Phase Forward Incorporated Q4 2008 Earnings Call Transcript

Phase Forward Incorporated (PFWD)

Q4 2008 Earnings Call

February 5, 2009 5:00 pm ET

Executives

Timothy Dolan – ICR Investor Relations

Robert K. Weiler – Chairman of the Board, President & Chief Executive Officer

Rodger Weismann – Senior Vice President & Chief Financial Officer

Analysts

Steven F. Crowley – Craig-Hallum Capital

Bret Jones – Leerink Swan

Richard Close – Jefferies & Company

Richard Davis – Needham & Company

Steven P. Halper – Thomas Weisel Partners

Nabil Elsheshai – Pacific Crest

Sean W. Wieland – Piper Jaffray

Raymond A. Myers – Emerging Growth Equities, Ltd.

Andrey V. Glukhov - Brean Murray, Carret & Co.

Raghavan Sarathy - Dougherty & Company

Alexander Draper – Raymond James & Associates

Steven F. Crowley - Craig-Hallum Capital

Stephen Shankman – Natexis

Presentation

Operator

Welcome to the fourth quarter 2008 Phase Forward Incorporated earnings conference call. My name is [Camesha] and I will be your operator for today. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today’s call, Mr. Tim Dolan.

Timothy Dolan

Please note that various remarks today consist of forward-looking statements for the purpose of the Safe Harbor provision under the Private Security Litigation Reform Act of 1995. These statements including managements’ forecast of financial performance and management’s plans objectives and strategies are subject to a variety of risk and uncertainties which could cause actual results to differ materially from those discussed today.

These risks and uncertainties are contained in the company’s public filings with the Securities & Exchange Commission. With that let me turn it over to the CEO of Phase Forward, Robert Weiler.

Robert K. Weiler

Thank you for joining us on the call to review our fourth quarter results which were better than expected and represented a strong finish to a highly successful year for Phase Forward. During the fourth quarter we signed multiyear, multimillion dollar contract extensions and expansions with some of the largest pharmaceutical companies in the world related to our industry leading InForm EC solutions.

We grew our business with CROs, which is among our top strategic initiatives. Clarix’s interactive response technologies delivered better than expected revenues in its first full quarter as part of Phase Forward. We saw continued commitment to Phase Forward’s industry leading suite of safety solutions and we were honored to be recognized by the World Economic Forum as a technology pioneer.

The key drivers to our success remain fundamentally the same: broad customer satisfaction and referenceability based on our proven track record of delivering highly scalable and complex implementations on a global basis for companies of all sizes.

Now, let me take you through the summary of our fourth quarter results. Total non-GAAP revenue came in at $49.1 million representing a 30% year-over-year growth and well above the high end of our guidance. From a profitability perspective, non-GAAP operating income came in at $7.5 million above our guidance and up 43% on a year-over-year basis. While non-GAAP EPS of $0.13 was at the high end of our guidance.

Turning to the highlights of our fourth quarter performance, it starts with our ability to continue to deepen our relationships with existing customers. We signed a number of important multiyear, multimillion dollar contracts during the fourth quarter that both extended existing relationships and expanded the scope of some relations. Some of the largest pharmaceutical companies in the world such as Novo Nordisk, GSK, Sanofi Pasteur and another top 10 pharma company are among our [inaudible] contracts for license and/or services signed during the fourth quarter.

Taking Novo Nordisk for example, they signed a multiyear multimillion dollar enterprise license and a service contract to extend the expanded use of InForm. As part of this they’ll be using InForm as their default data capture system across all clinical trial phases from phase I through phase IV. Since signing an ASP arrangement in mid 2006, Novo Nordisk has successfully implemented and integrated global InForm studies with internal systems such as ORACLE Clinical.

Our success in renewing and expanding our relationships is important for a couple of reasons. We believe it is evidence of the value we are delivering and our high levels of customer satisfaction which leads customers to view Phase Forward as a strategic long term partner. This success also reinforces the high level of visibility inherent in our business model which is based on multiyear contracts and a high level of customer retention.

In addition to the large pharma deals just mentioned, we also continue to grow our InForm customer base and extend existing relationships with smaller life science companies as well demonstrating our ability to grow Phase Forward’s EDC community with companies of all sizes.

To provide some perspective on the share size of our growing EDC community in 2008 Phase Forward supported users in over 110 countries and we estimate that our InForm EDC solution has now been used in over 2,850 trials to date. At year end we had approximately 920 live production trials running in our hosting facility from 770 at the end of 2007. In addition, we had over 37,000 user registrations of our EDC eLearning solutions in 2008 up from approximately 22,000 in 2007 and 8,000 in 2006.

Our other data management solutions are also contributing to the expansion of our footprint. For example, FDA extended the agreement for use of our web SDM software as their standard solution for validation and review of electronic data submission in the CDISC SDTM format. Our web SDTM solution has also been adopted by service provides such as ISI and Veristat who entered in to agreements with us in the fourth quarter.

On the CRO front during the quarter, we expanded our relationships with CROs such as Quintiles, Everest Clinical, Duke Clinical Research and Harvard Clinical Research Institute among others. We now have over 100 additional customers through our CRO partners and this contributed to a 44% year-over-year growth in revenues from CROs during the fourth quarter. Moreover, the expansion of our CRO partner base and deepened relationship with other CROs over the course of the year helped to grow our CRO related business to 20% of revenue in 2008 which is up from 18% in 2007.

Moving to Clarix and the IRT space, we are still relatively early in the integration of Clarix acquisition but we are pleased with the result to date including feedback that we have received from customers and partners alike. As I mentioned at the outset, Clarix’s revenues during the fourth quarter were better than expected. We had follow on IRT related business with customers such as Genzyme, Aptuit, Cephlon as well as our largest IRT related channel partner.

Moving forward we believe that demand is strong for integrated EDC and IRT solution from a single trusted and independent solutions provider. Being uniquely positioned with a best in class solutions in both categories and the market share leadership in EDC we are optimistic about the opportunity and the potential for continued growth.

Momentum in our safety business also continues. During the fourth quarter we saw renewed commitment to our Empirica Suite of safety solutions across a number of companies including Bayer Schering, Alcon, [Solve A], UCB and Drug Safety Alliance.

From an overall perspective we are pleased with the company’s execution and performance in the fourth quarter and the year as a whole. We are not resting however, we are continuing to invest in our solutions to maintain and extend our market leadership position and the strength of our technology continues to be reinforced by independent third parties.

For example, we are proud of our work with GSK on its innovative molecular clinical safety intelligence or MCSI system with co-development with Phase Forward’s Lincoln Safety Group. In the fourth quarter we announced that GSK had won the 2008 Technology Innovation Award from the Wall Street Journal for the MCSI system taking top honors in the healthcare IT category.

