are being incorporated very broadly into everything we do.

They also formed some important business development relationships that we did not weight heavily in doing the acquisition, but appear to have real promise, so that was a relatively small deal that I think, over time, is going to be an important contributor.

Stephen Silk – C. Silk & Sons

Okay, and finally, on the balance sheet. Are the auction rate securities still paying interest, number one; and number two, could you give guidance to where you think the cash will be at the end of the year?

Shelly Schaffer

I’ll take the first part and then we’ll split the second question up. So, yes, they’re still paying interest, so absolutely and second of all, from a forward-looking on cash, the way I like to think about it is we’re obviously very prudent on all facets of cash, collections and all the spending on the operating side.

But as Josh has indicated, we are definitely in the ramping and expanding mode and so all of the kind of fixed structure or fixed spending that has to go in place to scale those, we’re going to have to do those, but we ought to be able to get leverage over time on – the support function.

Second of all, and you can add color to it, Josh, we’re definitely going to look at all buy-build-and-partner outlets that are going to allow us to take the business to the scalable level we want to bring it to and so if you were to look back maybe four quarters ago or even three or even two, things in the "buy mode" might have been in a price point that really didn’t combine with our long-term model, and I think that things are getting more reasonable.

So, for us to simply say there’s a flat, out cash forecast I don’t think would be appropriate. I think anything that we do from the spending side, we would definitely want to message and then come back to you and talk about it as we execute against it.

Josh Pickus

Yes, what I would say, just to add to that, is that as far as Q4 goes, we will burn cash. My suspicion is that we’ll burn more cash organically than we did in Q3, but not dramatically so and to Shelly’s point, there are possible inorganic uses of cash where there are attractive opportunities that are priced very differently than where they were.

As you know, forecasting cash is one of the hardest things, and I don’t think we serve anyone well by being more precise than that, but that’s kind of the directional information we can give you.

Operator

Our next question comes from the line of Ted Ketterer of TK Associates. Please proceed.

Ted Ketterer – TK Associates

Hi, guys.

Shelly Schaffer

Hi.

Ted Ketterer – TK Associates

I’ve got a couple of questions. You’ve got 200 agents now. What do you think that number will be by year end?

Josh Pickus

I think it will be meaningfully larger. When you combine continuing ramp in OD with a number of the other programs going, it’s clear that we need meaningfully more agents and it’s a difficult thing, because if the agents today, were as efficient and productive as we know they will be, we’d need to do less of that, but we’re having to make the choice between not servicing existing programs well and bulking up.

At this stage of the business, the choice I’m making is to make sure that we staff in a way that we do good work for our partners, and then, over time, we’ve got to dramatically increased productivity. So I’m not going to give you a specific number, but it will be meaningfully larger than it is today.

Shelly Schaffer

One thing, Josh, that I would add to that is if you just think in the straight model that we have right now, which is a fee for transaction, I think that’s fair. That’s the model that we’re doing today, but we’re also looking at alternate models and we’ve discussed that on the prior call.

So if we were to do a subscription-based model, I think it would be important not to use that metric across just a straight line, here, I have this many agents and I’m going to deliver this many services, because when you bring in a subscription model, it should give you an improved margin on that.

So I think it’s important to think about it from that perspective, too.

Ted Ketterer – TK Associates

I know you’re very sensitive about who the US and the European partners. Are they retailers of computers, much like Office Depot? Sort of describe them as a size relative to Office Depot? Are they larger, smaller?

Josh Pickus

They are larger.

Ted Ketterer – TK Associates

They’re larger? Larger in terms of PCs sold? Okay. Are they, as part of this rollout, promoting the diagnostic and repair, as well as the attached services?

Josh Pickus

Well, there’s different SKU mixes for the two programs and so without going into a lot of detail, it’s hard to tell you exactly. I would tell you that when we launch programs, we tend to skew them towards the simpler attach services as a way of getting started and then add and repair later.

Broadly speaking, that is true in both of these programs, though I can tell you that in the US one, we’re already seeing demand for the diag and repair and it’s possible that those would get added in the relatively near term.

Ted Ketterer – TK Associates

That sounds good. I guess the last thing, Josh, trying to think about the Office Depot rollout in Q3, how many stores were actually rolled out in that period? I mean, how many stores were there before the final rollout?

Josh Pickus

Well, last quarter, we had about 400.

Ted Ketterer – TK Associates

You’ve added 875 new stores?

Josh Pickus

Yes, that’s right. Some of that occurred in October. We got the 1275th ones, which were in Canada and Puerto Rico, done literally in the last week. So I don’t recall exactly what the number was at September 30, but from then until today, we went from 400 to 1275.

Ted Ketterer – TK Associates

Would it be safe to say that less than half of it was backend loaded in terms of revenues coming from those stores, the bulk of it?

Josh Pickus

Not really. No, it was a sort of almost ratable store ramp across the quarter and OD stuck to that to the day.

Ted Ketterer – TK Associates

Okay. So it would be safe to say that maybe half of the potential revenue actually came in, given if it was done literally over the quarter?

Ted Ketterer – TK Associates

You know, I want to be careful to not say something that changes my guidance. We’ve given you a sense in our guidance that we do believe there is meaningfully more that this relationship can produce.

Exactly how much that is, we’ll know more after we get through the quarter, and I’m not sure I want to speculate any more than that at this stage.

Ted Ketterer – TK Associates

That’s fine, Josh. We’re in a period where it’s not going to make any difference to stock prices for a while. So I was just curious just as to how that’s going to work out.

