SourceForge, Inc. F1Q09 (Qtr End 10/31/2008) Earnings Call Transcript

| About: SourceForge, Inc. (LNUX)

SourceForge, Inc. (LNUX) F1Q09 Earnings Call November 25, 2008 5:00 PM ET

Executives

Patricia S. Morris – Chief Financial Officer

Robert M. Neumeister, Jr. - Chairman of the Board, Interim President & Chief Executive Officer

Jonathan K. Sobel - Group President, Media

Analysts

James Gilman – Cross Research

[David Carson – Whitman Capital]

Clayton Moran – Stanford Group

[Ron Long – ThinkEquity Partners]

Presentation

Operator

Welcome to SourceForge’s first quarter fiscal year 2009 conference call. At this time all participants are in a listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is not my pleasure to introduce Ms. Patty Morris, CFO.

Patricia S. Morris

Welcome to SourceForge’s conference call reviewing our first quarter of fiscal 2009 financial results. Let me remind you that this discussion will include forward-looking statements which will be made pursuant to the Safe Harbor provisions of Section 21(e) of the Securities Exchange Act of 1934.

Investors are cautioned that statements made during this call that are not strictly historical in nature constitute forward-looking statements which involve risks and uncertainties such as statements regarding our future operating and financial performance, management’s plans and objectives for future operations, product plans and performance, management’s assessment of market factors, expected contribution to revenue of various products and services offered by SourceForge and statements regarding the strategy and plans of SourceForge and our ability to achieve our strategic objectives.

Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors and these results may be material and adverse. Such factors include SourceForge’s ability to attract and retain qualified personnel, success in designing and offering innovative online advertising program, decreases or delays in online advertising spending especially in light of current macro economic challenges and uncertainty, SourceForge’s effectiveness at planning and managing it’s E-commerce inventory, SourceForge’s ability to achieve and sustain higher levels of revenue, SourceForge’s ability to protect and defend its intellectual property rights, rapid technological and market change, unforeseen expenses that SourceForge may incur in future quarters or that might diminish SourceForge’s existing cash and investment balances and cause disruption in or dissention of our stock repurchase program and competition with and pricing pressures from larger and/or more established competitors.

Additional factors that could cause actual results to differ from our forward-looking statements are specified in filings with the Securities & Exchange Commission including SourceForge’s annual report on Form 10-K for the year ended July 31, 2008. These documents are available at the company’s website, www.SourceForge.com and at the SEC’s website, www.SEC.gov.

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP SourceForge reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results and the accompanying statement regarding use of non-GAAP financial information which can be found in SourceForge’s earnings press release announcing SourceForge’s financial results issued after the stock market’s close today and posted on the company’s website.

A replay of this conference call will be available on our website later today. The replay will also be available by telephone toll free 1-877-660-6853 or 1-201-612-7415 referencing replay account 286 and call ID 301621.

The following members of management will be participating on today’s call, Bob Neumeister, SourceForge's interim President and CEO’ Patty Morris, CFO; and Jon Sobel, Group President, Media.

With that I will turn the call over Bob.

Robert M. Neumeister, Jr.

Thank you for taking the time to join us. I realize that these are difficult times and that with the stock selling at cash value we need to convey our message to you clearly and succinctly so that’s what we’ll do. I will go through what I think are the key take aways from this call.

First as we indicated in our pre-release of first quarter fiscal year results we met the guidance that we gave you in August which forecasted sequential growth in both of our lines of business. In terms of guidance the economic environment is making it increasingly difficult to forecast the second quarter.

Further as I have previously indicated we expect to name a new CEO by year end and we feel it is best to wait for their arrival to update our near term outlook. Second we believe that our strategic repositioning in media and the fine tuning of our strategy at ThinkGeek is starting to show positive results.

Our efforts to improve monetization of our websites by focusing on performance oriented ad products, sales execution and ad network optimization resulted in an 85% increase of premium product ad revenues and a 67% increase in ad network’s revenue from the fourth quarter of fiscal year 2008.

More importantly we feel well positioned to take advantage of the shift towards performance based ad products from commodity display advertising a trend which has been accelerated by the difficult economic conditions. At ThinkGeek efforts to scale merchandising and build a proprietary product franchise are also showing positive results.

Third while we are not immune to the macro economic environment and we recognize that expense management is critical our belief is that our strong balance sheet gives us plenty of staying power allowing us to continue to pursue our long term objectives. In fact it is our goal to come out of this recession in a better position relative to other media and E-commerce companies.

