iPass, Inc. Q4 2008 Earnings Call Transcript

Feb.23.09 | About: iPass Inc. (IPAS)

iPass, Inc. (NASDAQ:IPAS)

Q4 2008 Earnings Call

February 23, 2009 5:00 pm ET

Executives

Frank E. Verdecanna – Chief Financial Officer & Vice President

Evan L. Kaplan – President, Chief Executive Officer & Director

Analysts

Edward Einboden – William Smith & Company

Frederick Ziegel – Mackinac Research, LLC

Neil Weiner – Fox-Hill Capital Partners

Justin Orlando – Dolphin Management

[Kenneth Traus]

Randy Bassett – Value Investments, LLC

Operator

Welcome to the fourth quarter 2008 iPass Incorporated earnings conference call. My name is Melanie and I’ll be your coordinator for today. At this time all participants are in listen only mode. We will conduct a question and answer session at the end of this conference. (Operator Instructions) As a reminder, today’s call is being recorded for replay purposes. I would now like to turn the call over to Mr. Frank Verdecanna, Chief Financial Officer.

Frank E. Verdecanna

Thank you for joining us to discuss our financial and operating results for the fourth quarter of 2008. I’m Frank Verdecanna, Chief Financial Officer of iPass and am joined by Evan Kaplan, President and CEO. Before I turn the call over to Evan I would like to bring the following to your attention. The date of this call is February 23, 2009. Our presentation today contains forward-looking statements about events and circumstances that have not yet occurred.

Statements regarding our projected financial results for the first quarter 2009, statements containing words such as will, expect, believe and should and other statements in the future tense are forward-looking statements. Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties.

These risks and uncertainties are set forth in our press release of today as well as in our quarterly report on Form 10K under the section factors affecting operating results in part one item two of that report filed with the Securities & Exchange Commission on November 10, 2008 and available at www.SEC.gov. iPass undertakes no responsibility to update the information in this conference call under any circumstances.

The press release announcing our financial results is available on our website at www.iPass.com in the press room section under press releases. The current report on Form 8K furnished with respect to our press release is available on our website in the investor relations section under SEC filings. In addition, in this earnings call we will provide non-GAAP financial results. The press release on our website includes texts and tables that explain our reconciliation of these non-GAAP results to GAAP results.

This earnings call is also being recorded for replay and is being webcast and will be available on our website for one quarter until the next quarter’s call. This webcast is the property of iPass and any copying or rebroadcasting of this webcast without the express written consent of iPass is strictly prohibited. I’ll now turn the call over to President and CEO Evan Kaplan.

Evan L. Kaplan

I’d like to start by saying I’m excited to take the reins as President and CEO at iPass. After a roughly 100 days on the job I’m optimistic about our long term opportunity. I recognize we are completing a painful multiyear transition from dial to broadband and that we face an unprecedented economic environment but I’m encouraged by the fact that we are positioned to benefit from the tremendous long term wave of mobile Internet adoption and that we hold an enviable position as the trusted mobility partner for a substantial number of the world’s largest companies.

So, even in these difficult times I’m confident that looking forward we can lay the foundation to deliver a new round of growth and exit 2009 as a more focused, more efficient and most importantly a stronger company. On this call we’ll cover four topics, first Frank and I will discuss the fourth quarter results. Next, I’ll share my perspective on iPass after 100 days and then I’ll outline the restructuring that we announced today. To close, I’ll discuss the key initiatives for the company in 2009.

First, let’s talk about Q4 2008. The shadow looming over the quarter was the brutal impact of the global economic downturn as evidenced by the sharp drop off in business travel and a spike in corporate layoffs that drove a 4% revenue decline from Q3. While this results was unquestionably unfavorable we believe that it was tied specifically to these broader economic trends and that we have maintained or even grown share within our market during the quarter.

We have also benefitted from the downside protection afforded to us by having over half our revenue tied to fixed term contracts with monthly minimum commitments. Lastly, we have a base of blue chip customers that’s quite simply reliably pay their bills. There are also several bright spots within the results that support my optimism. First, we grew both our mobile broadband revenues and our mobile broadband user counts during the quarter despite the economic situation.

In addition, both our Wi-Fi and 3G businesses grew with Wi-Fi revenues increasing by 2% and 3G posting a 14% revenue gain as enterprises increased their adoption of this newer technology. Later in the call I will outline our plans to capitalize on this long term trend towards 3G with more aggressive actions in the market.