Josh Pickus

Fair enough.

Ted Ketterer – TK Associates

Thank you.

Operator

Our next question comes from the line of Jim Kennedy of Marathon Capital Management. Please proceed.

Jim Kennedy – Marathon Capital Management

Hi Josh! Hi Shelly! A couple of quick questions for you.

Could you give us a little more color on the antivirus deal and what does that look like to the consumer? How does that actually reach the consumer? Am I a consumer sitting at home and I’m shopping for antivirus software and this happens to be a selection that provides that, as well as support, or is it competing with a similar package from the other antivirus guys?

Josh Pickus

So here’s how that deal works. You’re getting very fresh information, because that program actually officially launched and went live this morning. So I have about six hours of data.

But I can describe the program design to you. This antivirus provider has a larger number of users worldwide. Some of them are paying. Many of them are using the free version of their software and right now, the support options available are basically e-mail support. You can e-mail us with a problem and within some number of days we will come back to you.

What we’re offering now is that if you’re having a support issue, you will get presented with this opportunity to do what exists today, which is the e-mail and you can get that, if you’re a “paying user,” without additional cost.

At the same time that you see a banner giving you that right, you would see a banner saying you can also get immediate help from a life person, but it will cost you money. If you’d like to do that, click here and I would say that we’ve been a little bit astonished in the first six hours at the level of activity coming out of this. Our experience with these pilots is that for the first few days or weeks, very little happens.

This one, there seems to be a lot of interest. Now, I don’t yet know what that will mean, but my perception is that as this antivirus provider suspected, that there is a lot of pent-up demand for support, because all they’ve provided is this e-mail support, and that having another option that is immediate, now as opposed to in two or three days, could be a very compelling offer, even if it is one that involves paying and that’s certainly what the first six hours suggest.

Jim Kennedy – Marathon Capital Management

So that live chat feature is basically you guys sitting behind the scenes?

Josh Pickus

That is correct.

Jim Kennedy – Marathon Capital Management

Okay and then competitively, is this provider the only one with that type of offering?

Josh Pickus

Well, I would say that all of the major antivirus providers – or that’s not quite true. Trend doesn’t have anything that I’m aware of, but both Symantec and McAfee have offerings of one sort of another and they see what we see, which is that an antivirus provider is a very natural place to go to get these kind of services.

They also have different support structures than this provider does. So it’s fair to say that the antivirus providers are going to be in this market in one way or another, but that their approaches to it, I think, will vary.

And my suspicion is that over the long haul, all of them or most of them will choose to do this with third-party specialists like us, but that’s still panning out.

Jim Kennedy – Marathon Capital Management

Okay and is there a link, are you going to put up a link on your website to this offering so that your shareholders might be able to purchase or use the antivirus software?

Josh Pickus

You know, we will probably do that at some point. We want to give these pilots some time to bake and smooth out before we are too prominent about them, but that’s certainly something that we would think about doing as this thing rolls out and becomes more stable.

Jim Kennedy – Marathon Capital Management

Okay and I may have missed it earlier, but have you given any more color on broadband trials in this country?

Josh Pickus

We haven’t given any. There’s a lot of activity there, but we have not provided any specific color on it in this call.

Jim Kennedy – Marathon Capital Management

And can you say whether or not any trials are currently ongoing?

Josh Pickus

There is a trial ongoing.

Jim Kennedy – Marathon Capital Management

Okay. Last question, could you frame-up, kind of the competitive landscape at this point? I know there is a variety of private companies’ kind of dancing around this space. How do you view the competition at this point?

Josh Pickus

Well, let me talk about that in two ways. First of all, direct competition for these large partner opportunities, which is the thing that most impacts our revenue now and for the foreseeable future.

The competition there is largely quite a number of these private companies. Many of them are good and it seems to be a very popular thing in the venture capital community to fund these days.

We feel that that’s an excellent competitive set for us, not because these companies aren’t good, they are, but because we have really differentiated positioning. We have a lot of capital. We’re a public company. We have a huge technology capability and we have worldwide geographic presence, before you get to any other detail5.

So while we respect these guys, we’re really pleased with our competitive position and I think that accounts for why you’re seeing us announce new important things happening every quarter.

The broader competitive set is anybody who is offering premium technology services and then you come to everybody from Geek Squad to Firedog to the Symantec service to the service that AT&T is offering, and, at some level, those things are competitive with us, because they are offering to provide premium technology services, but I don’t tend to look at them that way, because the vast majority of those things are actually not done by the entity whose name is on it.

They’re done by specialist providers and I look at those as opportunities for us to do that business on a white label basis. So that’s kind of how I look at the competitive landscape.

Jim Kennedy – Marathon Capital Management

Okay and then lastly, the broadband trial that’s ongoing, are you hoping to complete that sometime in early ‘09, mid ‘09, late ‘09? What’s your thinking there?

Josh Pickus

I think that probably until we talk more formally about it, I shouldn’t provide any specifics on it. It’s ongoing. It’s very interesting to us, and it’s not entirely clear to me what the timing for that would be.

Jim Kennedy – Marathon Capital Management

Okay, great. Thanks a lot.

Josh Pickus

Thank you.

Operator

Thank you, ladies and gentlemen. This concludes today’s questions-and-answers session. I’d like to turn the call over to Mr. Josh Pickus, CEO, for closing remarks.

Josh Pickus

Thanks very much for being with us today, and we’ll look forward to talking to you next quarter.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.

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Source: SupportSoft Inc. Q3 2008 Earnings Call Transcript
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