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InnerWorkings, Inc. (NASDAQ:INWK)

Q4 2008 Earnings Call Transcript

February 19, 2009 5:30 pm ET

Executives

Joe Busky – CFO

Eric Belcher – President and CEO

Analysts

George Sutton – Craig-Hallum

Vance Edelson – Morgan Stanley

Michael French – Morgan Joseph

Operator

Good day, and welcome, everyone, to the InnerWorkings Incorporated quarterly earnings conference call. As a reminder, this call is being recorded. At this time, I would like to turn the call over to the Chief Financial Officer, Mr. Joe Busky. Please go ahead, sir.

Joe Busky

Thanks, Kevin. Good afternoon, everyone, and thank you for joining us on our fourth quarter and full year 2008 earnings call. This is Joe Busky and I’m the Chief Financial Officer at InnerWorkings. Joining me on the call today is our Chief Executive Officer, 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. Listeners to the call are advised to review our SEC filings, including the risk factors contained in our most recent Form 10-K. In addition, please note that this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without prior our consent.

So at this time, I would like to turn the call over to our Chief Executive Officer, Eric Belcher, who will provide an overview of fourth quarter and full year highlights and business drivers, and then I will spend a few minutes on our financial results. And Eric will then conclude with a broader discussion of the business, and finally we will finish up with your questions. Eric?

Eric Belcher

Thanks, Joe, and thank you everyone for joining us on our call today.

2008 was a year of great accomplishments for InnerWorkings tempered by the abrupt impact of the faltering economy in the fourth quarter. Over the past 12 months, we realized impressive progress on multiple fronts including achieving numerous enterprise wins, capturing market share in a shrinking environment for printed and promotional material and expanding our footprint to encompass important new geographies, all while reporting record revenues and cash flow.

That said, the latter half of the year, and in particular the fourth quarter, also included several unique unanticipated and certainly unprecedented events that impacted our performance. These events include reduced marketing budgets, a number of customer bankruptcies, new regulations in the pharmaceutical vertical, which I will discuss in more detail in a moment, and a strengthening dollar, which adversely impacted our reported results.

While all of the challenges require focus and disciplined to manage through, we believe that none of these issues diminish in anyway the long-term prospects of our business. InnerWorkings’ proven ability to grow at a rapid rate has shaped and defined our culture since the founding of the company. As many of you are aware, the historical volume of printed materials has fluctuated within a narrow band that follows the national GDP, regardless of the market environment. However, recent estimates forecast that the current slowdown in the volume of printed materials is at record levels. In hindsight, we didn't anticipate the depth of his reception. However, when the full impact to our business became clear in the month of December, our management team acted within a matter of weeks to address this new reality by implementing rightsizing initiatives in January.

Despite the shrinking print market, InnerWorkings’ 2008 revenue rose an impressive 45% to a record $419 million, up from $288 million in 2007. This figure includes 6% organic growth despite a declining overall print market, and it also underscores our strong position and for rapid growth when print spending regains its historical realignment with national GDP. And we believe we have positive momentum among our contractual enterprise relationships as we launched a company record 27 enterprise accounts during the year, including six in the fourth quarter. This brings our total enterprise client base to 143.

We greatly expanded our national and global team of talented professionals. During 2008 we added a meaningful presence in Britain and in the southeast region of the United States as well as strengthened our position in New York and the Midwest. I am pleased to report we now have a presence in seven of the top ten domestic print markets in addition to our beachhead in Europe. And a reminder that we're not just present in these locales, but we are there with the best teams in the marketplace.

An often overlooked and critical statistic is our customer retention, which speaks to our strong existing client relationships and underscores the value we deliver to our clients. We are proud that we continue to do business with 24 of our top 25 customers compared with a year ago, and our total revenue with these clients continues to grow. While full-year performance included some very positive results and crucial building blocks for long-term success, business in the fourth quarter was negatively impacted by multiple factors. While we started of the quarter with decent momentum, accelerating pressure on marketing and advertising budgets caused a steep revenue decline in December. During the month of December we generally have customers facing use-it-or-lose-it budget decisions. Typically annual budgets with remaining funds at the end of the year would be depleted, but as 2008 came into a close, these funds were almost exclusively saved.

