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InnerWorkings, Inc (NASDAQ:INWK)

Q4 2012 Earnings Call

February 13, 2013 05:30 pm ET

Executives

Eric Belcher – President, Chief Executive Officer

Joe Busky - Chief Financial Officer, Secretary

Analysts

Matthew Kempler – Sidoti & Company

Nate Brochmann – William Blair

Kevin Steinke – Barrington Research

George Sutton – Craig Hallum

Operator

Good day, ladies and gentlemen, and welcome to your InnerWorkings, Inc. Quarterly Earnings Call. (Operator Instructions) And as a reminder, today’s conference is being recorded. And now I would like to introduce your host for today, Joe Busky.

Joe Busky

Thanks, John. Good evening, everyone, and thank you for joining us on our Fourth Quarter and Full Year 2012 Earnings Call. This is Joe Busky, and I am the Chief Financial Officer at InnerWorkings. Joining me on the call today is our Chief Executive Officer, Eric Belcher.

Before we begin though, 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.

With respect to the call, you’re advised to review our SEC filings, including the risk factors contained in our most recent Form 10-K. This call will discuss, among other financial performance measures, non-GAAP adjusted EBITDA, non-GAAP adjusted operating cash flow and non-GAAP adjusted diluted EPS, which are non-GAAP financial performance measures. Please refer to the company’s earnings release issued earlier this evening for a reconciliation of these non-GAAP measures to the nearest comparable GAAP measures. This call is intended for investors and analysts and may not be reproduced in the media, in whole or in part, without our prior consent.

Eric will lead off today by highlighting our fourth quarter achievements and activities, and then I’ll spend a few minutes on the financial results, and then as always, we’ll open the call up to your questions. And with that, I’ll turn the call over to Eric Belcher.

Eric Belcher

All right. Thanks, Joe. Looking back at 2012, it was our best year ever and given our success in signing larger, new long-term contracts, some of which have only just started to ramp, 2013 is on track to be an even more exciting year.

Now let me walk you through the key highlights of 2012. We had record performances across the most important components of our business. First, we recorded over $100 million in incremental organic revenue from new clients, far and away a record, with the annual value of the contracts worth substantially more than $100 million, which of course sets us up nicely for 2013. Wins this year included large contracts with brand-name companies like TNT Financial, Gannett and Procter & Gamble, to name a few. Every major client up for contract renewal in 2012 resigned multi-year agreements with us and we’ve also taken over additional categories in geographies with a number of our existing clients. We now have 249 employees on site, full-time at our clients’ offices around the world. Our new client pipeline is more exciting than it’s ever been. We feel great about our prospects of adding new, large contractual clients to our roster in 2013.

We made solid resource allocation decisions on behalf of our shareholders throughout the year, particularly as it relates to two major investments, the first being our organic push into new markets like Brazil and China, and the second being our inside sales group.

Now we expect these investments to begin paying dividends in 2013. And here’s a little more information on each. First, our rapid, global expansion. In just a few years, we moved from being primarily a U.S.-based provider, to becoming a true, global powerhouse. 2012 was the year that we proved our domestic success with transfers to international markets. For example, we now support one of our clients in over 50 countries, another in 32 and handful more in at least 10 different countries.

We completed our build out in the major economies where we required additional presence, adding 40 number people in China and Brazil along last year. While we had very little in the way of revenue in China and Brazil in 2012, we’ve entered 2013 with new contracts and full head of steam and we expect big things from both countries this year. We’ve also added talent and new leadership in Europe, Asia and Latin America. Our customer spend was soft Europe in the second half of the year, though we still grew our European top line by 67%, of which almost 13% was organic growth. Still we expected even more growth and would have realized it, if it weren’t for the current economic downturn in the region. But we wouldn’t change a thing with respect to our decision to penetrate Europe, and of course we remain in full-attack mode in the region. We expect Europe to play out in a similar way, as the U.S. market did for us in 2008 and 2009, where a step back in our client’s spending patterns created larger business development opportunities for us.

