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Executives

Steve Zuccarini - Chief Executive Officer

Joe Busky - Chief Financial Officer

Eric Belcher - President and Chief Operating Officer

Analysts

Jim Friedland - Cowen and Company

Franco Turrinelli - William Blair

Randy Haugen - Piper Jaffray

Youssef Squali - Jefferies & Company

Michael French - Morgan Joseph

George Sutton - Craig-Hallum

Lev Polinsky - J.P. Morgan

InnerWorkings Inc. (INWK) F3Q09 Earnings Call November 6, 2008 5:30 PM ET

Operator

Good day, everyone and welcome to the InnerWorkings, Incorporated quarterly earnings conference call. As a reminder, this call is being recorded.

At this time, I would like to turn the call over to the Chief Financial Officer, Mr. Joe Busky. Please go ahead, sir.

Joe Busky

Thanks, Kevin. Good afternoon, everyone and thank you for joining us on our third quarter earnings call. This is Joe Busky and I’m the Chief Financial Officer at InnerWorkings. Joining me on the call today is our Chief Executive Officer, Steve Zuccarini and our President and Chief Operating Officer, Eric Belcher.

Before we begin, I’d like to note that this call will include forward-looking statements related to future results that are made pursuant to the Safe Harbor provisions of the Federal Securities Laws. These statements are subject to a variety of risks, uncertainties and assumptions that may cause actual results to differ materially from those stated or implied by the forward-looking statements.

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Listeners to the call are advised to review our SEC filings, including the risk factors contained in the most recent Form 10-K. Please note that this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior consent.

At this time, I would turn the call over to our Chief Executive Officer, Steve Zuccarini who will provide an overview of the quarter and the macroeconomic environment. Following Steve’s remarks, our President and Chief Operating Officer, Eric Belcher, will update you on the company’s sales, operations and acquisition activities. I will then spend a few minutes on financials. Steve will offer closing comments and we will finish with your questions. Steve.

Steve Zuccarini

Thanks, Joe and thank you everyone, for joining us on the call today. We are very pleased to report quality growth and strong sales momentum during the third quarter as we continue to further penetrate our existing customer base; launch new customer relationships and grow through selective acquisitions.

Among our exciting results was record revenue of $122 million and organic growth exceeding 17%. We also exhibited notable strength in our enterprise sales pipeline, as we signed seven new organic enterprise clients during the period, positioning the company very favorably for continued strong organic growth in 2009 and beyond.

What truly excites me is that our strategy is resonating with an ever wider cross section of customers, allowing us to greatly expand our base of relationships, particularly on the enterprise side. Companies searching for cost saving opportunities are opening doors for further discussions that had previously been closed to us.

Moreover, our pipeline of acquisition candidates remains robust, as evidenced by our October 6, acquisition of Origen Partners, a leading Atlanta-based print management firm. This acquisition now establishes our first meaningful presence in the large Southeast marketplace.

Our ability to identify and acquire targets at a reasonable price positions InnerWorkings to cost effectively expand our geographic reach, diversify our customer base and infuse our sales force with high performance, seasoned professionals.

Our value proposition as a low cost high service provider continues to gain traction, particularly in an increasingly expense focused marketplace. Further, the strength of our platform enhances our ability to retain revenue streams, providing consistent and recurring financial results for our shareholders in times of economic uncertainty.

Taken together, our improved sales traction and significant customer loyalty reinforces our belief that InnerWorkings is winning in our efforts to become a global multi-billion dollar business. Our near-term and long-term future is bright, as companies continue to seek ways to maximize their print related budgets in a challenging economic environment.

While we have realized many achievements during this period, InnerWorkings is not immune to the current macroeconomic environment. Beginning in September and intensifying in October, we have experienced new increased pressure on marketing and advertising budgets particularly among our clients in the financial, retail, housing and pharmaceutical industries.

A driving factor for our sustained growth in a softening economy is the continued acceleration of the market’s recognition of our print management solution, which has resulted in accelerated sales cycles and notably greater interest and receptivity from key corporate decision makers.

InnerWorkings is proud of the loyalty we have developed with our existing customers, and we are leveraging the breadth of our business relationships to retain and further penetrate these accounts. We will continue to respond swiftly to market challenges and manage our business with maximum effectiveness through this period of economic uncertainty. I want to reiterate that the underlying fundamentals of our business remain strong and our financial structure is sound.

Now, I’d like to turn the call over to Eric Belcher, our President and Chief Operating Officer.