In addition, let me offer a few customer examples of the pressure on print budgets. A major domestic airline and a long-term customer of InnerWorkings made a cutback decision toward the end of the year when it abruptly ceased printing ticket jackets for its coach passengers due to the fact that they lost their advertising sponsor for this piece. Another customer, one of our largest, contacted us at the beginning of December to inform us that all shipments for the remainder of the year were frozen. While shipments resumed again in January, this decision had a notable impact on our fourth quarter performance.

An additional important factor affecting our fourth quarter came from a self-imposed relation by pharmaceutical manufacturers. These companies have historically purchased promotional items such as pens and pads to promote their drugs to doctors and other medical professionals. However, in the third quarter, pharmaceutical manufacturers agreed to a self-imposed ban on the domestic distribution of all non-educational promotional products.

While it is still unclear as to what extent our clients and others will comply with this ban, it appears at the moment that it is holding, and we estimate it cost our business approximately $10 million in 2008 revenue, with nearly all of that total hitting in the fourth quarter. This change in client buying behavior was not seasonal or associated with the economy demonstrating the extraordinary confluence of factors that impacted our fourth quarter results.

One final noteworthy factor affecting our fourth quarter results was the adverse impact of foreign exchange associated with our business in the United Kingdom, which cost us over $2 million in reported revenue for the quarter.

To wrap up comments on the fourth quarter and full-year, I want to reiterate how proud we are of our 2008 achievements, particularly success in the enterprise arena and significant market share gains, while at the same time, acknowledging that events such as greatly reduced marketing budgets negatively impacted results, particularly in the fourth quarter. In 2009, our number one priority remains winning new major accounts and ramping them up as quickly as possible.

I'll discuss 2009 priorities in a moment but will now turn the call over to Joe for a discussion of the company's financial results. Joe?

Joe Busky

Thanks Eric.

I will now take you through our financial results for the quarter and year as well as provide some additional color around those metrics. Our revenue for the fiscal fourth quarter was $104.5 million. This represented a 16% increase over revenue of $90 million in the prior year quarter and was driven by gains made across both enterprise and transactional clients. Our organic business declined in the quarter by 15% reflecting the challenging fourth-quarter business environment that Eric just mentioned. Enterprise client growth remains strong and continues to exhibit excellent momentum however. Overall, enterprise revenues increased 18% quarter over quarter to $64.9 million with a customer base of 143 enterprise accounts versus 116 at this time last year.

Looking at transactional business, transactional revenue increased 13% quarter over quarter to $39.6 million, and we serviced over 3200 customers in the fourth quarter of 2008 versus roughly 2900 customers in the year earlier period. For the quarter, enterprise sales represented 62% of total revenues and transactional sales represented 38% as compared to 61% and 39% respectively in the same quarter last year.

Now looking at full-year performance, revenue for 2008 was $419 million compared to $288.4 million in 2007, a 45% increase. Both enterprise and transactional revenue reported significant gains. Enterprise revenue increased 49% to $267.7 million as 27 new enterprise accounts were added in 2008. Our transactional revenues rose 40% to $151.3 million compared to the prior year. This increase was largely the result of 59 new sales reps added during the year, bringing the total to 280. For the full-year, enterprise accounts represented 64% of revenues with transactional revenue driving the remaining 36%. This compares to 62% and 38% in 2007 respectively.

Gross profit for the quarter was $27.2 million versus $23.4 million in the year ago quarter. The gross margin was 26% even during the period, which is the same gross margin reported in the fourth quarter of 2007. Gross profit for the year was $104 million versus $73.4 million in 2007. Gross margin decreased slightly to 24.8% during the year from 25.4% in 2007 due primarily to the enterprise versus transactional revenue mix.