Today, we have a number of advanced discussions going with existing clients, as well as prospects, regarding having us become their global solution. Interest is at an all-time high and believe the hard work and expense of building the world’s first truly global platform will ultimately be viewed as a game changer for InnerWorkings. We’re deep into the development of our next-generation technology platform, which will not only handle all currencies and languages around the world within one system, but it will allow for global client reporting, the sharing of concepts and materials across the various regions that our clients are doing business in and collaborative sourcing capabilities that will allow us to optimize procurement decisions on a global basis, as well as combine manufacturing runs across clients. The two platform’s already been rolled out in Latin America, and by the end of 2013, we expect to have all of our operations on the new system.

Now moving to inside sales, which targets the SMB market. We grew the business dramatically in 2012 and now have over 150 sales professionals, surrounded by a large support team of operations personnel, trainers, procurement staff, sales management and recruiters. The revenue from inside sales more than doubled in 2012 and we expect it to more than double again this year, becoming the equivalent of a top five customer for us in 2013.

And we also expect the business to become profitable this year, which will be the first year of profit since we launched in 2010. Now with this new method of supporting the middle market, InnerWorkings is once again blazing a trail in our industry. We’re convinced that our solution represents the way of the future in this market segment, which has been overcharged and underserved for far too long.

We added over 300 people in 2012 around the globe and I couldn’t be more proud of our team. It’s our intention that our colleagues be in the top 1% of the talent pool in our industry and we believe we’re on track. To our knowledge, we’re also the only company aggressively bringing new talent into this industry.

Historically acquiring entrepreneurs through our M&A practice has been a highly successful source of sales talent and executive leadership within our company. And while we didn’t close as many M&A deals in 2012 as we’ve historically, we remain quite active within this space. We have a disciplined, principled approach to M&A, including a very selective process with respect to evaluating the capabilities of the entrepreneurs that we’re willing to partner with. This selectivity played a role in us having a relatively quiet year with respect to acquisitions. But we still see M&A as a tried and true way to bring on board talented business leaders, as well as new customer relationships that we can help grow with our global platform. We have a great pipeline today and we hope to leverage this pipeline and our track record as a trustworthy, successful M&A partner a little more in 2013 than we did last year. One final comment on the personnel front. We rounded out our already outstanding board of directors with the recent Julie Howard the CEO of Navigant Consulting. Julie’s pedigree in professional services experience are a welcome addition to our board and we look forward to working with Julie in the future.

So in summary we had a very successful 2012 and we enter 2013 with a conviction that our momentum will continue at a rapid pace. Here’s how we view the upcoming year in terms of our vision of the future. We expect to make solid progress toward our goal of becoming a multi-billion dollar global powerhouse with the most respected name in the industry. We’ll continue to expand around the globe and engage even more meaningfully with some of the world’s largest and most successful corporations. Over time we expect to have thousands of employees on site supporting our clients.

As our up front investments begin to pay off while operating continues to improve, we’ll make real progress this year on our adjusted EBITDA margins toward our longer term goal of 8% to 9%. We’ll roll out our advanced global technology platform to all corners of the globe as we expand our advantage versus any other system in our space. And we’ll continue to expand and diversify our offerings in areas such as software licensing, pre-media, food packaging and creative services. So with that I’ll turn the call back over to Joe to discuss our financials and provide a little more detail on our guidance for 2013.

Joe Busky

Thanks, Eric. In total we generated record revenue of $208 million in the fourth quarter of 2012 an increase of 19% compared with the fourth quarter of 2011. Walking through the growth in the press release, the growth in the fourth quarter was primarily attributable to $25 million or 14% organic new enterprise cap growth. We also had $4 million or 2% of organic billed market growth and $4 million of revenue growth derived from acquisitions made in the first half of 2012. Same customer organic spend in the fourth quarter was flat versus Q4 last year.

Note that because we passed the one year anniversary of the acquisition of the York-based productions graphic business which we acquired in October of 2011 and we completed very few acquisitions in 2012, there was very little liquiditive growth in the quarter. Taken together the total organic growth in the quarter continued to be a strong 16%.

For the full year 2012 we generated $798 million in revenue compared to revenue of $634 million in 2011. For 2012 we generated $102 million or 16% of organic new enterprise account growth and $14 million of new middle market growth. Same customer organic growth for the year was $3 million, an increase of 1% from 2011. So in total we grew our top line in excess of 26% overall and 19% organically compared to 2011. Keep in mind that this is our third year in a row with near 20% organic revenue growth.