Eric Belcher

Thanks, Steve. We are making considerable progress toward our stated goal of becoming the first global multi-billion dollar business in the print management industry. As a growth oriented professional services firm with a significant technology advantage, we recognize that it’s the talents and drive of our people that define our organization and our ambitions.

We now employ almost 800 people and this team represents many of the best and brightest in our industry. Importantly, 51 of these talented professionals are now located on a full-time basis, directly onsite at our client’s locations. This is compared with just seven people three years ago.

Being onsite has advantages to both InnerWorkings and to our clients. We become a part of the daily fabric of our customer’s operations, when working from within their physical environment. We become an extension of their marketing and procurement teams, making frequent suggestions and improvements to their campaigns and promotions.

The relationships fostered by these onsite placements help create long term partnerships, enhance customer loyalty and further expand our business opportunities. Over time, we fully expect that hundreds of our employees will report to work on a daily basis directly at our client’s locations.

We are rapidly assembling the greatest concentration of talent in the printing industry through aggressive organic hiring and a series of targeted acquisitions in key markets. We now have about 270 sales professionals representing InnerWorkings in the market with a growing number of these individuals increasingly focusing on contractual enterprise business.

In fact, over 20 different business development executives across our company are leading the charge on our top 50 enterprise prospects. This compares to only a handful of InnerWorkings personnel capable of winning major new business just three years ago. This demonstrates that we are successfully institutionalizing the process of sourcing and landing large contractual accounts.

Perhaps even more important than our solid seven new enterprise wins in this quarter, is the strength of our prospecting activities. We continue to learn a great deal from our successes and are using this experience to refine our sales approach and implementation efforts to further enhance our growth trajectory and our knowledge base to draw from is growing rapidly. Today, we have 43 customers that we have billed at least $1 million in the past 12 months, up from just 13 three years ago.

I’d like to talk more specifically about a couple of the customer wins that our new business development team achieved in the third quarter. As we previously announced, Nicor Gas, one of the nation’s largest energy companies, has outsourced the responsibility for producing and distributing its billing and insert program to InnerWorkings. Our services to Nicor are fundamental to their operations and financial results and we are proud of the fact that they have trusted InnerWorkings to manage this critical element of their business.

In the third quarter, we also won a contract for a complete enterprise print procurement solution for a major international law firm. We’ll be supporting their sales and marketing collateral, direct mail spend and numerous other categories on a global basis. Together, we expect these two new relationships to generate millions of dollars of incremental revenue in 2009 and beyond.

Now, supplementing our individual organic hiring efforts, we continue to be active on the M&A front. As a reminder, it’s the organizational and financial discipline, we have employed before striking our partnerships that is the backbone of our successful M&A track record.

We only acquire companies that share our philosophy, the data and technology, are in necessity to maximize performance and results in the print procurement space and in keeping with our belief that M&A in our professional services space is primarily a recruiting activity.

We only partner with companies and their employees willing to engage in multi-year earn out programs, multi-year employment agreements for key personnel and long term non-competes. We now have 24 offices and employees in 26 states, as well as a presence in both the U.K. and Canada.

I’d like to provide some more detail around our recent group hire in Atlanta. After studying the local market for almost two years, we discovered a talented group of professionals with deep, long-term relationships with some of the most substantial companies in the region. We agreed to purchase the company Origen Partners, in October and we have high expectations that working together, we will rapidly penetrate the Southeast print market.

In fact, from our current base of $36 million in annual revenue out of this office, we expect to be realizing over $100 million annually in the Atlanta region within the next three to five years. While that may seem like an aggressive goal we’re seeing convincing evidence that our M&A strategy is the right one.

For example, in the third quarter we signed major enterprise contracts with Absolut Vodka and with Pulte Homes, one of America’s largest home building companies with operations in 50 markets in 27 states.

Without the powerful combination of our business development, technology and M&A activities, we would not have signed either of these major enterprise deals. The introductions to the key decision makers at both of these corporations were made by individuals that were formerly associated with regional print management firms that we have acquired.

With our combined resources, complementary capabilities and aligned incentives our approach of developing regional platforms is accelerating our market presence and penetration and think of all the locations in just the United States alone, where we currently do not have a meaningful presence; Florida, Arizona, Houston, Boston, Seattle, Denver.

Overtime, we expect to be in all of these locations and more, bringing a new approach and new procurement technology to the major corporations headquartered in these geographies, and we expect to be there with the best talent in the market.

Now, let’s turn our attention from our people, sales and M&A activity to a topic on everyone’s mind, the economy and its effect on our business. As Steve stated earlier, InnerWorkings is not immune to the current macroeconomic environment. Our company is broadly being affected in two competing ways by the current recession.