MCSI enables for the first time direct translation of safety knowledge from human clinical experience to early stage drug discoveries by comparing the chemical and pharmacological benefits of early drug candidates through safety knowledge about drugs that have been previously tested. This allows scientist to rapidly evaluate potential safety risks of novel medicines as they are being designed and synthesized in the laboratory and before they even move to the development process.

Another example of third party recognition also came in the fourth quarter when the World Economic Forum recognized Phase Forward as a technology pioneer. More than 320 companies from around the world were evaluated by 44 global technology experts. Phase Forward was selected as one of 34 companies that were honored by the forum. The World Economic Forum characterizes technology pioneers as innovators of the highest caliber whose technologies will have a deep impact on business and society. We are honored to share this recognition with other World Economic Forum Technology Pioneers such as Google, [Diliad Sciences], Millennium Pharmaceuticals and Red Hat Software.

Now, looking to the future. From a market perspective we made comments on our Q3 call relating to the general environment and have continued to watch closely for any tangible developments in our own business. As we discussed last call, life science companies are continuing to focus on delivering their pipelines of new treatments. At the same time, they are seeking improvements in the development, effectiveness and optimal returns on their investments.

In speaking to our customers, it is clear that improving the automation of clinical trial management processes has become an established way for life science companies to improve productivity and there continues to be a high level of interest in technology solutions that help manage clinical trials including electronic data capture, interactive response technologies or IRT and safety solutions.

As long as trials are launched and move forward particularly in the phase II and phase III stages, there is a need for our solutions and we believe that demand for our solutions will continue as adoption levels continue to increase. We recognize however, that in today’s market environment is having an increased effect on our pharmaceutical client base and on the funding available to biotech clients, both of which are likely to have some effect on their revenue streams and related capacity to spend on R&D.

We believe life science companies will continue to focus on critical phase II and phase III programs which is our sweet spot and as such we continue to forecast solid annual revenue growth in 2009. It is prudent nonetheless to expect the current market environment for our customers to present an incremental challenge for the vendors supplying them.

We have taken all these factors in to consideration in developing our business plan for 2009 which Rodger will discuss in a moment. From an operational perspective, we will continue to focus on the strategic growth initiatives that drove our growth in the fourth quarter, namely continuing to focus on our customers’ success and forging expanded long term relationships with them, growing our customer base across all segments and geographies, executing on our strategy of being the vendor of choice for CROs, integrating and leveraging our Clarix acquisition leveraging our strong balance sheet and cash position to expand our solutions through further acquisitions.

From a long term perspective, we remain optimistic about our outlook based on our continued business momentum, market leadership position, strong financial profile and a business model that provides us with a high level of visibility in to future revenue streams.

Before I turn it over I want to touch on our announced transition as a CFO post in the second quarter of 2009 as Rodger will be retiring as the company’s CFO during that time. As I remarked in our press release it has been a pleasure to work with Rodger over the past four years and we are grateful for his many contributions to the company’s success. He has played a key role in helping Phase Forward scale and establish a track record of delivering consistent, solid revenue growth and expanding profitability margins.

In addition to continuing as CFO during the first half of the transition period, Rodger will have an ongoing part-time role with Phase Forward in an advisory capacity to me and the board. However, in June, Chris Menard, currently our Vice President of Finance will take over as CFO. We are highly confident that the transition process will be smooth and that Chris will be a great CFO. With that, let me turn it over to Rodger who will go over the financials in more detail.

Rodger Weismann

I appreciate the kind words and I would add that I have enjoyed my tenure as CFO of Phase Forward a great deal and I look forward to continuing with the company beyond my full-time retirement. I feel good about the timing of the transition due to the momentum of Phase Forward’s business as well as the strong finance team that we have put in place over the past couple of years.

Chris Menard has had responsibility for managing most of Phase Forward’s financial departments on a worldwide basis for some time now as we have been grooming him to become our next CFO. In addition, having a strong financial management background, a key reason that we believe Chris is ideally suited to become Phase Forward’s next CFO is the fact that his knowledge of our company business model and the industry that we compete in is second to none based on his 10 years of management experience with Phase Forward as well as Clinsoft which is a company we acquired seven years ago.

Many of you have already met Chris either during investor conferences or as part of our secondary offering road show and we look forward to introducing him to the broader investment community moving ahead.

Now, let me provide some further detail on the fourth quarter and full year 2008 financial statements. Then, I will close with our first quarter and full year 2009 guidance before turning it over to the operator for Q&A. Beginning with the P&L, total GAAP revenues for the fourth quarter 2008 were $48.3 million, an increase of 28% year-over-year.

As we discussed last quarter, purchase accounting requires that GAAP revenues including adjustment to the fair value of deferred revenue and backlog of Clarix which has the effect of reducing the revenue flow on trials already underway at the time of the acquisition as compared to the treatment as a standalone company. This write down on Q4 revenues was $779,000. Excluding such write downs results in total non-GAAP revenue of $49.1 million, an increase of 30% year-over-year and above our guidance of $46 to $47 million.

Non-GAAP revenue from Clarix of $2.3 million exceeded our guidance of $2 million. Within total revenue InForm license, application hosting and other related revenues were $35.3 million representing 73% of total revenue and increasing 29% on a year-over-year basis. Overall license revenues in the fourth quarter came in at $14 million representing 29% of total revenue and a year-over-year increase of 5%.

Q4 services revenues of $34.1 million represented 71% of total revenue and grew at 44% on a year-over-year basis. The strong growth in our services revenue was due primarily to our application hosting services business which at $27.4 million grew 62% over the prior year and now represents 56% of our total revenue. This category now includes Clarix’s revenues which contributed 14% o this growth.

Turning to cost and profitability, we will review our numbers on both a GAAP and non-GAAP basis. A reconciliation between GAAP and non-GAAP results is contained in our earnings release which is posted on our website. Our non-GAAP results exclude non-cash expenses associated with FAS 123R, the amortization of intangibles associated with acquisitions, the write down of deferred revenue and backlog associated with the Clarix acquisition and lease exit costs related to our recent move to new corporate headquarters.

Non-GAAP gross margin was 59.6% in the fourth quarter of 2008 compared to 58.1% in the same period a year ago and 58.9% in Q3 of 2008. We saw continuing improvement in our services margin with service margin expanding to 44.6% in the fourth quarter up from 37.5% a year ago and 43% last quarter. From an operating expense perspective, total non-GAAP expenses in Q4 were $21.7 million, a 30% increase from $16.7 million in the same period a year ago and were 44.3% of revenues as compared to approximately 42% in the first three quarters.