To give you a better sense of the European softness we witnessed in the quarter, it represented approximately $8 million of revenue shortfall versus our plan, and 100% of the shortfall is related to macro-economic conditions in Europe, where our client’s budgets were reduced versus their original forecast. While we’re in close dialog with our European clients regarding their 2013 plans, we’re optimistic about our future in the region, primarily because independent of the cyclical macro environment, we expect to overcome the current headwinds with our wins and growing pipeline.

Looking at our sales channel mix, enterprise revenue grew 23% in the fourth quarter of 2012 versus the year earlier period driven primarily by the successful ramp of new account revenue, particularly from recent large new enterprise wins. Middle market revenue grew by 9% compared to last year driven primarily by growth in inside sales. Over time as inside sales becomes a larger percentage of our Middle Market business, we expect the total middle market growth rate to accelerate.

Overall, our enterprise channel accounted for 75% of revenue during the quarter and middle market 25% compared to the 72%/28% split in the fourth quarter of 2011. Full year 2012 enterprise account growth was 30% and full year mid-market account growth was 15%. Now given the mix shift towards enterprise revenue, we had some slight drop in both the fourth quarter and annual gross margin. Gross profit for the quarter was $49.3 million and gross margin was 23.7% compared to $42.6 million and 24.3% in Q4 of last year. For the full year 2012 gross profit was $185.4 million and reported gross margin was 23.2% versus a 23.6% margin in 2011.

Now turning to expenses, we settled two legal proceedings in Q4 of 2012. The 2008 Circuit City preferential payment lawsuit filed by the trustee of the Circuit City liquidating trust was settled in Q4. And as a result we recorded an additional $1.1 million of expense to settle all claims and expenses related to this suit. In addition, we are concluding a settlement of the U.K. VAT claim in a Q4 recorded $1.5 million of expense to settle all claims in being from 2008 through 2012. All addition VAT going forward from 2012 will be billed to our customers in the UK as a normal pass through expense. No additional expense is expected from either of these legal proceedings.

SG&A excluding legal settlement expense, contingent consideration impact and stock based compensation was $36.8 million or 17.7% of revenue in the fourth quarter versus $31.5 million or 18% of revenue in the year earlier period. On a full year basis excluding again legal settlement expense, contingent consideration impact and stock based compensation SG&A as percentage of revenue was up 20 basis points to 17.8%. Investments and growth of both inside sales and our presence in Brazil in China map a 60 basis point SG&A margin improvement in our core business during the year. This point’s important as we expect the loss on inside sales, Brazil and China in 2012 to turn profitable in 2013 which should continue to support solid margin improvement.

As mentioned in the release issued earlier in Q4 we recorded a net benefit on the change in fair value of contingent consideration of $3.5 million related to acquisitions in Europe. All acquisitions we make are structured under a contingent consideration arrangement pursuant to which additional purchase price burnouts are not paid unless certain performance measures are met. Due to the macro softness in Europe we saw in 2012 not all of these applicable performance measures were met and as a result the company recorded a net benefit to release contingent consideration obligations. The structure used in our M&A transactions protects our shareholders in situations such as these.

Now offsetting more than half of that contingent consideration benefit recorded was an incremental in nature noncash stock based compensation spend of $2 million recorded in Q4. While have a true up in Q4 every year on stock based compensation the size of this one was larger than usual. We don’t expect a similar unusually large charge in 2013. And the charge specifically relates to assumptions we made on employee retention four years ago. The good news is that our retention was much greater than forecasted when these rewards were granted. The flip side is we need to true this up with a noncash accounting expense.

So EBITDA adjusted to exclude stock based compensation, legal settlement expense and contingent consideration impact was $12.5 million compared to $11.2 million in the year earlier period. Our full year adjusted EBITDA is $45.3 million and is up 20% versus 2011. And as further evidence of the margin improvement opportunity in our core business in our more established U.S. enterprise market, we increased our contribution margin by 100 basis points from 9.2% to 10.2% in 2012. This improvement was driven by year-over-year margin improvement on our large enterprise account, and we expect a similar trend in our international markets as we develop scale and associated operating leverage in those regions. Q4 operating income before legal settlements was 10.3%, which is up 36% year-over-year, and looking at operating income before legal settlement expense for all of 2012, we are 31% higher than the year earlier period.