In the short-term environment, we are seeing pressure placed on corporate marketing budgets as unit volumes associated with campaigns and promotions geared at the upcoming holiday season are being reduced. This dynamic had an impact albeit, relatively minor on our third quarter performance and we expect it will have a greater negative impact on our fourth quarter reported results.

Now, on the flip side as the low cost provider in the marketplace, there is more interest today in our solution than we have ever seen in our company’s history. Our offering has two immediate cost benefits to our current and prospective clients.

The first is an absolute reduction in the cost to buy printed materials. We are finding that corporate executives are heavily motivated to attack this low-hanging fruit within their organizations during these difficult times and we are even seeing an acceleration of our sales cycles, as there’s a new urgency within procurement and marketing executives to realize any at all cost savings.

Secondly, we free-up headcount expenses for our customers as our personnel take over the responsibility for managing the print procurement function going forward. In fact, over the past couple of months, we’ve seen a number of our prospects focus more on their interest on the staffing component of our solution.

One recent example, a prospect reached out to us following a loss of a critical print production manager through a general reduction in force put in place by their company. This effectively eliminated their ability to procure printed materials in-house and they turned to us for an immediate solution.

We had a resource onsite in a matter of days and we are currently procuring all of their printed materials while we work through the details of our contractual arrangement. Even the pricing pressures, created by the additional pockets of excess capacity that exist in the print manufacturing marketplace today, are helping to build our relative competitive position in buying printed material.

Our distinct informational advantage across a vast supplier network allows us to capitalize on the buying opportunities made available by the additional excess capacity found in our industry today.

To summarize, our unique low cost solution continues to position InnerWorkings favorably in the marketplace despite the economic downturn and we are aggressively pulling on the appropriate levels in our drive to become a global multi-billion dollar business. There is not a doubt among us that we will emerge from these trying economic times in an even stronger position.

I’ll now turn the call over to Joe, for a discussion on the company’s financials. Joe.

Joe Busky

Thanks for the update, Eric. I will now take you through our financial results for the quarter and provide some additional color around those results. As Steve mentioned, our revenues for the fiscal third quarter was a record $122 million. This represents a 69% increase over revenue of $72.1 million in the prior year quarter and was driven by strong gains made across, both enterprise and transactional clients.

Our organic growth in the quarter was an impressive 17% in a period of economic downturn. Enterprise client growth remains strong and continues to exhibit excellent momentum. Overall, enterprise revenues increased 68% quarter-over-quarter to $79.2 million, with a customer base of 137 enterprise accounts versus 110 at this time last year.

Looking at our transactional business; transactional revenue increased 71% quarter-over-quarter to $42.8 million and we serviced over 3400 customers in the third quarter of ‘08 versus roughly 2400 in the year earlier period.

For the quarter, enterprise sales represented 65% of total revenue and transactional sales represented 35%. While we continue to see strong transactional revenues as a result of recent acquisitions, we are most pleased with our significant organic growth from our enterprise business segment.

Gross profit for the quarter was $29.5 million, versus $18.3 million in the year ago quarter. Gross margin was 24.2% during the period, which were 120 basis points lower than our gross margin of 25.4% reported in the third quarter of ‘07. While lower year-over-year, InnerWorkings gross margin remains inline with our long-term guidance.

Recent results are a near-term mix occurrence driven primarily by new, not yet fully integrated acquisitions, with still lower margins than which we have not leveraged our technology, supplier certifications and sourcing processes. We estimate this impact to be approximately 80 basis points of margin in the quarter.

We continue to practice stringent cost discipline and our selling, general and administrative expenses were essentially flat at 16.6% of revenue, in the current quarter compared to 16.5% during the same quarter of the prior year and are down about 50 basis points sequentially versus our Q2, 2008 SG&A margin after adjusting for the one-time bad debt reserve of $1.5 million last quarter.

We are actively taking cost out of SG&A where possible, including out of companies acquired in the last five months, while selectively reinvesting back into the infrastructure with particular emphasis on our sales management, sales support and technology infrastructures, as these functions have the greatest impact on supporting the business and building a robust, lasting platform.

Now, I’ll discuss operating income, net income and EPS results. First, let me begin with operating income. In the third quarter, operating income was $7.8 million, as compared to $5.8 million in the prior year quarter. Operating margin was 6.4% during the quarter, as compared to 8.1% in the same quarter last year.