Q4 operating expenses increased due to additional bonus expense related to both the heavier weighting of the bonus in Q4 and over achievement of bonus targets. Further, Q4 included incremental expenses associated with our new corporate headquarters and additional R&D investments.

Our non-GAAP income from operations for the fourth quarter was $7.5 million, above our guidance of $6.5 to $7.1 million. This also represented and increase of 43% on a year-over-year basis and a non-GAAP operating margin of 15.3%. Interest income of $1.1 million was down from $2.3 million in the year ago quarter and $1.5 million last quarter resulting from a decline in interest rates.

In addition, our non-operating other income includes a net $706,000 loss related to reducing the fair value of our auction rate securities partially offset by the value of a put contract with UBS on those securities that can be executed commencing in 2010.

Our non-GAAP tax rate was 26% in the fourth quarter leading to a non-GAAP net income of $5.8 million or $0.13 diluted earnings per share which was at the high end of our guidance of $0.12 to $0.13, this compared to $18.2 million or $0.41 per share in the same quarter of 2007 which included a $9.6 million or $0.22 tax benefit realized related to the full release of the remaining evaluation allowance against our NOLs and other tax credits of $1.6 million or $0.04 per share. In addition, the just mentioned reduction of interest income and net loss of auction rate securities contributed an additional $0.02 and $0.01 respectively in the year-over-year decline in non-GAAP EPS.

Looking at our fourth quarter 2008 results on a GAAP basis, GAAP net income was $2.7 million. We generated GAAP EPS of $0.06 in the fourth quarter of 2008 compared to $0.36 in the fourth quarter of 2007. GAAP EPS in the year ago quarter benefited similarly from the tax benefits and credits just mentioned.

From a full year perspective we delivered non-GAAP revenue of $171.2 million representing an increase of 27% on a year-over-year basis. Our full year non-GAAP operating income was $27.8 million. This represented an increase of 41% on a year-over-year basis and a non-GAAP operating margin of 16.2% up from 14.7% margin in 2007. Our full year non-GAAP EPS came in at $0.48 with GAAP EPS of $0.32.

Moving to the balance sheet total cash, cash equivalents and short term investments totaled $159.5 million at the end of the fourth quarter, an increase of $4.1 million from the end of the third quarter. This balance excludes the fair value of auction rate securities of $18 million and a related put contract on those securities exercisable in June 2010 valued at $5.3 million for a total value of $23.3 million both of which are classified as long term assets.

For the fourth quarter the company generated $14.7 million in cash from operations and $4.3 million after capital expenditures of $10.4 million. For the year the company generated cash from operations of $65.4 million and $43.9 million after capital expenditures on $21.5 million. Accounts receivables increased by $5.4 million from the end of the prior quarter to $40 million. This lead to DSOs of 77 days at the end of the quarter up from 74 days at the end of the prior quarter but down from 86 days at the end of the same quarter last year.

As a reminder, our fourth quarter DSOs have historically been higher due to seasonality of customer invoicing. We continue to target DSOs in the 70s range from a long term perspective though there can be significant quarter-to-quarter fluctuations as a result of seasonal invoicing effects especially in Q4 and Q1 of each year. Total deferred revenues was $88.5 million at the end of the quarter, an increase of $21.4 million on a year-over-year basis and $2 million from last quarter.

With that, let me now turn to guidance. The following statements are based on our expectations as of today and we assume no further obligation to update or confirm them. As a reminder, our non-GAAP references exclude the amortization of intangibles associated with prior period acquisitions, the deferred revenue and backlog write down associated with the Clarix acquisition and FAS 123R stock-based compensation expenses.

Looking at the year as a whole, non-GAAP revenues are expected to be between $200 and $205 million an increase of between 17% to 20%. We expect between 75% and 78% of our 2009 revenue to come from our existing backlog entering the year. The strengthened US dollar has reduced expected revenues in 2009 by approximately $3.5 million compared to currency rates in affect during 2008 thereby reducing our expected growth rate by approximately two percentage points.

In the current environment these rates can fluctuate significantly period to period with resulting effects on both revenues and expenses. On a GAAP basis GAAP revenues including the write down of Clarix’s deferred revenues and backlog, approximately $2 million are expected to be between $198 and $203 million.

To provide some additional perspective on our revenue forecast for the year, we find the current market conditions for the bulk of our trials and the sweet spot of EDC and IRT solutions which is phase II and phase III to be holding up well and our sales activity remains strong. Internally, we have used similar techniques to estimate 2009 revenues as in prior years such as forecasting the conversion of our backlog based on discussions with customers regarding the timing of planned trial starts plus a review of anticipated new bookings based on revenues with customers as well as expectations for potential RFPs and other future business.

Since the current market environment is more dynamic and potentially less predictable, we believe it is appropriate to apply a more conservative estimate of how much and when these activities will eventually convert to revenue. Our analysis suggest that growth in the volume of new trial starts will be slower than recent time periods however, we continue to believe that Phase Forward is well positioned to deliver solid growth in 2009 off of what was a very strong 2008.

In particular we currently anticipate a growth rate of our InForm revenues to be in the mid to high teens range. We expect the company’s overall revenue growth to be several points higher than this as a result of the rapid growth of our Clarix offerings. We current expect Clarix contribution to 2009 to be between $13 and $14 million and within the range of our initial estimates which was provided at the time we announced the acquisitions.

From a profitability perspective we are forecasting gross margins to be between 58% and 59% with service margins between 44% and 45% and operating expenses to be between 42% and 43% of revenues. Within operating expenses we expect sales and marketing to be approximately 14.5% and 15.5% of our revenues as we significantly expand our sales force by over 20% to add sales coverage for IRC and an under cupboard small and medium size pharma and biotech companies.

R&D of approximately 15% up from 14.2% in 2007 as we step up development and investments in areas that our customers have been requesting and G&A of approximately 12.5% to 13% down from 13.2% in 2008. As a result we expect non-GAAP operating income to be between $31 and $34 million or between 15.5% and 16.5% for the year. We are currently forecasting interest income of between $3 and $3.5 million in 2009 which is down from both Q3 and Q4 2008 levels as interest rates continue their steep decline from Q2 levels last year.

Our anticipated book tax rate is expected to be approximately 35% while our cash tax rate is expected to be in the 4% to 5% range. On a non-GAAP basis EPS is expected to be between $0.50 and $0.54. Using an estimate of stock-based compensation expense of $10 million and amortization of intangibles associate with previous acquisitions of approximately $3 million we expect GAAP EPS to be between $0.30 and $0.34. We expect to spend approximately $15 million in capital expenditures for the full year 2009.

Looking out at the first quarter of 2009, non-GAAP revenues are estimated to be between $47 and $48 million, an increase of between 24% to 26% over the first quarter of 2008. With a write down of approximately $600,000 of Clarix deferred revenues and back log, we expect GAAP revenues to be between $46.4 and $47.4 million. We are forecasting non-GAAP operating income to be between $7.3 and $7.9 million.