Lastly on the CEO search we are in the process of finalizing the employment contract which we will have our new leader on board by the start of the new year. As soon as that process is completed we will be making a formal announcement. Now let me turn the meeting over to Patty and Jon to provide additional details.

Patricia S. Morris

As reported in our press release first quarter 2009 revenue increased 17% year-over-year to $12.1 million. Our net loss on a GAAP basis for the first quarter was $0.01 per share and break even per share on a non-GAAP basis. Media revenue for the first quarter was $5.4 million a record for media and an increase of 23% over the $4.4 million of revenue for the same period last year.

This also represents 14% sequential growth from the fourth quarter of 2008 revenue of $4.8 million. We are committed to our strategy of introducing new premium products and our results are confirmation that our strategy is gaining acceptance by advertisers. We executed well on selling our premium products generating revenue of almost $1 million during the quarter.

Continued efforts to optimize our ad network programs yielded a 67% sequential increase in revenue from the prior quarter. Media gross margin for the first quarter of fiscal 2009 was 60% a sequential improvement from the 56% reported in the prior quarter. we believe that the appropriate measure of our media business’ operating results is contribution margin which is operating income before any allocation of corporate expense.

This quarter the media business’ contribution margin was essentially break even as compared to a contribution loss of $800,000 or 17% in the fourth quarter of fiscal 2008. E-commerce revenue grew 13% to $6.7 million from $5.9 million for the same period last year. E-commerce gross margins for the first quarter of fiscal 2008 decreased to 22% from 27% in the same period last year primarily due to increases in operating expenses, shipping costs and fulfillment costs.

Our operating expenses in the first quarter of fiscal 2008 included certain expenses which are no expected to repeat such as restructuring charges and the capitalization of labor related to internally developed software. The key take away is that excluding these expenses operating expenses grew 21% year-over-year as we continued to invest in headcount and related employee costs.

Adjusting for fourth quarter fiscal 2008 severance legal settlement and restructuring expenses we saw a 2% decrease in op ex quarter-over-quarter primarily due to seasonal fourth quarter discretionary marketing programs and FAS 123R stock-compensation expense. To give you a sense of the investment in headcount we have 130 people at the end of the first quarter up 30 heads from the 100 people a year ago and an increase of 10 heads from 120 employees at the end of the fourth quarter.

Going forward we will limit our hiring to a few key select positions and only when we can find exceptionally well qualified candidates who might be coming on to the market. For the first quarter fiscal 2009 the GAAP loss from continuing operations was $400,000 or a $0.01 loss per share compared with GAAP loss of $1.1 million or $0.02 per share for the same period last year.

Our GAAP loss includes interest income of $150,000 compared to $700,000 of interest income for the first quarter of last year. The lower interest income resulted primarily from the significantly lower yields on Treasury Bills and to a lesser extent a decline in our cash balances.

The GAAP loss also includes other income of $600,000 under a newly adopted accounting standard, FAS 159, the fair value option for financial assets and liabilities which represents the net unrealized income on our assets recorded at fair value. Non-GAAP income from continuing operations, which excludes stock-based compensation and restructuring charges was $100,000 or $0.00 per share compared with $900,000 or $0.01 per share for the same period last year.

Turning to the balance sheet let me start with a brief explanation of the newly adopted accounting standard, FAS 159, which I mentioned earlier. We recently accepted our investment manager’s offer to repurchase our auction rate securities at PAR value on June 30th, 2010.

As a result of this acceptance we recorded the value of this right which approximates the difference between the PAR value and the fair value of our auction rate securities as an increase in long term assets of $1.6 million. However under these new rules we also reduced the underlying auction rate securities by $1 million to their fair value.

This netted to the $600,000 gain as reported in other income during this quarter. Now to the balance sheet, we finished the first fiscal quarter with cash and investments of $47.2 million a decrease of $6.5 million from the prior fiscal quarter. The decrease in cash is primarily due to the cyclical nature of our E-commerce business where we buy and receive inventory in our first quarter in anticipation of the upcoming holiday season where we roughly triple our sales sequentially.

The cash decline also includes the fair value option rate adjustment I just mentioned a minute ago. Moving to inventory like any other retailer the inventory challenge is to have enough stock on hand to maximize revenue while also minimizing our downside exposure.

Historically we have a good track with seasonal inventory management based on our practices of both testing products on the market and for committing to large purchases and procuring products at margins which allow us to sell the product profitably over a period of time if initial product sales do not meet expectations.