For the quarter ended December 31, 2008, our SG&A expenses were $24.8 million. This represents an increase of $4.5 million versus Q3 2008 due to incremental bad debt expense of $2.4 million and an incremental $2.5 million of expense related to the three accretive acquisitions completed in the third and fourth quarters of 2008. These increases were partially offset by nearly $500,000 of miscellaneous cost reductions. And on a percent of revenue basis, SG&A expenses increased from 16.6% of revenues in Q3 2008 to 23.7% of revenue in Q4 due to the incremental bad debt expense and reduced top line leverage from the macro economic downturn in Q4.

Year over year, our Q4 2008 SG&A as compared to Q4 2007 increased from $14.8 million and 16.4% of revenue to $24.8 million and 23.7% as a percent of revenue, primarily for the same reasons I just mentioned. And for the full year, our SG&A expense increased from $48 million and 16.6% of revenue in 2007 to $80 million and 19% of revenue in 2008. The SG&A dollar increase is due primarily to be $3.5 million in additional bad debt expense from Q4 2008, $1.1 million of non-cash incremental stock-based compensation from our 2008 auction grants, $4.1 million of additional sales commission expense on higher sales, and nearly $19 million of incremental G&A expense from accretive acquisitions completed in 2007 and 2008. The SG&A expense as a percentage of revenue increased from 2007 to 2008 due to the less than expected revenue we experienced in Q4 2008.

So in response to the loss of top line leverage, we now have a renewed focus on cost discipline and are actively taking overhead expenses out of G&A where possible, including a reduction of 15% of non-sales workforce announced in January that I will discuss in greater detail later in my remarks. In addition, we have identified and capitalized on cost reductions and redundant resources associated with the companies we have acquired.

Now I will discuss operating income, net income and EPS results. First let me begin with operating income. In the fourth quarter, operating income was $800,000 as compared to $8 million in the prior year quarter. The operating income decline was a direct result of marketing and print budget cutbacks instituted by our customers and the additional bad debt expense of $2.3 million. Operating income for the full-year totaled $19.6 million as compared to $23.2 million in 2007. Absent the increases in non-cash D&A and stock-based compensation expense, 2008 operating income is flat compared to 2007. Bad debt expense in 2008 of $4.1 million as compared to only $600,000 in 2007 further impacted our 2008 operating income performance. We are aggressively addressing receivables collections and are closely monitoring credit health for new and existing customers to proactively manage our bad debt in 2009.

Net income during the fourth quarter was $300,000. As a percentage of revenue, net income stood at 0.3% as compared to 4.7% in the same quarter last year without the impact of the fourth quarter 2007 tax benefit of $6.6 million. This net income decline is due to the operating income decline I just discuss as well as a $1 million or 100 basis point impact from additional net interest expense in 2008.

Our fully diluted EPS during the fourth quarter was $0.01 and these results included increase in bad debt expense of approximately $0.03 per share associated with the liquidation of a major retail client and a Chapter 7 bankruptcy recently filed by an InnerWorkings customer as recently as February, this month, which caused us to fall to the bottom of the previously disclosed guidance range of $0.01 to $0.03.

The drop in earnings per share from the fourth quarter of 2007 to the fourth quarter of 2008 is due primarily to the following factors

The one-time tax benefit in the fourth quarter of 2007; an increase in non-cash stock-based compensation and depreciation and amortization expense in 2008; an increase in bad debt expense in 2008 versus 2007, and finally sluggish top line growth due to the weakness in the overall economy in the fourth quarter of this year – fourth quarter of 2008. For the year, net income decreased to $16 million from $22.5 million in the prior year, and fully diluted EPS during the full-year was $0.32 compared to $0.45 in the full year of 2007.

Next let’s turn our attention to the balance sheet. For the full year 2008, we generated $12.6 million of operating cash flow versus $8 million in 2007. In addition to the strong operating cash flow, we also generated $6.1 million of cash from the opportunistic sales of 650,000 shares of our Echo Global Holdings at a value we realize in our 2008 Echo sales, our remaining original Echo investments represents up to an additional $13 million of liquidity to fund our long-term growth. We ended the year with $17 million of cash and auction rate securities. So our strong cash position coupled with our low requirements of capital facilitates a continued upward growth trajectory.