Our non-GAAP tax rate is anticipated to be approximately 35%, stock-base compensation expenses is estimated to be approximately $2.4 million and amortization of intangibles at approximately $760,000. Non-GAAP EPS is expected to be between $0.12 and $0.13 and GAAP EPS is expected to be between $0.07 and $0.08.

In summary, our fourth quarter and full year 2008 results were strong. We are targeting solid growth and profitability in 2009 and we are optimistic about the long term outlook. With that, let me turn it back to the operating to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Steven F. Crowley – Craig-Hallum Capital.

Steven F. Crowley – Craig-Hallum Capital

A couple of questions for you, Bob you made a point of talking about renewals, extensions and expansions of relationships and business deals with large customers. Can you talk to us a little bit about those discussions and the resulting terms? Have they been as expected? Has the environment bred any change in the discussion about pricing or renewal terms?

Robert K. Weiler

I think as we said before that the issue around renewals is that the customers are looking to us to provide more comprehensive solutions to help improve their processes and their productivity to reduce costs. That said, I would say we’re very pleased with renewals and extensions and the value we’ve received from that and I would also say that it is as expected from even a year ago. With that in mind I would say the economic turmoil hasn’t changed and the contracts we were able to deliver were based on what we expected when we did the same exercise at the end of 2007.

Steven F. Crowley – Craig-Hallum Capital

In terms of your operating margin guidance, in the past you’ve talked to Wall Street about the prospects for 100 basis points of operating margin improvement a year. That’s obviously not what you’re telegraphing for 2009. I’m wondering what the larger factors are in 2009 deviating from that pattern? Is it your decision to invest in certain categories, is it the macro back drop, is foreign currency playing a role? Maybe you could talk through that Delta?

Rodger Weismann

The previous guidance that I’ve given in approximately three years our targeting operating margin going in the range of 18% to 21% which on average that works out to 100 basis points per year. I think one of the keywords is average. The business world and actual results don’t go up in an exact amount each quarter or each year so getting them up 300 basis points over a year isn’t necessarily going to go in a straight line so that’s one general answer to it.

But, within your question I think you hit on one of the things that part of the guidance we gave which is on R&D where we’re forecasting about a 70 basis point increase in R&D as a percent of the total going up from about 14.2% or 14.3% up in the neighborhood of 15% of our revenues so that is an increase where in the last couple of years its drifted down on a very slight basis.

I think that’s the general impact because the other areas we are increasing gross margin a little. The service margins continue to increase as we have previously guided to that trend in the past and G&A is coming down slightly as a percentage of total revenues.

Steven F. Crowley – Craig-Hallum Capital

In terms of some of the revenue breakdowns you’ve given us before Rodger, could you provide those in terms of a breakdown between your services business – you gave us application hosting but between consulting and customer support and might you have the category breakdown? You gave us InForm but do you have safety and clinical data management to go along with that?

Rodger Weismann

The consulting for the quarter was $4.2 million or a little over 8.5% and support $3.2 million or almost 7% and I think your other question was by product and I think I gave Clarix before?

Steven F. Crowley – Craig-Hallum Capital

Yes, and you gave us InForm before.

Rodger Weismann

So I think the safety piece of $5.4 million and the clinical data management $6.2 million.

Operator

Your next question comes from Bret Jones – Leerink Swan.

Bret Jones – Leerink Swan

If we could talk about the guidance a little bit and I know you talked about InForm being about 14% to 16% in growth and I’m just trying to back in to what the organic growth is. So, if I strip out Clarix for 2008 and the expectation I was using $13 million for 2009 I’m showing the base business is growing somewhere around 11% to 14%, is that accurate? And, that includes the $3.5 million foreign exchange impact to revenue.

Rodger Weismann

I’m not sure about the other piece but I didn’t say 14% to 16% for InForm, I said mid to high teens. So, if you take the widest range of that, that would be 15% to 19% so it’s more in the high teens neighborhood which probably means the other two components that you were talking about outside of Clarix and InForm would probably be a smaller percentage growth than what you just indicated.

Bret Jones – Leerink Swan

Speaking about Clarix, if Clarix delivered better than expected results in this quarter, I guess why tighten the range downward to 13% to 14% because I think it was 13% to 15% before.

Rodger Weismann

I think the overage this quarter is fairly small compared to the total amount forecasted next year. We went through a detail work up, the same as we always do on the pre Clarix business that we had which is taking backlog and estimating how that unwinds coupled with timing and when we expect new orders to come in and when those trials start happen and the estimate turned out to be between $13 and $14 million.

Bret Jones – Leerink Swan

So it really is a matter of – I think Bob mentioned trails starting up on a slower pace, is that what is affecting that because you’re bundling most of your Clarix in with EDC.

Rodger Weismann

No, it’s separate guidance on it and the comment about the trial starts slower had to do with on the InForm side of the business. We don’t have much prior experience to speed of the trail starts historically in IRT but we expect significant growth out of that because the company is fairly small and we believe the technology leader so we expect it will grow faster than the overall market because we believe that we are capable of taking market share from other people.

Bret Jones – Leerink Swan

When you talk about bundling, have you had enough experience with bundling Clarix in with EDC to know if you’re going to get the same bundled price that you were expecting? I think you were talking about getting an additional $150,000 per trial.

Rodger Weismann

The average price per trial of a the Clarix revenue was holding up according to our original expectations. I think it’s still fairly early to be selling it as a bundled offer. It takes time to get sales people trained and build up the pipeline so we’re still in the very early stages of that.

Bret Jones – Leerink Swan

Then just the last question, I’d ask you about renewals and I know you commented about it on the previous question. When you look at the renewals and you said that they were in line with your expectations but when you look at renewals can you talk directionally as to whether the renewals have been for a larger or smaller amount? I assume we’re talking about licenses here as opposed to ASP so the renewals directionally are they bigger or smaller and that would speak to whether we’re seeing large [inaudible] outsource more I guess, is what I’m trying to really get to.

Rodger Weismann

The renewals have been larger.

Robert K. Weiler

They cover both license and services, a number of our customers when they renew they’re renewing it could be for a service or it could be a combination of license and service.

Bret Jones – Leerink Swan

But when we talk about the license are those larger?

Robert K. Weiler

Both.

Operator

Your next question comes from Richard Close – Jefferies & Company.

Richard Close – Jefferies & Company

I was just curious if we can go in to the backlog conversion and the slower number of trials. Is that something that you guys are as the fourth quarter came to a close you experienced slower backlog conversion or a dramatic slowdown on the new trials in terms of the bookings, are you guys just taking I mean considering the environment just deciding to take a conservative stance here or is it actually something you’ve noticed over the last couple of months?