As a result we have a good history as it relates to inventory write downs and our current inventory levels are consistent with historical operating ratios. We believe that our inventory levels represent a balanced risk reward position. Now let’s talk about the metrics of our businesses.

We believe we are focused on the right strategy and here are a few data points to illustrate our positioning. Since last quarter ad network revenue increased 67%, premium product revenue grew 85% to $1 million, media uniques grew 5% to $36 million, RPM increased to $11.57 from $10.86, page views increased 7%, revenue per user of $0.59 increased from $0.55 and page views per unique remained relatively constant at four pages.

Moving now to ThinkGeek we shipped 96,000 orders a 19% increase year-over-year. The average order size decreased slightly to $69 from $72 in the prior year’s first quarter. While I know we’ve given you modest directional guidance last quarter given that we are expecting to bring on a new CEO by year end coupled with the fact that media budgets are as uncertain as they have ever been we think it is prudent not to give guidance at this time.

When we announce the new CEO we will certainly revisit the guidance issue for the rest of the year. Now for a quick update on our stock repurchase program before I turn it over to Jon. As you may be aware on November 3rd we announced a stock repurchase program pursuant to which our Board authorized us to use a portion of our existing cash and investments to repurchase up to $10 million worth of our outstanding common stock over a 12 month period.

On November 19th we completed our first transaction under the repurchase program and we repurchased approximately 4.5 million shares of our common stock. We intend to continue to work towards achieving the goals of the repurchase program and will actively pursue opportunities to repurchase shares of our common stock as opportunities arise for us to do so in a manner that is beneficial to our stockholders.

As we previously announced share repurchases under this program may be made through a variety of methods including open market purchases or privately negotiated transactions and the timing and actual number of shares repurchased will depend on a variety of factors including the common share price, corporate and regulatory requirements and other market and economic conditions.

I’ll now turn it over to Jon who will share a few final observations about our media business.

Jonathan K. Sobel

As many of you on the call appreciate we along with many web publishers are facing challenging times. There are in fact several challenges. One the web is changing fast and even for sites that only a few years ago held a commanding position it is easy to fall behind. Two traditional display advertising a revenue stream many sites rely upon as more and more of a commodity and three advertising in general is under pressure.

Against these forces successful websites must stay current for their users, offer distinctive ad products for advertisers and of course manage difficult economic conditions as well as they can. As Bob and Patty have shared this past quarter as been our best media quarter ever. The company anticipated shifts in the Internet advertising landscape and the need to begin to improve our sites and responded.

More encouraging within only a few quarters the composition of our revenue has moved from a heavy dependency on commodity advertising to include a significant and growing component of premium advertising. We’ve also grown uses of our sites and continue to make site improvements in order to accelerate the growth of our advertising inventory.

Last we’ve begun to offer some important new features for our users such as a set of new tools for developers this past quarter which we will continue to roll out. These are all good changes and they show that on the first two challenges innovating for users and advertisers we are delivering.

Like everyone else we also face the third challenge, the economy. Many of our advertising clients are reducing spending and making decisions more slowly. We are also hearing from them that we are a better choice than before. So while for obvious reasons visibility into our near term is less certain than is often the case for all the reasons Bob and Patty shared the foundation of our media business is solid.

Our strategy is working and we are well positioned for the future. Now let me turn over the call to Bob for closing comments.

Robert M. Neumeister, Jr.

To summarize we are all living in a world of increasing uncertainty. We weathered the tough current economic environment during our first quarter recording double digit top line growth for both media and E-commerce businesses. We showed improvement in RPU, double premium ad sales and optimized monetization of our traffic. At ThinkGeek we shipped more orders than ever before for the same quarter while improving merchandising and product offerings.

All we can do now is stay focused on the task ahead of us. We’re pleased that our team has made tremendous progress in just a couple of short quarters and continues to show great promise for continued future growth. Operator let us now open the line for questions.

Question-And-Answer Session

Operator

We will be conducting a question-and-answer session. (Operator Instructions) One moment please while we poll for questions. Our first question is from James Gilman – Cross Research.

James Gilman – Cross Research

A couple questions here, first on the CEO search it sounds like you have narrowed down the candidates and maybe have a candidate that’s going to take the position but there is maybe reasons that they haven’t done so. Would that be fair to read into that based on your wording?

Robert M. Neumeister, Jr.

I think we’re a little further along than what you have phrased, James. I think we’re keyed in on an individual and we’re clearing the last bit of roadblock out of the way.