The company’s non-GAAP diluted earnings per share for the quarter before legal settlements is up 25% to $0.15 versus $0.12 in the year earlier period. Full year non-GAAP EPS before legal settlements is $0.41 versus $0.35 in 2011, an increase of 17%. And if the Echo gains are excluded, the full year EPS growth is 33%. We do not expect any more expense coming from either of the legal issues in our future results, and there will be no additional impact from the sale of Echo stock going forward as we have sold all of the shares as of the end of Q4.

Moving on to our liquidity and balance sheet, we had a record $22 million of adjusted operating cash flow in the fourth quarter. Looking at our full year operating cash flow, please note that in addition to the $4 million VAT paid in Q3, there is a $9 million cash back benefit associated with exercised options that under U.S. GAAP practices have to be recorded as a deduction to operating cash flow and an increase to financing cash flow. Both of these items are considered out of the ordinary and as a result our adjusted operating cash flow on a full year basis is $23 million. In Q4 we kept VPOs flat while at the same time improving our DSOs. We identified a number of operational DSO improvements to put in place with our customers and our production staff to allow us to continue to drive DSOs down in 2013.

At December 31, 2012, we reduced our gross debt by $9 million in Q3 to $65 million and with $17 million of cash and short-term investments, our net debt is down 26% from Q3 and now stands at $48 million. Total liquidity is $102 million and our debt-to-leverage ratio is at four year low at 1.4 times trailing 12 months adjusted EBITDA.

Now looking at our guidance for 2013, our guidance is $930 million to $960 million in revenue and $0.57 to $0.61 in earnings per share. This guidance does not assume any new acquisitions and translates to a range of 16% to 20% organic growth from the top line and 39% to 49% growth in EPS, compared to the 2012 adjusted diluted EPS, excluding legal settlement expense. The strong bottom-line improvement is primarily driven by adding profitable new clients, creating operating leverage on existing business and turning the loss related to investments and inside sales, in Brazil and China, to profitability in 2013.

With that, operator, let’s open up the call to some questions now, please?

Question-and-Answer Session

Operator

(Operator Instructions) So we’ll take our first question from Matthew Kempler from Sidoti & Company. Matthew, please go ahead.

Matthew Kempler – Sidoti & Company

Thank you. So just to summarize, is it fair to say that enterprise domestically was in line with expectations, both mid-market and Europe were soft?

Eric Belcher

No, Matt. I don’t think that’s exactly how I would say it. We’re pleased with the Middle Market business as well, and really it’s just Europe that we saw soften.

Matthew Kempler – Sidoti & Company

Okay. And so in Europe, the $8 million shortfall versus the budget, purely macro related, so just give us a sense – you talked about and you think it will power through in 2013, even with the same environment that we’re facing now, can you elaborate a little bit more on where that confidence is coming from? What you’re seeing in the discussions?

Eric Belcher

Sure. So if we look at the United States back in 2008 and 2009, same customer spend dropped off 20% to 25%. And it was also during that time that we brought on board some of our largest, new enterprise contracts, as corporations more aggressively sought ways to take out back-office expenses, bad costs. So we were facing some headwinds, but only in the near-term financial results.

Not in our business development efforts, which actually, we believe, were accelerated in some cases due to the pressures in the macroeconomic environment in the U.S. So now as we look to Europe, there’s no doubt that every major corporation doing business in Europe is feeling economic pressure and the idea of partnering up with InnerWorkings to take out bad costs and their indirect spend categories is just that much more appealing. And so from a business development standpoint, our team in Europe is as switched on as they’ve ever been and I expect some great announcements before this year is over. So our revenue has fallen off by that $8 million that Joe mentioned but that’s a small amount in relation to the larger scheme of things in terms of what we’re going to be able to do I believe, in terms of bringing on new clients.