Rodger Weismann

What we’ve noted is that we estimate the rate of new trial starts meaning through new bookings will be at a slower rate than has been in recent time periods. That’s really the only message there.

Richard Close – Jefferies & Company

So it’s not something that necessarily has taken place, you’re just discounting the number of new trial starts for the current fiscal year.

Rodger Weismann

We have a lot of visibility both not just to the backlog body in the short term to our estimated new bookings coming in from new trial starts. A lot of it’s based upon what we see off the forecast of new business.

Richard Close – Jefferies & Company

With respect to the service margins, obviously continued improvement there, have you seen anything with respect to increased cancellations that maybe artificially inflated that number at all in the fourth quarter?

Rodger Weismann

I would say the fourth quarter did have a couple large trials that cancelled early on in the process and as we’ve mentioned in the past a large trial cancelling can cause an increase in revenues for the quarter which can have some short term impact on the margin.

Richard Close – Jefferies & Company

Would your '09 guidance include a higher level of cancelled trials? Is that something that you’re expecting on a go forward basis?

Rodger Weismann

I would say that it does not include a higher level of cancelled trials. I think the couple that I mentioned in the fourth quarter were larger than normal, the size of the trial was larger than normal and thus the cancellation amount was larger.

Richard Close – Jefferies & Company

With respect to your revenue guidance, and obviously you have the FX impact there and the deferred revenue and all that, with respect to your visibility from beginning backlog, you’ve talked about it being around 75%, you’re saying 75% to 78%, you’re giving a range. Is there any one thing that’s driving that, moving that top end up to 78%?

Rodger Weismann

Probably not one thing. In the past it maybe has averaged around 75% but there’s also been ranges between 73% and 77%. Even though we don’t give out bookings for the year reported any more what’s implied is when you’ve got a little more coming out of backlog it implies that you have a healthy backlog.

Richard Close – Jefferies & Company

I was just going to see about that. With respect to if you take last year’s number because you gave the backlog and all that and then gave the 75% number, I guess with respect to your revenue guidance you were at about 44% coming out of that backlog in terms of hitting the revenue. Is that a similar level you’re looking at this year?

Rodger Weismann

I actually don’t know the number and I can’t give it you because you could back into what our total backlog was.

Operator

Your next question comes from Richard Davis – Needham & Company.

Richard Davis – Needham & Company

With regard to one of the question we get apropos to what the previous Richard said was trial cancellations and particularly a lot of people are worried about Phase I. I think Phase I are less than 20% of trials less than 10% of your revenues.

Is there a percentage of those 10% of revenues that are enterprise customers so that those numbers may move around but they’re much less sensitive to the financing environment that if I were a standalone biotech company doing Phase I that might be gasping for air whereas if I’m inside a big company doing Phase I it’s not as big an issue?

Rodger Weismann

Phase I, I think generally is in the neighborhood of less than 10% of overall revenues and as you rightly point out that our Phase I volume was more skewed to our big pharma companies which have decided to standardize us as their EDC platform. They’re probably less apt to cancel it but more particularly even if they did particularly if they have a license for what you could eat there’s no impact on that, the license fee stays the same.

So that also I think dampens any effect to the extent there is much of an effect on us on less Phase I trials.

Richard Davis – Needham & Company

The second question is if you believe that a lot of the opportunity to grow is in the mid-market inasmuch as there’s still a handful of the larger guys, elephants left to be hunted down, but let’s assume that over the next two years or so the mid-market is where you’re growing, or where a lot of people will try to grow, do you have a different go to market strategy for the mid-market and how do you think about that or is it the same strategy or basically when you guys strategize, what do you think about that?

Robert K. Weiler

I think, Richard, the strategy for the mid-market is really about coverage. One of the things that we highlighted and one of the things you saw Rodger talking about was our increase in sales and marketing expense next year and it’s not only just the Clarix. When you start getting large customers and you start getting many, many trials it’s clearly the year to invest in really broadening our sales force to get that coverage into that small medium market.

So I think our message is clearly the same because we’ve been delivering to small customers with large customers. I think the combined solution is even more appropriate for the small to midsize company that just doesn’t have the people to do the evaluations and spend the process, they want to get up and running quickly with a more integrated solution.

We frankly just needed more coverage there. In fact I probably wish we had done it a little earlier but we’re doing it now and I think we’re going to be hitting that market pretty hard in 2009.

Operator

Your next question comes from Steven P. Halper – Thomas Weisel Partners.

Steven P. Halper – Thomas Weisel Partners

When you look at your competitive win rates in the fourth quarter, has there been any kind of meaningful change there and what are the assumptions for 2009?

Robert K. Weiler

It really hasn’t changed. We’ve all been in the same situation. The lower tier companies just seem to be struggling more and more and having more difficulty and it’s turning into a three way race to the top and we win some, they win some but overall I believe our competitive position, two things, particularly the Clarix has really put us in a position now where we’re seeing a lot of optimism from our sales force on increasing win rates.

The second thing is our financial position and strength of our balance sheet particularly in this economy where more and more people are concerned about people’s balance sheets and what their future is something that’s getting more play in the market space as well. So I think both those things bode well for our competitive positioning, at the worst staying the same if not getting better.

Steven P. Halper – Thomas Weisel Partners

Any major change in pricing trends? I know it’s competitive but any change in trend?

Robert K. Weiler

No.

Operator

Your next question comes from Nabil Elsheshai – Pacific Crest.

Nabil Elsheshai – Pacific Crest

Just to follow up on the med market stuff that you talked about Bob, is that investment in sales and marketing something you’ve already ramped on or are you going to be adding the sales force over the next few quarters?

Robert K. Weiler

It’s going to be out further during the year. They’re stepped out during the year so that when we come out of 2009 we’ll probably be where we want to be.

Nabil Elsheshai – Pacific Crest

Is the increase in R&D expenses tied to that as well? Is there anything you need to do to maybe simplify things for that part of the market?

Robert K. Weiler

No, not really. What we looked at R&D is that if we look at the market competitively except for Oracle we’re in the top financially sound position and during this time that our competitors are reaching to get capital and do the things they have to do. We felt it was important that we could invest not just in making products for new markets but build new products actually as well.

We’re confident in our business, we’re confident in our position and we felt that this was a good time to invest to be a stronger company when this thing turns around.

Nabil Elsheshai – Pacific Crest

On the acquisition front, I think you guys obviously have talked about it, just in terms of the pace of acquisitions that you’re comfortable with, do you think one a year is appropriate or do you think you could do things more aggressively?

Robert K. Weiler

We could be a little more aggressive. I wouldn’t say five but we could easily absorb one to three a year.