James Gilman – Cross Research

Jon, these questions are directed towards you. In reference to the online media some of the premium ads and everything referenced exclude the advertisers but the end users, the ones that come to the websites, have you received any feedback, good or bad, from your users of your websites to those premium ads?

Jonathan K. Sobel

You bet, James and probably the best way to assess how users feel about new ad products is to see how the ad products perform. Without getting too specific or detailed, one of the things we look at is click through rate and what’s known in the industry as interaction rate. We’ve had very high click through and interaction rates on our new products and we believe it’s because our team has been very thoughtful about how the products are designed and where they are in the user flow.

Many ads as you know on the web, in traditional media, can be intrusive, they essentially interrupt a TV show to use a metaphor. We’ve tried very hard to place advertising and marketing in logical places for our users and we think that’s part of the reason the programs are showing success.

James Gilman – Cross Research

How are your overseas initiatives working out?

Jonathan K. Sobel

They’re working out well. We are seeing increasing success with several of our reseller partners. We signed a deal with ad pepper in late May or early June, several months ago. That’s taking a little while to get going and we’re in discussions with them about some changes to the relationship. Overall, especially with our other two partners, we’ve seen some good results and we feel like we have a pretty good understanding of how to approach that going forward.

James Gilman – Cross Research

Are there similar economic challenges overseas as there are in the US or is it separate challenges?

Jonathan K. Sobel

As far as the macro economy, we’re seeing some similarities between how advertisers are approaching their budgets both abroad and at home. There are obviously differences in how advertising is sold and differences within regions but if the question relates to macro economic dynamics, we’re pretty much seeing the same thing around the world.

James Gilman – Cross Research

In reference to the economic environment, are you having to maybe structure your deals a little bit differently than you might have in the past to gain the sale?

Jonathan K. Sobel

Not really. We have designed a few products recently to fill out parts of our advertising portfolio that we didn’t have before. A few lower priced offerings and one or two things that have more of a pay for performance orientation but we have held firmly generally speaking to our pricing for premium products and we have continued to sell and position and price them the same way as we did before.

James Gilman – Cross Research

Patty or Bob, this question is directed your way, you mentioned, I’m not sure who did, ThinkGeek initiatives on more, these are my words, in house products or whatever. Can you just go on in a little bit more in detail on that?

Robert M. Neumeister, Jr.

A couple of the initiatives that we have at ThinkGeek are to in effect scale our merchandising, if you will. Anybody familiar with the site would recognize that they have a unique set of product offerings and to get that business to grow, one of the key components is being able to have a fresh flow of new products and perhaps a larger flow of products than we’ve had, so we need to scale our merchandising.

That’s one of the things that we’ve clearly been working on. The other which feeds both the profit line and the revenue line is increasing the percentage of what we call proprietary products in the total sales mix. Those are products that are effectively created, designed, not manufactured because we do push that out obviously, but done all in house.

A classic example of that would have been the WiFi t-shirt last year and the shower sock soap that you may be familiar with that’s on the site, things that we create, take out and have contract manufactured generally have higher margins and if we’re doing a really good job they tend to be some of our frontrunner sales products as well.

Operator

Our next question is from David Carson – Whitman Capital.

David Carson – Whitman Capital

On the Emersion product can you talk a little bit about that? Was that also the majority of the $1 million of the premium?

Jonathan K. Sobel

Emersion which is one of our premium products represents a meaningful part of that $1 million but is by no means the $1 million in its entirety. We had some very good results with a feature download product that we have which yields effective CPMs that are also quite high.

David Carson – Whitman Capital

Did you pick up any new premium customers or can you talk a little bit about that?

Jonathan K. Sobel

I don’t have a specific list in front of me. The short answer is yes.

David Carson – Whitman Capital

On the balance sheet, under long term that’s virtually all ARS, auction rate securities?

Patricia S. Morris

I’m sorry, what was your question?

David Carson – Whitman Capital

The $10.2 million under long term, that’s auction rate securities? Is that correct?

Patricia S. Morris

That’s correct. That also includes $1 million of restricted cash.

David Carson – Whitman Capital

So auction rate securities would be approximately $9.2 million then?

Patricia S. Morris

Because remember we took the $1 million adjustment under the implementation of FAS 159. So we booked an offsetting right in other assets for $1.6 million.

David Carson – Whitman Capital

That’s restricted though?

Patricia S. Morris

The $1.6 million is not restricted, that’s the right for our investment manager to purchase the auction rate back from us at June 30th of 2010.