During the fourth quarter, we made additional borrowing under the existing bank credit facilities bringing total gross debt to $42.6 million and net debt to $25.4 million as of December 31, 2008. We have an additional $32.4 million of available liquidity on the bank credit facility and $17.2 million of cash and auction rate securities for a total of $49.6 million of available liquidity. As an asset light business with low inventory, a short cash conversion period and strong working capital, we believe InnerWorkings’ financial position represents a significant competitive advantage and provides us with much needed stability in a volatile market.

Now I will conclude with a discussion around our financial outlook. As mentioned in our January 23 press release, we responded proactively to the rapidly changing landscape and modified our business through cost control measures in a matter of weeks, reducing non-sales workforce by approximately 15% and saving the company approximately $6 million on an annualized basis. Let me remind you that one of these cuts impact our ability to grow our sales workforce, which were totally excluded from cuts and remains wholly focused on initiating and expanding our enterprise relationships.

Now in that same press release we updated 2009 EPS guidance and stated our intention to comment on our revenue guidance during this call, which I will do now. We are reiterating our EPS guidance of $0.35 to $0.39 and providing revised 2009 revenue guidance in the range of $450 million to $475 million. The low-end of our updated revenue range implies continued contraction within the print industry in the first three quarters of 2009 and a rebound in the fourth quarter of 2009. The high end of the revenue guidance implies continued contraction in the first two quarters of 2009 coupled with a flat Q3 and then an increase in print shipments in Q4.

Our cost s structure is primarily variable in nature and therefore can be closely managed to coincide with periods of slower demand as well as demand acceleration. We will continue to respond swiftly to new market challenges and manage our business with maximum effectiveness in this period of economic uncertainty but never losing focus on our long-term growth strategy. Finally I want to reiterate that the underlying fundamentals of our business remains strong and our financial structure is sound.

And now I would turn the presentation back to Eric before we open it up for Q&A.

Eric Belcher

Thanks Joe.

Let's take a step back and revisit InnerWorkings key advantages within the context of this broadly slowing market environment. As a low-cost provider in the marketplace, this economic climate highlights the advantages of our business model, and it's driving interest in our service offering from organizations hungry to realize meaningful and lasting cost savings. Further, our unique technology offers a distinct informational advantage across a vast and highly fragmented supplier channel, allowing us to capitalize on the buying opportunities made available by the additional excess capacity found in our industry today. And while today's tremendous pricing pressure on print manufacturers is a significant burden to every other participants in this space, it is a powerful point of leverage for InnerWorkings, and only serves to expand our relative ability to procure even lower prices for our customers in the open market.

Our supplier relationships are widespread. In fact in 2008 alone, we awarded work to more than 4000 unique print suppliers, highlighting our independence from any particular vendor or groups of vendors. Our financial stability, particularly relative to the print manufacturing community, creates an additional compelling reason for companies to outsource their print management function to us. A key component of our service offering is our staffing solution, which is another primary competitive advantage in this marketplace, as we maintain the ability to free up headcount expenses for our customers as our personnel takeover the responsibility for managing our clients’ print procurement function. As we expected, the memory of this economic period will linger for years. We believe that adoption by corporate America of outsourced solutions for non-core functions will be greater upon emergence from this recession.

We have been translating these advantages of our low cost, high service model into enterprise momentum. As I mentioned previously, we had six enterprise wins in the fourth quarter and a record 27 for full year 2008. Our increasing stable of enterprise relationships provides us with an opportunity to lock in recurring revenue streams and create a sustainable long-term platform for growth. Specifically, our fourth quarter wins include some of the most respected brands within the financial services, publishing, not-for-profit, and healthcare industries. Based on our experiences, we expect that our 27 new enterprise accounts in 2008 will ramp up to approximately $50 million in revenue in 2009. Mitigating factors such as further recession related print spend reductions may impact the rate and timeline in which these relationships ramp.