Finally, iPass continues to attract new marquee customers. During the fourth quarter we added eight new Forbes Global 2000 customers bringing our total to 447. We closed 30 new Global 2000 customers for the year, the same number as in 2007. I believe that this demonstrates that our overarching value proposition of unified mobility management continues to gain traction in the market and we expect this traction to improve further as the recession drives enterprises to get better control over their mobility costs.

Before I turn the call back over to Frank, I’d like to close with a comment on the accounting impairment we recognized this quarter. Included in our GAAP operating loss and GAAP net loss is a non-cash goodwill and long lived assets impairment charge of approximately $84.1 million. The charge is related to assets initially recorded in connection with the acquisitions over the last four years. It does not impact the company’s normal business operations, our liquidity or our cash flow.

With that, Frank will take you through the financial results in more detail and then I’ll be back at the end of the call to discuss my insights and the directional changes for the business. With that I’ll turn the call back over to Frank.

Frank E. Verdecanna

Total revenues for the fourth quarter ended December 31, 2008 were $46.4 million versus $48.4 million last quarter, a decrease in the quarter of 4%. The revenue decline was a result of large scale travel restrictions and layoffs in our enterprise customer base especially in the back half of the quarter.

Full year 2008 revenues were basically flat with last year at $191.5 million despite nearly $31 million of dial erosion year-over-year. Our total broadband revenues in the fourth quarter were $27.1 million up from $26.3 million in Q3. For the full year broadband revenues were $103.7 million compared to $75.1 million in 2007 or year-over-year growth of 38%.

Mobile broadband revenues came in at $20.2 million in the fourth quarter compared to $19.4 million in Q3. Full year mobile broadband revenues were $76.1 million compared to $48.8 million in 2007 or year-over-year growth of 56%. Fixed broadband revenue were $6.9 million in Q4 which was flat with Q3. Full year fixed broadband revenues were $27.6 million compared with $26.3 million in 2007 or year-over-year growth of 5%.

Software and service fee revenues in Q4 were $11.9 million versus $13.3 million last quarter, a decrease of 11%. In Q3 we had a few large professional services projects completed which resulted in about $1.2 million more in fees than in Q4. Full year software and service fee revenues were $50.7 million compared to $48.8 million in 2007 or 4% year-over-year growth.

Dial revenues in Q4 were $7.4 million versus $8.8 million in Q3, a 16% reduction. The decline was a result of reduced usage across our customer base in addition to a shift in usage towards Wi-Fi from enterprise flat rate users. Full year dial revenues were $37.1 million compared to $67.8 million in 2007 or a decline of 45%.

Our combined broadband software and service fee revenues in Q4 were $39 million or 84% of our total revenues with dial representing the remaining 16%. For the full year 2008 our combined broadband and software fee service revenues were $154.4 million compared to $123.9 million in 2007 or 25% year-over-year growth.

In the fourth quarter US revenues accounted for 62% of total revenues and international revenues accounted for the remaining 38%. Net work access costs were $20.4 million in the fourth quarter or 44% of total revenues versus $20.1 million or 42% of total revenues last quarter. Our gross margin was 56% in the fourth quarter compared with 58% in Q3.

The primary three drivers of the decrease in gross margin were: first, a shift in the product mix in the quarter from higher margin dial in fee revenues to lower margin broadband; second, a shift in the usage patterns from dial to Wi-Fi of customers on enterprise flat rice pricing; and third, a solid increase in European Wi-Fi revenues in the quarter and a decline in North American Wi-Fi revenues. This shift lowers margins since North America Wi-Fi margins are considerably higher than the European Wi-Fi margins.

Now, let’s revenue our operating income and operating expenses. During Q4 our combined non-stock compensation expenses for network operations, research and development, sales and marketing and general and administrative expenses was $27.1 million which was down $300,000 from Q3. Included in the GAAP results was an impairment of goodwill and long lived assets in the amount of $84.1 million.

We had a GAAP operating loss of $86.6 million in the fourth quarter compared to a loss of $1.7 million last quarter. We had a non-GAAP operating loss of $1.1 million in the fourth quarter versus non-GAAP operating income of $822,000 in Q3. Now, I’d like to review our net income and earnings per share both on a GAAP and non-GAAP basis.

We had a GAAP net loss of $86.7 million or $1.42 per diluted share versus a net loss of $2.1 million or $0.03 per diluted share in Q3. We had a non-GAAP net loss of $1.2 million or $0.02 per diluted share compared to non-GAAP net income of $467,000 last quarter or $0.01 per diluted share. We ended the fourth quarter with $68.4 million in cash and investments. Once again, we had no debt. During the quarter we had cash flow used in operations of approximately $100,000.