Operator

Your next question comes from Sean W. Wieland – Piper Jaffray.

Sean W. Wieland – Piper Jaffray

What are your thoughts on pharma consolidation and how would that impact your business?

Robert K. Weiler

pharma consolidation really comes out to play about a, who’s on the top, who they are and when you are the market share leader in our space the best thing I can say is that we probably have a better chance than the rest of the market because we have more customers and therefore we’re probably going to be on one or the other side of the transaction.

What we have done in the past is that we’ve gone through all the pharma consolidations on a model and said okay what if this company bought that company, who’s the incumbent, what happens where it’s going? As with Pfizer as an example they’re a very, very large Oracle shop, have been, whenever they do acquisitions they tend to push Oracle throughout their organization.

Wyeth is not a customer of ours so there are two that happened that don’t affect us at all because this time we were fortunate that neither of them are our customers but clearly Pfizer is a big, big Oracle shop.

Sean W. Wieland – Piper Jaffray

The Clarix, can you give us an idea of what the Clarix cross sell rate has been so far and what you anticipate it to be in 2009?

Robert K. Weiler

It’s minimal right now if anything. Essentially we are in the process as Rodger mentioned. Think about the average sales cycle that these things run between six and nine months and we just did this acquisition September 5^th, we finished the year, did some training but I will tell you we are talking to an awful lot of our customers and an awful lot of our customers are looking for the integrated solution and RFPs going out, proposals going out.

To cite successes would be way too early and even the long term to see how it gets traction we don’t have a specific number. I’ll be candid, I am more than pleased and excited with the level of interest we’ve gotten from our customers in looking at the integrated solution but I can’t put a real number on it yet.

Sean W. Wieland – Piper Jaffray

Could you maybe give us your thoughts on 100% cross sell? Granted that that might not be an achievable number, but could you quantify what that opportunity might be?

Robert K. Weiler

The way we look at is if you look at your attachment rate, so you’d have to take the number of trials we have that’s getting an average of $450,000 per trial, the $150,000 from Clarix, if you attach at a 30% rate, you still have a tremendous amount of tremendous growth even at that rate. Anything that we can do to get that number North of 25% or 30% attached to each trial has dramatic growth opportunities for us.

That’s the way we look at attach rates. If we could get expectations, you’re talking about 100%, if we got 25% or 30% attached to every InForm trial this thing would be more than an astounding success and when you think of it that way, that’s not that unrealistic a number at all.

Sean W. Wieland – Piper Jaffray

You talked about in your comments increasing investments in areas customers have been requesting. What kind of areas specifically?

Robert K. Weiler

Particularly around what we talk about in our user meetings around the back end analytical tools, warehousing tools where we’ve gone through a progress where customers, it’s just not about capturing the data any more. When you go in and you compete on the market right now and you start talking about look at our screens and look at how we capture data, that’s one level of customer requirement.

The customer’s now been doing this for many, many years, they have cross trial information, they want analytical tools, they want Lincoln tied into a lot of their tools. You saw that topic that I talked about the MCI, the molecular clinical safety initiative at GSK, that’s sparring a whole lot of areas, healthcare, data mining. We announced earlier about our safety products being used at the DOD.

We have the FDA that has now once again signed another contract to standardize on the SDTM format. So there many, many products that we can use and build that customers are asking for to enhance those environments and that’s exactly where we’re attacking.

Sean W. Wieland – Piper Jaffray

One last one, interest income, Rodger, I think you said $3 million to $3.5 million, was that a net number, net of expenses?

Rodger Weismann

No, it’s just interest income.

Sean W. Wieland – Piper Jaffray

What would it be net of expense?

Rodger Weismann

There’s essentially no expense related to it. What are you trying to get at?

Sean W. Wieland – Piper Jaffray

I’m just trying to get at what your interest expense is expected to be. Will you have any?

Rodger Weismann

We don’t have any.

Robert K. Weiler

Zero debt.

Operator

Your next question comes from Raymond A. Myers – Emerging Growth Equities, Ltd.

Raymond A. Myers – Emerging Growth Equities, Ltd.

Bob, I wonder if you could touch on Medidata. They filed an S-1 to go public shortly. Assuming that they’re successful how does that affect the competitive environment?

Robert K. Weiler

Number one I think that’s a big assumption in this market. If you look at the current market right now anybody who we believe stands a chance of getting [inaudible] the market is going to value long term profitability and cash flow. It’s not 1999 where just solid growth is going to get you any place. I think number one, they showed strong revenue growth.

When we look at the transparency that we now can see about Medidata we can see that they clearly have managed the company in a mode to grow and not create profits and that’s a concern for customers that they’ve been around 10 years and they’re not profitable. That is going to be an issue.

I also think in the short term when you look at it, I don’t know how close you read the S-1, but in that they have a for sale provision that in May of 2009 they can be forced by their Series D shareholders to force a transaction which could be sale if they’re not success getting to be an IPO. That creates uncertainty in the market about their future. I think from a marketing standpoint they can say we file an S-1 we’re going to be public.

Number one I think in this market you have to be a very, very solid growth and growth profitable company to get out. If they get out I think that would be a real complement to them. Second, I think that they haven’t been able o produce profits is going to be something that has caused concerns with customers.

Then in the short term if they don’t get out, what’s going to happen with their company where they have a for sale clause in their agreement? I think at the end of the day, it probably won’t change the competitive environment that much, but I do know in some situations it already has.

Raymond A. Myers – Emerging Growth Equities, Ltd.

My follow up question was about market share and considering your comment about increasing your sales force for the mid-market where I believe Medidata is a strong player, it would seem that your attacking their weakness.

Robert K. Weiler

Actually if you look at the market share data, we’re stronger than they are in every market we participate, number one.

Number two, they are at that market and we believe that even though we’re stronger from what we believe is a market percentage standpoint, number of customers, number of CROs, that there’s still a lot of opportunity that we’ve been leaving on the table that we just haven’t been able to cover because of the growth we’ve experienced and we believe now that we have the financial resources and we have the profits, we have the growth, that we now can expand into that market with a larger sales organization.

Raymond A. Myers – Emerging Growth Equities, Ltd.

These new opportunities you’ve been made aware of, are these customers who are surprised by what they saw in the S-1 especially relative to profitability or lack thereof?

Robert K. Weiler

I would say twofold, yes and surprised as compared to what the general market perception has been.

Raymond A. Myers – Emerging Growth Equities, Ltd.

That was my feeling as well. It sounds like that bodes well for you and am I correct in assuming that you expect to be gaining market share in 2009?

Robert K. Weiler

Yes.

Operator

Your next question comes from Andrey V. Glukhov - Brean Murray, Carret & Co.