Matthew Kempler – Sidoti & Company

Okay. And then on the inside sales force. So our target I believe was to have at least $15 million of revenue from that group in 2012. Did we achieve that? And then, did the head count end up where you thought it would for the year? And how far do your plans look in 2013?

Eric Belcher

Hey, Matt. So we actually did achieve the growth targets that we had laid out for inside sales for the year. And the number of reps is also right in the range of the target we laid out as of the end of the year which was 150 to 200 reps by the end of the year.

Matthew Kempler – Sidoti & Company

Okay. And are we still looking to scale that up in 2013?

Eric Belcher

Yes. We’ll be bringing on more reps and more support infrastructure in 2013. No doubt about it. We love what we’re seeing with the inside sales business. It’s going to be a fantastic contributor to InnerWorkings over the long term.

Matthew Kempler – Sidoti & Company

Okay. And then last thing and I’ll get back in the queue. Can you just talk a little bit more about China? The investments you’re making there and is that bringing over existing clients? Or are you talking to new business there as well?

Eric Belcher

So we have begun in China working with existing clients that we’ve been servicing in other regions of the world. Same goes for Brazil. So we’re doing business in China with companies like InterContinental Hotels and MoneyGram. We’re doing business with companies like Unilever and Procter & Gamble in other markets of the world. And so it’s getting established, Matt, with existing clients but we’re out aggressively promoting our capabilities as well to add new clients in China and Brazil. And we, based on where we are with discussions right now, we fully expect that to happen here over the course of the next few months.

Matthew Kempler – Sidoti & Company

Okay, thank you.

Operator

Okay, thank you. (Operator Instructions) So we’ll take our next question from Nate Brochmann from William Blair. Please go ahead.

Nate Brochmann – William Blair

Good evening gentlemen.

Eric Belcher

Hi, Nate.

Nate Brochmann – William Blair

Hey, wanted to talk just a little bit more on Europe. You know you talked about the poly staying customer spend being down there a little bit. Could you give maybe a magnitude relative to that 25%, you know 20%, 25% down that you saw in the U.S. during the worst period? Where Europe might be relative to where they were a year ago or so? And two, we’re hearing from some other industrial companies that, that’s starting to feel like it’s stabilizing a little bit. Was wondering on top of your ability to win additional share with the value proposition, just whether you see that same spend leveling off or not?

Joe Busky

It’s Joe. For the year the reductions in customer spend that we’ve seen is in the 15% to 20% range, and we actually saw it increase as we moved throughout the year. So the impact in the second half was a little greater than it was earlier in the year. As far as stabilization, we’re staying close with our customers in close dialog with their 2013 plans, and as Eric said, we’re optimistic about the region because we do have a very solid pipeline and a lot of good things going on there. So I’m not going to try to predict what that same customer spend is going to be in 2013. I would guess it’s going to be negative at this point, but we can talk more about the assumptions built into our 2013 guidance next week at our investor day.

Nate Brochmann – William Blair

Okay. Fair enough. And just kind of derivative of that, though, we were expecting some of this higher margin transactional business to come in at the end of the year from your based end seasonality. I assume that, that was in terms of that higher margin transactional business that definitely fell off as well, not just same spend on your core customers in Europe?

Eric Belcher

Yeah. That’s right, Nate.

Nate Brochmann – William Blair

Okay. And then moving to guidance a little bit, I was a little surprised that you guys uncharacteristically gave guidance on the call versus waiting until next week, which we appreciate. And revenue definitely looks pretty strong and earnings looks even stronger. I mean, those are definitely going to be some great incremental margins and you explained some of that, Joe. Is there any underlying differences in terms of what you might have been originally expecting on any contingent consideration payments or anything else unusual? Or is it really the strength in the new profitable customers switching the losses to profits, et cetera?

Joe Busky

First of all, Nate, on the timing of the guidance, we recognize that sometimes it’s a little awkward for you guys with your report that we have an earnings call and then a week later we have an investor day. So we decided to try to eliminate that time lag between the two events, which might make it easier for your reports. And second of all on the bottom line improvement, it’s really – it’s driven by three things. It’s adding profitable new customers, it’s realizing leverage on the existing business and it’s turning those investments in Brazil, China, inside sales into profitability next year. And those three things are the three main drivers of the significant increase in earnings in 2013.