This 170 basis point drop year-over-year is primarily due to the previously mentioned gross profit impact and a 60 basis point impact from increased non-cash depreciation and amortization. Net income increased 41% year-over-year to $5.7 million during the third quarter. As a percentage of revenue, net income stood at 4.7% as compared to 5.6% in the same quarter of last year. This 90 basis point drop is due to the gross profit in D&A dynamic suspension, in addition to a 40 basis point impact from additional net interest expense in the current quarter.

Finally, our fully diluted GAAP, EPS during the third quarter was $0.12 per share and our operating EPS was $0.10, as compared to $0.08 during the third quarter of ‘07. Our diluted share count for the current quarter is 49.1 million shares. Now, excluding the year-over-year increase in D&A and interest expense through an apples-to-apples comparison, we would have generated $0.12 per share versus $0.08 in operating EPS in Q3, ‘08 versus Q3, ‘07.

Now, let’s turn our attention to the balance sheet. Cash flow from operations was $3.6 million during the quarter. This represents an impressive 44% increase versus the $2.5 million reported in cash flow from operations in the third quarter of ‘07, and does highlight the attractiveness of this company in certain generating cash flow.

In fact, year-to-date, we have generated $15 million of operating cash flow, versus $7 million from year-to-date ‘07. We ended the quarter with $32.5 million of cash and marketable securities. Our strong cash position coupled with our low requirements for capital facilitates our continued upward growth trajectory.

We also made borrowings on our existing credit facilities to support our acquisition activities and share repurchases, bringing our total debt to $35.5 million. The resulting net debt is $3 million and the company has a robust $72.2 million of available liquidity.

As an asset light business with low inventory, a low cash conversion rate and very strong working capital we believe InnerWorkings financial position represents a significant competitive advantage and provides us with much needed stability in a volatile market.

Now, I will conclude with a discussion regarding the sale of a portion of our Echo Global Logistics asset, an update on our buyback program and an update on our outlook. Let me begin the discussion with comments around the partial sale of our equity and Echo Global Logistics.

In Q3, the company sold 150,000 common shares of its holdings in Echo for $1.5 million in cash. We are extremely pleased with the sale, as it represents a significant gain on InnerWorkings February ‘05 investment of $125,000 for 2 million shares of Echo. We expect to further enhance shareholder values, opportunistically monetizing our remaining 1,350,000 shares of Echo stock.

At the value we have realized in the past, this investment represents an additional approximately $13 million of liquidity to fund our M&A pipeline. In addition to the sale of Echo shares, we remain active in the deployment of capital with the goal of enhancing shareholder value. During the quarter, we purchased approximately 1.6 million shares of InnerWorkings stock for $18.7 million, at an average price of $11.42 per share.

This program reflects our strong confidence in the company’s prospects. We remain committed, we are appropriate to utilize this lever, increase shareholder value and boost long-term return on invested capital. With a healthy cash position, a secured line of credit at a very competitive interest rate and available proceeds from the sale of Echo stock, we have ample liquidity to fund strategic growth initiatives, including acquisitions and the repurchase of shares of our common stock.

Moving on to our outlook, we are taking the actions necessary to successfully navigate through today’s economic uncertainty and a changing economic landscape. However, the slowdown in the broader market mentioned earlier by Steve and Eric has affected our business, we believe it makes sense to revisit our ‘08 annual guidance expectations.

We have, therefore adjusted our near-term expectations and we are changing 2008 revenue guidance to a range of $435 million to $450 million. Annual, earnings per share guidance is now projected to range between $0.41 per share and $0.43 per share.

Operating earnings per share results are estimated to range from $0.09 to $0.11 for the fourth quarter. This change primarily reflects three factors all a result of the weak economy. First a significant cutback on print and promotional budget spending by our customers; second a decline in print costs, which reduces our revenue and cost proportionally on our open-book cost plus contracts, so earnings and EPS dollar contributions are lower; finally, a foreign exchange impact due to the strengthening dollar.

This range of fourth quarter of guidance may seem wide, but given the current macroeconomic and credit market conditions, which make predicting revenue very difficult we feel that the wide range is appropriate. Even with the revised 2008 guidance, though we expect to finish with an annual revenue run rate in excess of $500 million as we enter into 2009.

Additionally, we expect continued strong organic growth and to make selective acquisitions throughout the year. We will provide additional granularity on our 2009 organic only guidance at our November 20, Investor Day in New York.

Now, I will turn the presentation back over to Steve for closing comments before we open it up for q-&-a. Steve.

Steve Zuccarini

Thank you, Joe. Really to conclude I want to reiterate our confidence and our ability to emerge on the other side of this macroeconomic slowdown even stronger than before. We regard this challenging environment as a significant opportunity. The platform we are constructing is consistent with our articulated strategy and critical for our long-term success.