Andrey V. Glukhov - Brean Murray, Carret & Co.

First of all when we talk about ASP per trial being $450,000, so far as we’re entering 2009, are you guys seeing any pressure from customers on that number?

Robert K. Weiler

Every customer out there is going through a situation where they’re having cost reductions, layoffs, access to capital and much of those layoffs are in the sales areas, they’re restructuring R&D, they’re doing a lot of things and some of it is because of the economy, some of it is because you hear that a company has laid off because they recognize their patent result in two years and they just don’t know they’re going to get a new drug to cover that.

There’s both the combination of the historic that’s been going since 2004, 2005 in the cost cutting in the pharmaceutical areas and now that’s compounded by an economic environment that just has everybody unsure and swirling. That said, every customer talks to us about the price and what we can to help them with their budgets.

What our job is to continue to one, be there and help them, not be an arrogant company that says hey, we’re Phase Forward, this is the price. We work with them, but it’s just not about taking price down. A perfect example and one of the reasons we believe we’re getting so much traction from our Clarix acquisition is that we can actually show by an integrated software product that we can reduce their total cost of ownership by going with Phase Forward.

That message resonates with them, so they aren’t beating us up just to drop our price. Now in some cases, some of our competitors are dropping their price pretty dramatically to try to win business and we’re not going to win all of that business.

On the other side of it, as long as we can continue to show the value, as long as we can show the value to the customers that we can help them lower their cost and be more productive, I believe that the results that we just posted speak for the message we’ve been bringing to the market.

Andrey V. Glukhov - Brean Murray, Carret & Co.

Rodger, when it comes to Clarix, first of all do you have off hand what Clarix’s contribution to deferred revenue in the quarter was?

Rodger Weismann

No, I don’t know.

Andrey V. Glukhov - Brean Murray, Carret & Co.

This $13 million to $14 million in revenue they’re expected to contribute in 2009, that’s roughly what you guys were thinking before, any reason that they EPS neutrality argument is not going to hold or at least you expect it to be EPS neutral through the year?

Rodger Weismann

I think the guidance that we gave before which was approximately a break even on their contribution. Some of that gets a little harder to track as we integrate the two and we don’t track them completely as a separate company. But our expectations on the profit side are probably about the same or slightly less than before.

It’s also, I didn’t mention it earlier, until they get up to what we view as more a mature margin which would be the fourth quarter of '09 or the first quarter of 2010 they tend to have a slight dampening effect on our overall operating margin. The first question about getting towards increasing 100 basis points a year I think another minor reason to that is that their operating margins are less than our 16%.

Until they get up there they have a slight dampening effect on that

Andrey V. Glukhov - Brean Murray, Carret & Co.

Lastly, Bob as we think about 2009 are there any particular big contract renewals that we should be aware of?

Robert K. Weiler

GSK in mid year.

Operator

Your next question comes from Raghavan Sarathy - Dougherty & Company.

Raghavan Sarathy - Dougherty & Company

Rodger, can you give us some sense for the license revenue as a percentage of total revenues that you’re expecting in your guidance?

Rodger Weismann

In the fourth quarter I think it was 28.6% or so and we do expect it to go down a little bit, not move as much as it has during the past year. We would say in the 27% to 28% of revenue neighborhood.

Raghavan Sarathy - Dougherty & Company

In terms of your services margin, last year you started the scale of the trials and the investments you made, how should we think about that fluctuating this year now that you’re going to have Clarix for the full year as well?

Rodger Weismann

You mean what kind of service margin improvement do I expect over the year?

Raghavan Sarathy - Dougherty & Company

Yes, it is going to dip to start with and you improve through the year? How should we think about service margin?

Rodger Weismann

There’s the first annual qualifier that I gave on improving operating margins over time, that doesn’t happen in a perfectly straight line, different things can happen in different quarters so I had the same qualifier on service margins as we saw a general improvement in 2008. It didn’t happen in a straight line quarter-by-quarter, it went up a lot in Q1, it dropped a little bit in Q2, went up in Q3.

Those things are quite apt to happen on a quarterly basis in 2009. For the year I think I gave some guidance that was in the neighborhood of about a 200 basis point increase over the year in service margins. But I don’t expect trying to get a period where we would have a significant dip as we did in late 2007.

Raghavan Sarathy - Dougherty & Company

In terms of the trial count, can you give us the licensee and ASP trial count as of last year?

Rodger Weismann

The total on adoption?

Raghavan Sarathy - Dougherty & Company

Right.

Rodger Weismann

We’re right at or just over 2,850 at the end of the year.

Raghavan Sarathy - Dougherty & Company

The break out between licensee and ASP?

Rodger Weismann

Licensees are 2,157 and ASPs 693.

Raghavan Sarathy - Dougherty & Company

If I recall correctly the ASP trials also include some of the test trials you set up, is that right?

Robert K. Weiler

No.

Raghavan Sarathy - Dougherty & Company

It’s not all production trials, is that correct?

Rodger Weismann

Sometimes these numbers can be confusing. We have 920 trials live in our data center today and not all of the trials that I gave you in the adoption go through the data center. Secondly, every trial has close to two other trials, the test and the training trials that go along that. So sometimes we say how many total trials are running in our data center at any point in time?

I don’t know what the exact number is but it would approach three times the 920 that we have as lag trials. I would estimate it’s in the neighborhood of about 2,500 today. Did I confuse you more?

Raghavan Sarathy - Dougherty & Company

What I’m trying to get at is the number of ASP trials, production trials. In other words a clean number that gives us some sense of revenue from ASP trials.

Rodger Weismann

I don’t know what the total ASP trials that are live today. For example, all the TSKs which are not ASP trials those are all running at our data center. I don’t have that breakdown.

Robert K. Weiler

Plus you have de-commissioned trials so it’s always a net trial, trials going up and down. There’s two points to be made. One, the first numbers that Rodger gave was a cumulative number of trials broken down that have used InForm. The second numbers he’s talking about are just the number of trials that are running in our hosting facility at this point in time.

You kind of use those to back into ASP total number trials and revenue.

Raghavan Sarathy - Dougherty & Company

One final question, is CRO a contribution as being the big part of your growth given the fact that CRO is not lowering your outlook. I’m wondering what sort of assumptions you have baked into your outlook for the channel.

Rodger Weismann

I don’t have the specific numbers of the CRO revenues broken out. I think in general we expect them to continue similar growth and probably the growth in CRO revenues at a little bit faster rate than our overall growth.

Raghavan Sarathy - Dougherty & Company

But have you seen any slowdown from CRO channels thus far?

Rodger Weismann

No.

Operator

Your next question comes from Alexander Draper – Raymond James & Associates.