David Carson – Whitman Capital

Perhaps mention just given the current stock price below cash per share, any consideration of perhaps accelerating, increasing the stock buy back given how strongly accretive it is at this point in time?

Robert M. Neumeister, Jr.

That’s something that we are giving some thought to. No promises, no commitments. We have a Board meeting next week, so it’s a timely discussion for that meeting.

Operator

Our next question is from Clayton Moran – Stanford Group.

Clayton Moran – Stanford Group

I have a few questions, I assume that you’re not providing an outlook for the second quarter, that your 2009 advertising growth outlook you provided last quarter of 20% to 40% is pulled off the table. Is that right?

Robert M. Neumeister, Jr.

It’s still something that we are focusing on as a target that we want to achieve, but let’s be frank though, the environment out there is just very hard to read at this point in time. I think that we would say that if we saw a return to stability in the economic environment that that still might have a chance of being something that we would be able to achieve. If the instability keeps along, it’s really gong be highly dependent upon what the advertising market itself does.

We just don’t have visibility to that. I think the other reason for hesitating just a little bit on that, Clay, is that as I’ve referenced, we do expect to have a new leader in the business at the first of the year and suspect that they will have some independent thoughts on where they want to drive the business and what they want to do with it and give them an opportunity to update what their outlook for the year would be.

Clayton Moran – Stanford Group

We’re expecting the domestic online commerce and advertising markets to contract in the calendar fourth quarter. Since you’re not providing an outlook, is there anything you can help us with or can you tell me whether you think, in your case, that would be too pessimistic? Is there any reason why that that wouldn’t apply to you at this time?

Robert M. Neumeister, Jr.

I don’t know that we’re immune from major economic trends. I think as Jon indicated we’ve been doing a number of things that we think do help us in that regard. Clearly we’re seeing the market move to premium away from commodity based products, if you will. We’re in an advertising segment that fortunately is not financial services or autos, so our traditional advertisers aren’t apparently hurt as bad as some of the other parts of the economy are.

We’re only 25 days into the quarter and it’s just really hard to tell. As I think I said, we’re just trying to keep everybody focused on driving for the finish line and we’ll do the very best we can to get the best results we can.

Clayton Moran – Stanford Group

Since the stock is trading below cash value I have to ask one more question along the same lines and maybe you can’t answer, but in case you can, is there anything you can say in regards to cash burn and expectations of near term cash burn?

Robert M. Neumeister, Jr.

Yes, two things. First of all, as you know and as Patty referenced, we do use cash during our fiscal first quarter as we build up inventories at ThinkGeek that will clearly be in a normal sell and reversal cycle and we will have cash inflow from that balance sheet shrinkage, I guess you could call it in the inventory line.

As we also referenced, we’re being very judicious about our expense levels. We’re watching our pennies and that means we watch dollars as well. We don’t expect to use cash in this second quarter.

Clayton Moran – Stanford Group

Couple other questions while I have you, you talked about the ad networks briefly. Is there anything you can say about your contextual ad performance in the quarter and through the current time? Just curious if you’ve seen any change in the performance there whether it’s in regards to total revenue or clicks or click prices?

Jonathan K. Sobel

A couple of observations, relative to prior quarters we got much better at how we work with networks and certainly part of that was where we place the advertising and how we manage it. From a very general point of view, things like click through are obviously higher thus driving better performance.

With regard to the current quarter, again we’re 25 days into it. I think it’s fair to say that we made such a big move in the last couple of months I wouldn’t expect the same kind of big move given how much we accomplished in a short time. That is relative to other sources of revenue a pretty stable line of business once you get it right. I don’t have a lot to add other than that we think we figured out a lot about it and it feels pretty secure.

Clayton Moran – Stanford Group

One more, I think you maybe you mentioned it, but did you mention the price at which you bought that 4.5 million shares?

Robert M. Neumeister, Jr.

No, we didn’t mention it. I think that’s something we’d like to keep under our hats for the time being.

Operator

Our next question comes from Ron Long – ThinkEquity Partners.

Ron Long – ThinkEquity Partners

It sounds from your last responses additional runway in improving non-premium monetization may be limited. How far do you think you are in terms of investing the premium opportunity in term of sell through rate and what might be the key drivers for growth there, whether there’s more inventory than you can open up or just selling to more people or increasing prices by demonstrating improved engagement rates.

Jonathan K. Sobel

A couple of thoughts there, as you know very well and I’ve read some of your work or your college work I believe on ad networks, one of the drivers for growing ad network revenue once you’ve really got them figured out and have them performing well is growing the volume of available inventory. That’s been something we’ve been talking about, that’s part of our long term strategy.