There are many positives for InnerWorkings in a weak economy and we are actively taking advantage of these opportunities presented. Should the business climate continue at these current levels, InnerWorkings niche as an asset light, high service, low cost provider in this sector positions the company to rapidly expand our market share.

Kevin, I’d now like to open it up for questions, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is come from Jim Friedland - Cowen and Company.

Jim Friedland - Cowen and Company

I have a few housekeeping question. First, were you able to liquidate any of the auction rate preferred that you held in the quarter? Second, given that you have the choice in terms of some additional room on the buyback and on the other hand, the potential to acquire additional companies. Should we expect, I think there is about $25 million left are you looking to finish that up or are you looking in this environment to really focus on acquisitions? Then, I have a follow up after that. Thanks.

Joe Busky

Jim, this is Joe. Thanks for the question. First of all, on the auction rates, what we did, and you’ll see this in the Q when it’s filed? We did sign a rights agreement with UBS, who we hold the auction rates with, whereby we are going to get full liquidity at par on all of the auction rates sometime in the first half of 2010. So, we did not liquidate any in the quarter, but we do have an agreement set up now where we have that in place.

As far as the use of cash, our first and foremost use of cash is going to be on the M&A pipeline. That’s where we see the most shareholder value created. However, we do still have, as you mentioned some room left on the share repurchase program and we will, as the market allows us opportunistically buyback shares in the open market, but first and foremost we are going to look at the M&A pipeline first.

Jim Friedland - Cowen and Company

Then just a general question in terms of your comments on the financial, retail, housing and pharma showing some weakness; one I was under the impression, I thought financial and housing as a percentage your customers were relatively small.

So I was just wondering if you mentioned them because you noticed it or have you signed up additional customers, are those bigger categories. Also, as you’re looking at the base, on the same-store sales basis, can you give us a sense of what your typical retail customer might be spending this year versus at the same time next year? Are looking at it, flat year-over-year down 5%, what sort of a change in spending given the environment?

Eric Belcher

Jim, this is Eric. I’ll answer those two questions. First of all, we highlighted the four industry verticals, not because we’ve picked up any disproportionate amount of new meaningful business in those verticals, but simply because those are the four verticals across our portfolio that we’ve seen the greatest amount of pressure, the most in the form of cutbacks.

Our exposure to those four verticals is quite similar to their size as an overall percentage of the American economy, somewhere in the 15% range.

Jim Friedland - Cowen and Company

Yes, that’s great and then, maybe if you were to look at say retail, especially given what’s going on with the economy. What’s really changing in their budgets for your typical customer there, is it flat year-over-year, where you previously were expecting an increase or are they actually saying, you know we are just going to cut it by 5% versus what we did look you guys last year?

Eric Belcher

It’s more the latter. We’re seeing reductions in the 5%, and on some cases even 10% range within the retail segment of our customer base. That’s not 2009, that’s Q4 that’s this holiday season.

Operator

Your next question comes from Franco Turrinelli - William Blair.

Franco Turrinelli - William Blair

Can I just do a couple of real quick housekeeping just, so that we can put these numbers in the model? Joe, can you give us the basic and diluted share count, please?

Joe Busky

The diluted share count, I think it was 49.1 and I got to tell you, I don’t have the basic --

Franco Turrinelli - William Blair

That’s okay. We’ll assume that you’ll keep making money.

Joe Busky

I’ll get that to you after the call. I don’t have the basic, but I have the diluted.

Franco Turrinelli - William Blair

That’s fine and then, on the Echo shares again just that we properly treat that. Are you able to give us the amount, either pretax or after tax of that actually benefiting results --?

Joe Busky

Yes, I can do that. The pretax was $1,450,000 on the Echo gain for the quarter and the after tax is just under $900,000.

Franco Turrinelli - William Blair

So, now let’s turn to more important things. Eric, can you give us an update on U.K. operations?

Eric Belcher

The business is doing extremely well. As Joe mentioned, the dollar strengthened versus the pound in the quarter, that’s probably the only thing that didn’t work out well for our partnership with our friends now over in the U.K.

There’s a lot of dialogue going back and forth in both directions, us looking to help support their U.K. based clients here in the U.S. and in the reverse, even more so with them providing support for our large global American conglomerates as we look to expand our business within their organizations over into the U.K. So, everything is performing very well with the integration of our business in the U.K.

Franco Turrinelli - William Blair

I understand its early days yet, but what’s your thinking here, maybe to build out the U.K. or to use the U.K. as a launch pad for other markets rather than expanding the U.K.?