Encouragingly InnerWorkings continues to exhibit key growth indicators even beyond the addition to and an acceleration of our enterprise relationships. One important statistic is the number of employees InnerWorkings has on-site with our customers. At the end of 2008, we had 54 of our talented professionals located directly on site at our clients’ locations on a full-time basis. And as InnerWorkings continues to grow, we fully expect that number to expand into the hundreds. Today, we have 56 customers that we billed at least $1 million in 2008, up from 40 at the end of 2007. Furthermore, customer concentration from our top ten accounts dropped from 41% of total revenue in 2007 to 33% in 2008.

Next I will touch on our M&A pipeline. First of all, we are pleased to report that our 2008 acquisitions including etrinsic, Mikam Graphics and Origin Partners are off to a strong start with InnerWorkings and are performing well. As the most active incredible buyer in the market with ample liquidity, we will continue to make selective small tuck in acquisitions going forward. Historically, leads generated from personnel affiliated with our acquired companies have driven some of our most high-profile enterprise wins to date, as we have leveraged their customer relationships and our technology reputation and scale to win important new business, including Absolut Vodka, Pulte Homes, Modell’s Sporting Goods (inaudible) the retailer Party City.

In conclusion in 2008, we firmly established our unique model in the marketplace, grew revenue 45% from the year earlier period despite challenging market conditions, and continued to enhance our team with some of the most talented professionals in the industry. In 2009, we will maintain our focus on landing new major contractual enterprise relationships. We fully expect to continue to significantly outpace the industry growth rate as the slowing market affords us the opportunity to grab and control an even greater percentage of the print being bought and sold today. The opportunity in front of us is massive and as the market rebounds over time, we are poised to quickly ramp our platform to continue our rapid growth trajectory.

Operator, I would like to now open it up for questions.

Question-and-Answer-Session

Operator

(Operator instructions) And we will go first to George Sutton with Craig-Hallum.

George Sutton – Craig-Hallum

Hi guys. I have a few things. I'm curious, Eric, I know one of the challenges has been as you bring on these new enterprise customers, getting them to revenues has been a challenge in terms of getting that process ramped up, is there anything you can do to accelerate that? And you mentioned the $50 million that you will get from those customers in 2009, what would that number potentially look like in 2010 from that customer base?

Eric Belcher

Okay, first of all, hello George. Let we answer the first part of your question first. With respect to landing an enterprise contract and then recognizing revenue going forward, we have learnt a tremendous amount over the past few years, an in fact even in the past year or two about how best to ensure that we takeover and control all of the print spend associated with our new clients, becoming the buying authority, eliminating the historical method of participating in this channel, buying in this channel. So I would say primarily due to the fact that we have learnt how to implement more effectively over the past one to two years as we have gone from a small number to frankly a very large number of enterprise wins gives us confidence going forward that as we continue to ramp recent wins as well as set up and close new enterprise contracts, we're going to be recognizing this revenue much more effectively and quickly than we have historically.

Regarding your question of what our estimated $50 million in revenue recognized in 2009 might look like in 2010, I don't have a specific number, George, in front of me right now. Suffice it to stay that it would be quite a bit more than $50 million and what that number might ultimately look like depends in large part on how well we are able to integrate our solution into additional business units that might have been not included in the original contract as well as continue to take over product categories that might be either under contract today or have been deliberately excluded for some reason with our initial contract, with our initial enterprise win. So as with our other enterprise accounts, there is quite a bit of room even within our existing client base to grow our business. And as we learn and gain momentum and gain credibility and again influence in this industry, we expect a lot of growth coming from the current enterprise contracts that we have got right now.

George Sutton – Craig-Hallum

Okay. At your analyst day Ryan Irwin who has joined you from Ariba suggested he was just kind of getting out and really starting to see some increased levels of interest from customers, and I think the best way to term that was the number of audits were going up, can you just give us an update on what you're seeing with the economic slowdown, how that is impacting the audit process?