I don’t mean to imply that we don’t anticipate any growth in our ad network part of our business, but as you well appreciate once we’ve gotten good at monetizing it, it’s an inventory and growth story. With regard to premium, we are fairly early in rolling out those products and proving their worth to our advertisers. We’ve had very good results in initial trials and initial campaigns with folks.

Our view is that each product may have somewhat of a life cycle. We don’t think we’ve peaked in any of the life cycles for our existing premium products and, perhaps more fundamental, we really have repositioned the way our advertisers see us. For several years we had an audience sell, we said we had a lot of people who are very technology savvy, you should buy us.

Now we’re saying look at these product, look at the performance and we’re getting very good feedback from agencies and marketers that they do see the results and that they’re thinking of us differently. I think we’re early in that process.

Ron Long – ThinkEquity Partners

Going back to your first comment then, have you provided an update on your efforts in monetizing in Project Web and where you are with that?

Jonathan K. Sobel

No, we haven’t. We are having conversations with some of our projects there. We’ve had several conversations recently as you probably well appreciate that’s a community and it requires some real collaboration. But, that is something that we’ve kept our eye on and we are moving forward with.

Ron Long – ThinkEquity Partners

And on the none premium side, the gains that you’ve made, has that been accomplished pretty much entirely in house or were you using an optimization service or a combination?

Jonathan K. Sobel

I’m pleased to say they’ve been accomplished in house and it’s been a number f smart moves that people in the group have made ranging from change in the UI to being very thoughtful about optimizing various channels. Most, if not all of the gain of that have come from the initiatives and efforts of people on the team. We certainly have learned a lot from talking to folks. We’re always eager to stay current with what’s happening in the industry but primarily people here have done all of that themselves.

Ron Long – ThinkEquity Partners

Lastly, just going back to ThinkGeek, I don’t know if you could remind me what the typical seasonal trends are in terms of orders or average ticket? And, to the extent that you can comment on inter quarter trends how are those two things meeting your expectations? And also, just a question about gross margins particularly in ecommerce, is it mainly just fulfillment and shipping which are driving those down or is there a component of advertising or conversion rates or anything like that that’s going there? Sorry, that’s a lot wrapped up in to one question.

Robert M. Neumeister, Jr.

I’m not sure we’ve got all that but let us launch in to it and you can of course direct us if we aren’t getting what you wanted. Patty, why don’t you take the first end of that?

Patricia S. Morris

In terms of average order value I think is what your first question was, last year for the January quarter end, our AOB was about $71.06. So, what I reported in the script is last quarter we had $74, this October we had $69, it really varies based on the product mix. If you have higher priced products it typically will drive the AOB up slightly and then your promotional programs will also somewhat affect the AOB as well.

Ron Long – ThinkEquity Partners

Then just anything you can touch on with respect to margins and ecommerce.

Patricia S. Morris

So the primary drivers for the margins again, product mix is the big one so the product cost is going to be the biggest factor and Bob mentioned earlier that the customer products that we create internally typically drive much higher margins. In addition, you nailed the two other significant components which are really shipping and fulfillment. There’s a few other things that play in there but those are really the primary drivers and then just the basic operating cost of the holiday season you know bringing in a few more temps to help smooth the seasonality of the business during the holiday season.

Robert M. Neumeister, Jr.

Just on the shipping costs as you might expect, all of our shippers add fuel costs adjustment clauses in their contracts. Those tended to lag so as fuel really jumped up early in the year last year we were lagging two or three months, we’re starting to see the benefit of that now as we move in to the end of the year but again, it’s lagging so it doesn’t happen instantaneously. We also in that regard, I think like many other [inaudible] try to moderate exactly what we were charging for shipping and trying to get balanced equation there of tracking people and making sales and not having them abandon us at the checkout point because of shipping costs.

So that relationship should get a little bit better. We’ve also been able to negotiate some better volume contracts recently with both UPS and Fedex, our primary ground carriers which will help offset a little bit of that shipping expense that we had so that side of the business is obviously looking better at this point in time than it would have say the middle of the summer.

Operator

Ladies and gentlemen this concludes today’s conference. I would like to turn the call back over to Bob Neumeister for closing comments.

Robert M. Neumeister, Jr.

Again, just thank you everybody for taking time out in a holiday week in a bad market and joining us today. We appreciate your interest and on behalf of John, Patty and myself we hope you have a great Thanksgiving and we’ll talk to you sometime in December I’m sure.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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