Eric Belcher

Well we’re focused on expanding the U.K. first. Overtime, whether or not the U.K. becomes the platform for our growth into Continental Europe is an open question. It is our plan though, to use that talented team as our beachhead to do that.

Franco Turrinelli - William Blair

One final one before I get into queue, if I may. I’m very interested in your comment that, because you can now buy the printed product at lower prices, you know that has an impact on revenue and costs of goods sold, we certainly understand that.

My question is, whether or not that weakness in the printing market, creates either some disadvantages or advantages for you given your contractual arrangements with customers. I guess in all of those places where there is sort of a cost plus, the answer would obviously be no, but I’m kind of wondering about maybe those situations where you have a gain share or other contractual arrangements.

Eric Belcher

Well, you’re right. It’s in a cost plus environment, when we’ve got pricing in recession in the print manufacturing space not so much by the way in the paper market. That’s relatively flat and that’s about half of our COGS, but in the print manufacturing space of course, that works against us from a total revenue recognized and an earnings perspective in the short-term. What was the second part of your question?

Franco Turrinelli - William Blair

I’m really just kind of wondering if, I mean obviously this is probably an opportunity for you to do frankly, an even better job for your clients and save them more money and really kind of capture the weakness in the end market, but I’m wondering if in addition to client satisfaction, that’s maybe even a little bit more spread that you’re able to capture in this situation.

Eric Belcher

Well, first of all you had mentioned gain share and, yes we are picking up some small benefits on that front in this environment. It’s not meaningful or significant, but that benefit exists. Now, of course all of our clients in a market like this are aware of the fact that print manufacturing pricing is depressed and so their expectations of us are that we will, on a relative basis continue to outperform anything that they may do, if they attempted to pull this function in-house and we’re doing that.

In fact, we believe we’re on a relative basis, performing even better than a corporation buying in the sort of historical archaic way of utilizing an individual with no data and technology in a small supplier base given the fact that, as excess pockets of capacity arise, we’ve got more information at our fingertips, our ears to the ground, we’re able to find those pockets and capitalize on them.

So, in terms of our client satisfaction in this kind of an environment, not only are they getting increasing relative benefit of our buying capabilities, but frankly they’re quite satisfied that it’s our payroll, not theirs employing a person to conduct this function for them.

Franco Turrinelli - William Blair

Thank you Eric, I’ll get back onto the queue.

Eric Belcher

Franco, the basic share count is 47.1.

Operator

Your next question comes from Randy Haugen - Piper Jaffray.

Randy Haugen - Piper Jaffray

Could you just kind of give us a general timeline for how long it might take some of your recent wins to start showing significant revenue levels and then also, some visibility that you have into those levels?

Eric Belcher

The 21 enterprise, new enterprise contracts that we’ve landed organically thus far at this year, most of the benefit of the revenue recognition will come in 2009 and we expect particularly from the 16 or so landed in the last four or five months. We expect the revenue to hit in a meaningful way in the second half of the year and perhaps, what I should do to answer the second part of your question, Randy is give you a specific example.

We landed a new agreement with Absolut Vodka on July 1, so the beginning of Q3. We spent the next three months, the balance of that quarter getting up to speed on their business, on their brand, on their campaigns, on their philosophy.

We began booking our first orders for their promotions, primarily retail racking displays and promotions that end up in the retail environment in the fourth quarter in October. Most of the shipments, you know we recognized our revenue on shipment will take place starting in 2009 and it will be a gradual ramp through the year. We think it’s an eight-digit award and we think we’ll hit full stride on a run rate in the second half of 2009.

Randy Haugen - Piper Jaffray

Thanks helpful, then the 80 basis points of impact to the gross margins from lower margin acquisitions. How long is it going to take for those elevated costs to move out of the bottle?

Joe Busky

Randy, it’s Joe. It’s probably going to be in the first half of ‘09, until we get that fully driven in.

Randy Haugen - Piper Jaffray

Thanks, just one more housekeeping question. Could you give us the selling commissions for the quarter?

Joe Busky

Randy, one of the things that we’re looking at with the numbers is that, as we move our business more towards enterprise and less transactional. We’re seeing that, we have a less sales commission individuals and more salary commission or more salary-based executives managing these enterprise accounts.

So, we’re seeing a trend of the sales commission margins coming down. It’s trending down overtime and it’s moving into the G&A. So, I believe the more meaningful way to look at the numbers would be just to look at total SG&A because you have that offsetting trend going on.

Operator

Your next question comes from Youssef Squali - Jefferies & Company.

Youssef Squali - Jefferies & Company

Joe, just a clarification on that, so you are not breaking out SG&A going forward?