Now, I’d like to review our projections for the first quarter of 2009. The following statements are based on information available to iPass today. These statements are forward-looking and results may differ materially. For the quarter ended March 31, 2009 we anticipate revenues to be between approximately $42 and $45 million. We anticipate fully diluted GAAP loss per share to be between $0.12 and $0.15 per share.

We expect a fully diluted non-GAAP loss per share to be between $0.04 and $0.07 per share. The difference between projected fully diluted GAAP loss per share and the projected fully diluted non-GAAP loss per share of approximately $0.08 is based on expected FAS 123R stock-based compensation of $1.2 million, the expected amortization of intangibles of $400,000 and expected restructuring charge of approximately $3.1 million in the first quarter.

Now, I’d like to turn the call back over to Evan.

Evan L. Kaplan

The management team and I have taken a long hard look at the business over the past three months. Our overall conclusion is that while there’s much work to do the company has a solid foundation for future growth. First, we operate in a high growth market and hold a strong position with an enviable customer base. Second, we have a sizeable near term opportunity to grow revenue from our existing services within our existing customer base and third, we believe our business model will improve over time as 3G succeeds Wi-Fi hotspots as the primary mobile broadband technology for enterprises.

That said, there is a current economic reality that we must address. In order to control our costs during a recession and to focus our resources on our core mobility market, we announced today a restructuring of our business which includes the painful but necessary step of reducing our personnel by more than 70 people out of 520. This and other actions are expected to reduce our operating expenses by $1.75 million per quarter beginning in Q2.

Through this reorganization we will curtail investment in less profitable business lines and geographies. We will also be more disciplined around the amount of customer specific work we accept. These changes will allow us to increase funding in several areas which I consider key to the execution of our 2009 plan. For today, we will cover the plan at a summary level. In the coming weeks I will author an open letter to the stockholders that outline more specifically the evolution of our business, the opportunity ahead of us and how we intend to reshape the company to capture that opportunity.

The plan for 2009 centers around taking immediate actions in three key areas. Very simply: first, we need to drive increased penetration within our base of customers and by penetration I mean penetration and utilization of our service; second, we need to lead the market in its move to 3G; and third, we need to extend our market appeal and create new growth avenues by accelerating the development of our new service delivery platform.

I’ll now elaborate on each of these. First, let’s talk about increasing penetration in to the base. A detailed usage analysis and dozens of customer interviews conducted over the past there months lead us to conclude that we are underpenetrated in our base. We believe that currently only 30% to 40% of the mobile workers at our customers use our services.

To address this opportunity we will immediately expand our sales and marketing programs to mine the base reaching out to both our IT sponsors and to our end users directly. We will drive activities such as aggressive use of customized web based training, targeted end user campaigns and increased Wi-Fi footprint.

Second, we must lead in 3G. We’ve already begun driving new segment specific offerings in to the marketplace. In particular our usage analysis revealed that we are underrepresented in the larger user segment of locally mobile workers who are often field service and sales personnel. To attack this segment we have developed new service packages that were launched in to the market last week and that already appear to be gaining traction. We expect these programs to yield near term results over the coming quarters and to accelerate the growth curve of this strategic business. Success here will help us build on the progress we have already made in driving down our 3G access costs.

Third, we must accelerate the next generation product development. We’re in the early stages of initiatives to deliver a major refresh to our service delivery platform and our client software. In this development program we are taking advantages of some of the latest innovations of software as a service or SAS technology to create an iPass service platform that will be easier for our IT customer and channel partners to deploy, manage and customize giving them the flexibility to serve an increasingly sophisticated and broadband dependent workforce.

The new platform will help our customers manage an increasing variety of devices and networks in the market and will become the foundation for an array of value added service offerings. We expect the new platform to broaden the appeal of our services both within our current large enterprise market as well as to allow us to more efficiently extend our platform to small and medium enterprises.

So, looking back, the company has had a consistent core strategy that has lead to success in the past and I believe we’ll do it again. Over the past few years the company invested in to adjacent areas that at the time seemed strategic but in fact were a varying fit and required significant funding. Today, we are cutting the investment in these areas and refocusing the business around its core mission, helping enterprises manage their mobile workers through an in the cloud software driven platform.