Eric Belcher

Sure. Well, Ryan’s correct in that our audit department is probably the last people to leave the building these days. They are working very hard and very late, because the volume of analysis that we are conducting right now within that group. In terms of that information and how it is being utilized in our sales and marketing efforts to continue to land and ramp new enterprise accounts, we are seeing a heightened interest today versus even just 12 months ago at the savings proposals that we're putting in front of our clients. And so more and more we're finding our discussions presenting factual information regarding our ability to simply procure better than most companies in corporate America in this space we participate in, we're finding those conversations leading to meaningful discussions about more immediate opportunities for us to take over their print procurement function. So there is a general buzz of energy in our business development team and a general work effort going on right now in our audit department, which gives us good confidence that 2009 will lead to a large number of meaningful enterprise contracts. And in fact at the same investor day you referenced, George, I believe Ryan also increased the number of enterprise wins that we expect on a quarterly basis from four to six to six to eight and there is also of course beyond just the quantity of wins, there is the quality of those wins, the size of the contract, as well as the economics of the contract, as well as the probability that we expect that contract to ramp in a near period and the quality feels right too.

George Sutton – Craig-Hallum

Okay. And lastly if I could, for Joe, how should we look at seasonality this year relative to last year, or relative to traditional years?

Joe Busky

Yes, George. I don't think it'll be drastically different than the previous years. You're still going to see, as we have seen in prior years, a somewhat weaker first half than the second half. Eric mentioned earlier the use-it-or-lose-it mentality that a lot of our customers have at the end of the year. That will still be there absent unusual economic conditions again. So I would say that the seasonality would be fairly similar to what we have seen in the past.

George Sutton – Craig-Hallum

Thanks guys.

Eric Belcher

Thanks, George.

Operator

And we will take the next question from Vance Edelson from Morgan Stanley.

Vance Edelson – Morgan Stanley

Hi. Thanks a lot. It is great that you came out with 2009 full-year guidance when a lot of companies are afraid to at this point and you mentioned what the low end and the high end of the revenue range assumes in terms of demand trends, how confident are you in the overall range, which is actually pretty tight, given what we have all experienced the past year? Can you give us a feel for just how strong you think your visibility is going into 2009?

Joe Busky

Hi ,Vance. It is Joe. Thanks for the question. You know obviously visibility to revenue is impacted in economic times like this. In normal times, we would feel much more comfortable with visibility going out over several quarters. In this type of environment, it is definitely reduced. However, I feel that the numbers that we have given our conservative enough, and again as I said before, they assume similar economic conditions that we saw in Q4 throughout much of 2009. And in fact when you look at the – when you look at the full-year numbers on the revenue guidance, they all, the whole range assumes a full year decline in GDP and print shipments. And I think that is consistent with the latest testaments [ph] that were issued today. So I think it is – I would say it is – the range is very achievable.

Vance Edelson – Morgan Stanley

Okay, great. And then a question for Eric, how would you describe morale among the ranks? The stock is obviously down and you need folks to be out there aggressively selling and so forth, so can you give us a feel for how you are managing to keep the motivation level up these days? Thanks.

Eric Belcher

Sure, Vance. We are not here in a vacuum. I think if you were to ask any of our employees how InnerWorkings sits from a competitive position standpoint versus our peers, versus our competitors, versus the opportunity in front of us, they would in general feel as strong if not stronger today about their decision to join our company and about our prospects going forward. You mentioned the stock price. I'm hoping not too many of our employees are sitting around watching that; there’s work to do in the marketplace and we're gaining share. We are rapidly gaining market share, we are going organically in a shrinking market. I personally don't know of any other company frankly in our space that can say that. And there is no question that our employees feel in general as though they are working for the firm with the greatest reputation and the greatest potential in front of us over the next five years here at InnerWorkings.

Vance Edelson – Morgan Stanley

Okay, that is great. Good luck, guys.

Eric Belcher

Thank you.