Eric Belcher

(Inaudible) accounting like that...

Joe Busky

There’s no, as I mentioned in the prepared remarks the stock base comp competition should come back down to a more normal level and even contingent consideration I would expect to turn back to a more normal expect for the year as opposed to income. However we obviously have to keep an eye on the returns of the acquisitions and GAAP will require us again like it did in the fourth quarter, is if the probability of hitting the earn out targets in these purchase agreements falls, we’re compelled by GAAP to release some of that liability on the balance sheet. But at this point we’re not assuming that’s going to happen in 2013.

Eric Belcher

I completely understand. But that’s outstanding performance.

Nate Brochmann – William Blair

And on the top line are you guys assuming much, I assume zero on same customer spend? Just like you have in recent years?

Eric Belcher

That’s right. We can talk more about this next week at investor day but it’s going to be a zero total company spend comprised of positives in the U.S. and LatAm and a negative in Europe.

Nate Brochmann – William Blair

That’s great. And then just final question. You guys have seen a few wins now where you’re able to leverage the global platform. Can you talk a little bit about in terms of the pipeline and some of the other discussions that are going on these in terms of whether you see even bigger opportunities there with either current customers or new customers to really leverage that? And then I’ll turn it over and thanks.

Eric Belcher

Hi, Nate. We see, we see bigger opportunities today than we’ve ever seen before in terms of leveraging our global platform which is now established and incredible and solid. And if you look at the clients that are already utilizing that global platform the first movers if you will to a top tier in working solution these are some of the best, best brand name companies in the world, leaders in their respective verticals in many cases. And so as you can imagine having that kind of customer support, happy customers as referenceable customers to the next wave if you will of contracts that we’ll be looking to bring on is a real benefit. And so we’re gaining momentum in terms of rolling out our solution on a global basis.

Nate Brochmann – William Blair

Great. Thanks, guys.

Eric Belcher

All right. Thanks, Nate.

Operator

Okay, thank you. And we’ll take our next question from Kevin Steinke from Barrington Research. Kevin, please go ahead.

Kevin Steinke – Barrington Research

Hi. Good afternoon. Hey, you talked about inside sales becoming profitable in 2013. I’m not sure but is that a bit of a change from what you talked about maybe the last quarter where you were thinking about it more as a breakeven business in 2013?

Eric Belcher

Well we did have a very good fourth quarter with respect to inside sales. We’ve got new talented sales management in place and some of the recent classes that we’ve brought on have been performing at a rate that’s been even better than some of the earlier classes that we’ve brought on in previous years. So there is an element of some momentum with that inside sales group that’s caused us to redo our forecasts slightly on the bottom line that would have us actually turning a small profit in 2013.

Kevin Steinke – Barrington Research

Okay. That’s great. So it sounds like good momentum and you’re – are you seeing then the additional training and development for your people that you put in place then yielding kind of higher productivity once they get out on the floor? Is that, you think, part of the contributing factor?

Eric Belcher

Yeah, that’s absolutely a part of what’s contributing. There is also some time it takes for an individual to get situated and develop a book of business, and so we’re seeing that dynamic with some of our older reps play out. We’ve got new, experienced sales leadership, experienced in inside sales leadership making huge contributions to the business. I think we’re getting even better at recruiting, targeting the ideal employee for this group, and so there are really a number of factors that are playing out here, but training, as you mentioned, is certainly one of them.

Kevin Steinke – Barrington Research

Okay. And Eric, you also, you talked about 2012 being relatively quiet in terms of M&A, but you expect it to perhaps pick up in 2013, and it sounded like that would mostly be on the maybe the smaller tuck-in side? Or do you see opportunities to maybe do some larger ones as well to build out the global platform? Or do you feel like that’s pretty much in place now?

Eric Belcher

I feel like the global platform’s in place. With that said, there are larger opportunities that exist out there and we know of all the successful firms in our space, at least we think we know them all and in some cases, we’ve known them for quite some time. And so we don’t have any forecasts for what might happen, but large and small opportunities exist.