Alexander Draper – Raymond James & Associates

Two questions, one a quick one Rodger, all the margin numbers you gave, that’s pro forma revenue to get a pro forma operating margin, correct?

Rodger Weismann

Correct, almost every number I gave in there unless I specifically said GAAP they are all non-GAAP numbers, all that cost analysis, they’re all non-GAAP costs against non-GAAP revenue.

Alexander Draper – Raymond James & Associates

A follow up to Sean’s earlier question about pharma consolidation, how would it work if you had two pharma companies that were licensed customers, not ASP, but if they were both license customers of yours and they merged together, how would you handle that or how would that be done in terms of the potential impact on the revenue?

Robert K. Weiler

If they’re both our customers, for example, we did pricing and contracts based on the number of trials that they would, so those trial numbers unless they just stopped doing the trials for the other company would just be merged and we would be getting the revenue from the combined number of trials that were being performed.

Alexander Draper – Raymond James & Associates

So it’s not like there’s just a fixed amount and that you would lose one of those on the number of trials even though it’s still license?

Robert K. Weiler

Yes, it’s not a perpetual type model where they have clauses in there that say if you acquire somebody they get to roll it up. We price by the models and in fact we even have in our contracts protection that if something like that happens, that they aren’t entitled to take any licenses they have and apply them to the other.

Generally what happens in that environment, it hasn’t happened times, you enter into a negotiation with them so they can figure out what they’re trying to do.

Operator

Your next question comes from Steven F. Crowley - Craig-Hallum Capital.

Steven F. Crowley - Craig-Hallum Capital

Just a couple follow ups, first of all on the trial numbers that you’ve been giving us, not to rehash anything you just said, but when you talked 935 trials last quarter, you talked about 65 being from Clarix you’ve given us a 920 number this go around. What is the number of Clarix trials in that number?

Robert K. Weiler

We didn’t give Clarix trials.

Rodger Weismann

I don’t recall a 955 number.

Steven F. Crowley - Craig-Hallum Capital

935. I believe it was in the 10-Q and it referenced 65 trials from Clarix, the addition of 65 trials from Clarix. I just assumed you’d be giving us that number on an ongoing basis.

Rodger Weismann

The 920 doesn’t include Clarix.

Steven F. Crowley - Craig-Hallum Capital

You mentioned the foreign currency dollar impact that you included in your guidance, I believe you said $3.5 million.

Rodger Weismann

Right.

Steven F. Crowley - Craig-Hallum Capital

Could you lay out a little better picture of your foreign currency exposure? Historically you’ve given us a nice table of revenues generated in certain geographies, UK, France, Asia but there’s a different number that reflects the percentage that’s generated in foreign currencies. In other words, that first table adds up to about 45%.

In your last 10-Q you gave us disclosure that 32% of the first nine months of this year were in currencies other than the US dollar and 30% of Q3. What was it in Q4 and can you give us at least a ballpark feel for how that 30% or so breaks down between pounds sterling, euro and yen?

Rodger Weismann

I can’t on the call. It’s a good idea for the K. You’re right it’s about 30%. I don’t know what it is for this quarter. I would assume it is similar and it approximately breaks down to 60% of that I think is billed in the euro and I think about 25% to 30% in the pound. The yen is about 10% and there’s a small amount in Australian dollar.

Steven F. Crowley - Craig-Hallum Capital

That will be helpful to get the math to work on the currency impact and anything you can give us in the 10-K in terms of incremental disclosure would be great.

Rodger Weismann

I just have a couple expansions. It’s very hard to extrapolate without more data on our currency. It’s further complicated by two things. One is that a lot of times the currency impact isn’t immediate on our revenue because a lot of our revenue is billed in a prior period or the invoice went out in a prior period and it ends up in deferred revenue and not recognized for two, three, four quarters later and when it’s recognized it’s picking the exchange rate that it was billed at two or three quarters before.

The second is that our expenses are not in exact proportion to where those currencies were that I gave and so for example, over half of our foreign revenues are in Euros but much less than half of our expenses are in Euros and it’s probably almost the reverse where about 60% of our expenses are in the pound. It’s weird that sometimes in a period we can get a big pick up because if the pound is really weak we can get a reduction in expenses.

In the same period the euro might be strong and we get a pick up on the revenue side. So the net impact to the bottom line can get very hard to predict. We can do it internally but externally hard to predict.

Operator

At this time we are going to take the two last questions and please limit your questions. Your next question comes from Nabil Elsheshai – Pacific Crest.

Nabil Elsheshai – Pacific Crest

Just a real quick follow up, Bob since you threw it out there I was curious on what kind of time frame you think it would take to get to that 30% attach rate, just hypothetically?

Robert K. Weiler

I’d be looking in the 2011 timeframe.

Operator

Your next question comes from Stephen Shankman – Natexis.

Stephen Shankman – Natexis

Two real quick housekeeping type questions, one what is the expectation for the fully diluted share count for 2009?

Rodger Weismann

Based in our assumptions an average for the year we think is about 44.3 million shares. It’s a little bit lower than that in the first quarter and then it rises slowly during the year.

Stephen Shankman – Natexis

Following up to your foreign exchange comments, holding the existing currency rate steady going forward, what type of impact would that have on the other net income line, not the total other deductions but the other net below the interest income?

Rodger Weismann

The other net line it’s not impacted by these other effects that I mentioned. That is impacted by the amount of foreign currencies, what’s called nonfunctional currencies, that we carry on our balance sheet. For example the functional currency in the US is a dollar so if some other receivables that we have in pounds on our US company, if we have a gain or loss on that it goes through the other income line.

We try to hedge that exposure. If we have a perfect hedge on a monthly and quarterly basis it will be net to zero. But we have to forecast what we think that exposure is each month and we try to hedge that. Our goal is that net expense is zero but in any given period it could be positive or it could be negative.

We happen to have a fairly large negative amount in Q3 of last year where some of the currencies moved in a very dramatic fashion in a short period of time coupled with our forecast for that particular period wasn’t perfect. It did result in a loss of about $400,000 for that quarter. But that’s unusual, most quarters a goal is it would be quite small.

Stephen Shankman – Natexis

So no significant impact to the model that you’re baking in?

Rodger Weismann

Right.

Operator

This concludes your Q&A session. I would now like to turn the call over to Mr. Bob Weiler for closing remarks.

Robert K. Weiler

As I mentioned earlier we’re pleased with the performance of Q4. We’re very pleased with the growth on the whole year and once again we’re very, very excited that Rodger has the opportunity to improve his golf score and we’re excited that Chris, who’s been with us a long time, is going to be able to step up in this role and we have a great transition planned and have had for a while so we’re very confident in that. I’ll look forward to talking to you at the end of next quarter.

Operator

Thank you for your participation in today’s conference. This concludes your presentation.

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