Joe Busky

Youssef, I just don’t think it’s as meaningful as it has been in the past because it is trending down. I mean, I can tell you its coming down relative to where it has been in the past several quarters and it’s an offsetting impact on G&A.

Youssef Squali - Jefferies & Company

Can you speak to the implied organic growth in Q4 in your ‘08 guidance and what kind of visibility you have into those revenues already? I guess how much of those revenues have you already booked?

Joe Busky

If you look at the Q4 range that we gave you, the 120 to 135 that’s going to imply an organic growth rate in the 0% to 5% range. Remember that’s combined of the factors that we’ve discussed thus far on the call and that is, instead of seeing typically a 5% increase in print promotional campaign related spends, our customers, we’re seeing a 5% decline.

Now, offsetting that you’ve got the new enterprise accounts that we’ve signed ramping up, so that range of revenue we’ve given you, it’s going to imply a 0% to 5% organic growth in the fourth quarter.

Eric Belcher

Joe, just to build on that, we’re going to have 0% to 5% organic growth despite the fact that we’ve essentially lost 10% that we had planned on due to the economic environment, or approximately $20 million or so in revenue in Q4 due to the economy. Isn’t that correct?

Youssef Squali - Jefferies & Company

Yes, that actually brings it into my next question. So, at the midpoint of your new guidance, the Delta is about $27.5 million or almost 20% of previous estimates. Can you kind of break that out between how much of that is due to cut back into budgets, print costs and that FX? I’m assuming the biggest is the cutback in budgets.

Steve Zuccarini

Yes, Youssef, this is Steve. The majority of it is pure cutbacks on a top line revenue basis. 90 days ago, we were sitting here talking, no one would have expected what we saw happen in October. In my 30 years in the industry, I’ve never experienced such a rapid, widespread and significant pullback.

I mean, you know at the advertising and marketing budgets have been cut. We’re seeing retail same-store sales down 5%. Consumer confidence is that all-time low. The U.S. print shipment even in the month of September, which isn’t even going to be the worst month, was down 4.2%.

So, what we’re really seeing is this, almost entirely coming from cutbacks on people being frozen in this fourth quarter period.

Youssef Squali - Jefferies & Company

No, that makes sense. So, I guess following-up on that, what gives you confidence that you’ll see organic growth in ‘09? Is it because of all these enterprises wins that are finally going to start hitting in a big way starting next year?

Steve Zuccarini

That’s exactly what it is. It’s a combination of our enterprise wins and our prospects right now. Customers that we’re in advanced stages of dialogues with, that’s what gives us the confidence.

Youssef Squali - Jefferies & Company

Okay and then the last question. Joe going back to the balance sheet, how much earn-outs do you still have from all these acquisitions and do you expect to need any kind of financing, since some of your money is I guess stuck in AR, auction rate securities through 2010?

Joe Busky

Youssef, the ‘09 earn-out is estimated to be about $10 million, $12 million full-year and we’ve got plenty of current liquidity to pay those earn-outs even without the auction rate’s liquidity. I should mention that, we are allowed to borrow against those auction rates as well, so that liquidity is still there.

Operator

Your next question comes from Michael French - Morgan Joseph.

Michael French - Morgan Joseph

Can you comment on how the macro environment has affected the market for acquisitions that are you are seeing more opportunities, better-priced opportunities or is there something else going on out there?

Eric Belcher

Well, this is Eric. I’ll take that question, Michael. There are a few dynamics going on in the marketplace right now. Of course, in this kind of an environment, there are more companies for sale, distressed companies, but that’s not the market that we have historically participated in and nor do we intend to engage in meaningful dialogues with companies of that nature. We’re only looking for the best talent in the market when we’re out doing our group hiring through M&A.

From the standpoint of the economy and its impact on our M&A activity, from that perspective it’s meaningless. Now, from the perspective of valuations and structures, of course everybody’s valuation is down these days and that would include people that we’re in dialogue with about a partnership.

In addition, we’re heavily focused on structures, meaning amount of cash down on day one. Cash is king in these environments, we recognize that and we would expect partnerships executed in this kind of market environment to have more favorable whole structures and valuations from InnerWorkings perspective.

Michael French - Morgan Joseph

Do you think that the rate of acquisitions is likely to increase as opposed to previous periods or would the amount of activity stay the same, just with more favorable structure on the deals that do get done?

Steve Zuccarini

It would be the latter, Michael. We’re not looking to increase or decelerate our activity on the M&A front. Steady, deliberate, the way we’ve done it in the past.