We have the global platform in place, and so what we’re primarily looking for are highly-talented, growth-oriented entrepreneurs, where our businesses combined would each grow faster than we were to do this separately. And so we have a number of dialogs going all the way through 2012, it’s just as I had mentioned earlier, Kevin, we’re very, very selective and we also are very principled with respect to how we approach things like structure and incentives and things of that nature. And so not much happened last year, but given where we are in some discussions these days, I wouldn’t be surprised if it was a little busier in 2013. But again, we’ve got no specific targets. We’ll only do what’s right.

Kevin Steinke – Barrington Research

Okay. Could Asia be more of a target for M&A going forward given your investment in China?

Eric Belcher

Yes. Absolutely. Asia and the whole Pacific Rim would clearly be an area where we if we were able to come to terms and fall in love with an entrepreneur that we would move forward for sure.

Kevin Steinke – Barrington Research

Okay. Great. Well, thanks for all the information.

Eric Belcher

All right. Thank you, Kevin.

Kevin Steinke – Barrington Research

Sure.

Operator

Okay. Thank you. And we have time for one more question we’ll take from George Sutton from Craig Hallum Please go ahead, George.

George Sutton – Craig Hallum

Hi, guys. I hopped on late so if I ask something dumb I apologize. But relative to Europe as you look at the opportunity there, is it the same scenario we saw in the U.S. when you really started to see your business development pick up was really coincident with kind the 2009 time period here when things got really bad. Is it the same kind of an environment and opportunity? And how are you dealing with that relative to your business development team?

Eric Belcher

It’s the same situation, George. Or said another way if I look at our pipeline in Europe right now of new clients that I would expect we would on board at some point in the coming quarters, it feels outstanding. So we’ve got an excellent business development team in place throughout Europe that’s working harder today than they probably have in a long time, and while that may seem a little counter intuitive given the fact that client spend is down, we’re in full attack mode. And we feel very good about what’s likely to happen here in Europe in the coming months.

George Sutton – Craig Hallum

Okay. And, Joe, relative to the – you had mentioned on DSOs, which improved, you have some improvement, some areas of improvement that you see for 2013. I was just wondering if you could detail that a little bit?

Joe Busky

Yeah. George, we made some progress in 2012. We’re not happy with where we ended up. We still think there’s lots of opportunity to bring down DSOs for the company. So we’ve identified opportunities not only with our existing production staff internal but also with customers. There are some structural issues with how we end with our customers that we think we can improve and continue to bring down PSOs throughout 2013 as well.

George Sutton – Craig Hallum

Okay. And then lastly I heard you say a time or two that one of the things you’re excited about in 2013, one of the reasons for the leverage you’re expecting, is you’re adding profitable customers. And when you say that do you mean just simply the normal leverage on your fixed cost? Or is there something more to as you’re adding these new incremental customers that I wouldn’t have been aware of?

Eric Belcher

I just mean the normal leverage, George, on the fixed cost as we add new large enterprise accounts. They’re still going to come in as contribution marginal of low double digits margin percentage.

George Sutton – Craig Hallum

Okay. My question there may have been veiled a little bit in that my sense is you may continue to get better and better terms with some of your printer partners because of the bigger volume. Is there anything to that?

Eric Belcher

I think there’s a small element of that. If you look at our gain share within our contracts we have seen improvement on that front. So of course we’re sharing the better terms as we buy more intelligently every day, really that we go. And so there is some element to that. There’s no doubt about it. But as Joe said for the most part we’re very proud of the fact that our pricing is transparent and we price for the long term. And we do receive contributions to our fixed overhead in the double digit ranges as we bring in each new enterprise account. And so as the business grows that operating leverage sweeps in.

George Sutton – Craig Hallum

Gotcha. Okay. We’ll see you next week.

Eric Belcher

All right. Thanks, George. Looking forward to it.

Operator

Okay, thank you. And I’d like to turn the conference back to your host Joe Busky for any concluding remarks.

Joe Busky

All right. Thanks, John. And thanks to everyone that joined us today for the Fourth Quarter on Full Year 2012 Earnings Call. We look forward to speaking with all of you at our 2013 Annual Investor Day event on February 22nd which will be held at our Chicago headquarter facility. Thank you.

Operator

Okay, ladies and gentlemen. That does conclude your conference. You may now disconnect and have a great day.

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