Operator

(Operator instructions) We will go next to Michael French with Morgan Joseph.

Michael French – Morgan Joseph

Good afternoon, gentlemen.

Eric Belcher

Hi, Michael.

Michael French – Morgan Joseph

I have a question on cash flow. Can you describe what the cash was used in during the period, and what we should be thinking about in terms of cash flow for 09? And then somewhat related question is interest expense on the debt?

Joe Busky

Sure. This is Joe. So as far as cash flow for the quarter, we generally see an increase in working capital in the fourth quarter historically. So it is not unusual that the cash flow would be somewhat weaker in the fourth quarter relative to the other quarters. However, we're extremely proud of the cash flow, operating cash flow generation for the full-year of just under $30 million, which is about a 60% decrease over 2007. So if you work through the cash flow statement, you'll see that we generated the $30 million in operating cash flow, and then down in the investment section, you have about $40 million for acquisitions and about $8 million for earn outs related to prior year acquisitions.

Now as far as 2009 and beyond, I feel very comfortable that the operating cash flow that this company can generate will sufficiently cover our future earn outs as well as CapEx going forward. Our liquidity is strong. We have got basically three uses for our cash. It will be for M&A, it will be for share repurchase, and it will be for early pay discounts with our vendors. And Michael we will take a look at all three of those options individually and in the aggregate on a monthly basis and determine which is better for our shareholder base in terms of creating value. And that is how we allocate liquidity going forward. But I do feel very good about this company and its ability to generate cash flow going forward.

Michael French – Morgan Joseph

Okay, thanks. And on interest expense?

Joe Busky

The interest expense, the bank credit facility, it is at LIBOR plus 115.

Michael French – Morgan Joseph

What was the actual expense in the fourth quarter?

Joe Busky

It was about $400,000.

Michael French – Morgan Joseph

And when did you draw it?

Joe Busky

Well, the debt…

Michael French – Morgan Joseph

In say a typical quarter, like you were up a little from there or down a little from there (inaudible)?

Joe Busky

As far as the interest expense?

Michael French – Morgan Joseph

Right. This year you are going to borrow some more and maybe it goes up a little or if you pay off some it can go down.

Joe Busky

Well, most of the increase in the debt happens early in the quarter as it relates to the Origin acquisition as well as some share repurchases we did very early in Q4. So I think to answer your question directly, Michael, the interest, the net interest expense you see in this quarter is pre-represented [ph] going forward.

Michael French – Morgan Joseph

And the final one, the tax rate you are assuming for next year?

Joe Busky

It is similar; it is going to be as it has in the last two years between 38.5% and 39%. We are obviously working very hard through tax strategy to do our best to minimize that, but for now I assume it is going to be consistent with the two previous years.

Michael French – Morgan Joseph

Okay, great. Thank you.

Joe Busky

Thank you.

Operator

(Operator instructions) And we will take a follow-up question from George Sutton of Craig-Hallum.

George Sutton – Craig-Hallum

Yes. One thing for you, Joe, one of the criticisms of this business model traditionally as you are ramping up the revenues has been the inability to scale the business, and it looks like you have really started to focus on the cost structure side, as we start to get into a more normal environment, does it appear that this business can scale better than we had seen in the previous several quarters?

Joe Busky

Yes, George. We're going to be monitoring the revenue forecast on almost a daily basis going forward office by office, account by account, and we're acting accordingly to flex up or down with our cost basis. And our variable nature of our cost basis allows us to do that fairly quickly, just as we flex down on our cost base fairly rapidly at the end of January, we could flex up just as fast when things get back to normal later in 2009.

George Sutton – Craig-Hallum

So in other words I think this period has given you a little bit better recognition of that ability to flex than there might have been in the past? Is that a fair assumption?

Joe Busky

Yes, I think that is correct.

George Sutton – Craig-Hallum

Okay, thanks.

Joe Busky

Thank you.

Operator

Ladies and gentlemen, that is all the time that we have allocated for Q&A. We do appreciate everyone’s participation. You may disconnect at this time.

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