Michael French - Morgan Joseph

Okay and of course on the balance sheet with accounts receivable, any concerns over bad debt given what’s going on in the macro environment?

Joe Busky

Michael, this is Joe. Probably, every CFO in the country is worried. I am worried as well, about the credit environment and the current macro environment. If I told you, I wasn’t worried I’d be lying. There are lots of concerns out there, but we have a very solid credit collections group here and we stay on top of all of our customers, current customers in terms of their credit, as well as new customers in terms of doing thorough credit check, D&B checks to make sure that we will extend them credit.

What I’m encouraged by is that, if you look at our DSO for the quarter is at roughly 61 days, which is right around where it’s been for the past six or seven quarters. So, even with these economic times we’re in, I’m not seeing deterioration in our DSOs and obviously, I’ll be keeping a very close eye on that through the fourth quarter.

Michael French - Morgan Joseph

Lastly on the margins, can you comment on the trends going on in the margins side? Is it just a reflection of the mix shift in favor of enterprise and something that gets affected by volume as the top-line comes down?

Joe Busky

Michael, it’s a good question. If you look at our gross margins, in the quarter and even in the year-to-date numbers, it definitely was an impact to the five acquisitions we’ve done in the last three or four months, where we’ve brought those companies into our fold and we still have to integrate them into our supplier certification, technology and sourcing processes.

Once we do that, that will benefit or take those margins up, but you are totally right in that, as we continue to drive more towards an enterprise mix with our revenue, that is going to compress the gross profit margins overtime, more into the 24% to 25% range as opposed to 25% to 26%, where we’ve been in some of the quarters in the past couple of years. It’s a good question.

Operator

Your next question comes from George Sutton - Craig-Hallum.

George Sutton - Craig-Hallum

As you look at hiring plans, how much focus is there on sales force productivity versus sales force additions?

Eric Belcher

George, this is Eric. We are focused on both metrics, but ultimately sales force additions, meaning if we can strike a relationship with an individual contributor who will bring a $1 million book of business profitable for us and for that individual. Even though it might drag down our overall sales productivity metric, we would still hire that individual.

Now, we would look to help support them, so that they could become a $2 million sales rep in our environment, but we certainly wouldn’t hold off on a hire because it would affect our sales rep productivity metric. Actually, one metric that we suggest that the investment community does not follow for this exact reason is sales rep productivity.

George Sutton - Craig-Hallum

As we look at Q4, I understand the logic behind the ranges. What really gives you confidence at this point that Q4 won’t go negative from an organic growth perspective? Is it some contributions from the new enterprise accounts?

Eric Belcher

We do have visibility into the bookings right now in our backlog and so we’ve got quite a bit of confidence that we’re not going to go in the reverse.

George Sutton - Craig-Hallum

I missed the number of onsite people that you have at clients. What was that number?

Eric Belcher

It’s 51 as of the end of the third quarter.

Operator

Your final question comes from Lev Polinsky - J.P. Morgan.

Lev Polinsky - J.P. Morgan

Thanks for taking my question, a few quick questions. One, I was wondering if you were still planning on making further sales on the Echo Global Logistics through the rest of the year.

One, I was wondering, I think that the interest on your debt is not just LIBOR, so if you could talk about that a little bit or if there’s just LIBOR. Finally, in the third quarter and in the fourth quarter did you have any exposure, I guess probably on the transactional side to sort of political campaign type printing material that might be coming back? Thank you.

Joe Busky

This is Joe. Thanks for the questions. First of all on the Echo sale, we are going to opportunistically monetize that asset on our balance sheet as the market allows. So, we’re likely to sell those shares, over the next several periods and there are no immediate needs or plans that for instance sell it all in Q4 and Q1. We’ll wait till the market dictates when it’s right for us to monetize that investment.

As far as the line of credit that we have and before I move on I want to make sure it’s clear that in the $0.09 to $0.11 of Q4 earnings per share I mentioned, that does not include any anticipated sale of Echo shares. That’s total operating EPS.

Moving to the line of credit, I want to mention that line of credit is with very solid banks. It’s with BofA, J.P. Morgan and Northern Trust and the interest rate on that is anywhere from LIBOR 125 to LIBOR 150, so it’s a very attractive rate given where things are right now in the market.

Then, your final question we did have some limited political related revenue in the quarter, but nothing real significant. So there’s no significant impact or drop of from that.

Operator

That does conclude the InnerWorkings, Incorporated quarterly earnings conference call. We do appreciate everyone’s participation. You may disconnect at this time.

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Source: InnerWorkings F3Q09 (Qtr End 09/30/08) Earnings Call Transcript
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