While the economic circumstances today are trying, this is not a time to panic but to build. The demand for the value that iPass promises and is uniquely positioned to deliver continues to grow as the mobile Internet wave continues to penetrate the enterprise. Our intention is to focus, align and execute getting better and stronger through this downturn. We expect to come out the other side in a position to drive a new wave of growth.

Finally, from an investor perspective, I intend to make every effort to provide you with a realistic and grounded picture of our business. It is my objective to provide enough clarity for you to always understand our strategy and the reasons for my decisions. In ensuing quarters look for us to provide more details and a set of metrics that allow you to clearly evaluate our progress.

I work for the stockholders and I will do my best to serve that. That officially concludes my prepared remarks. I thank you for your time. With that, I will turn the call back to the operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edward Einboden – William Smith & Company.

Edward Einboden – William Smith & Company

I was just wondering can you kind of just maybe refresh us, I know you talked about last quarter that gross margin expectations kind of going forward were going to approximately 57% to 59%. Do you kind of expect that to be delayed in the second half of the year just overall in the kind of economic conditions we’re going through right now? Or, is there something fundamentally holding you guys back from getting that in 2009?

Frank E. Verdecanna

I think Ed that our expectations especially for 2009 is that we’d stay kind of in that mid 50s range. I think we’re a little bit lighter than our expectation a 2008 or mid 2008 and I think that really has to do with the revenue mix and the kind of drop off we saw in usage revenues in Q4.

Edward Einboden – William Smith & Company

I guess Evan, can you expand a little bit more on sort of the lines of business that you would be focusing on increasing spending and taking some spending out of the expense?

Evan L. Kaplan

Net/net the department least affected by the restructuring was our engineering efforts. I think we are down $200,000 from last year’s targeted spend. The intent here is to pull back on our investment in device ID, device management and the consumer initiative and to focus very much on these next generation projects that we have really brought in to focus over the last basically over the last 35 to 40 days.

So, we will be reducing our headcount in our Bangalore facility and we will be building a team here in California focused specifically on the next generation server platform. The idea being primarily there is because we’re focused on some of the SAS technology and because of the iteration process both with our customers and our local employees is so important and we’re so focused on time frame that we felt like having a California development operation which we’ve already started building would be more important in executing on that.

In terms of going forward we expect our India folks to continue to evolve the 3X platform which will continue to serve our customers over the next two to three years. So, I don’t know if that helps you with a little more clarity Ed.

Edward Einboden – William Smith & Company

I guess sort of talking to the end market users, I guess can you kind of go over their perception and have maybe some things that would help them to better utilize the technology and kind of things that make you excited in joining this franchise?

Evan L. Kaplan

From an anecdotal perspective when we talk to our customers and we did some very, very deep data driven dives on this. To be specific we did 150 interviews of IT personnel, we did a variety of interviews with end users, we did some survey work and then we actually mined our records to a greater level of detail than we ever have before. What we came out of that is feeling first of all from an anecdotal point of view is that the end users were in fact many of them not even aware that they had iPass installed on their desktop.

From a competitive advantage point of view, the huge competitive advantage we have is how many actually have it installed, the disadvantage is how many actually know how to activate it, know how to use it, know that they can actually use it on a public hot spot. So that’s a surprising fact that was sort of revealed in this process.

Now, what we have to do is somehow find a way to get the IT managers permission to educate those end users and there are a number of initiatives to do that and I will outline those in the shareholder note. But, the key issue is increasing the footprint and increasing the free footprint that allows them to just by natural use iPass to be their connectivity choice not just off net at home but off net when they’re traveling and in other places. That will drive their increased usage on paid.

Utilization numbers have the chance to dramatically change the landscape for us from an income statement point of view. So, not an easy marketing challenge but we feel like it is a reasonable one.

Operator

Your next question comes from Frederick Ziegel – Mackinac Research, LLC.

Frederick Ziegel – Mackinac Research, LLC

On the restructuring is that a cash charge of $3 million?

Frank E. Verdecanna

It’s a cash charge of about $1.5 million in Q1 and then the remaining charge is actually over the life of some of the leases that we’re restructuring.

Frederick Ziegel – Mackinac Research, LLC

But the total is $3 million?

Frank E. Verdecanna

Correct.

Frederick Ziegel – Mackinac Research, LLC

Evan, it sounds like the new service platform is just getting underway. Did in interpret your comments correctly in terms of development?

Evan L. Kaplan

You did Fred. You did. There’s some early work being done and there’s some hardcore definition but you did interpret that. On the client side that process is well underway but on the service backend platform that process is really just beginning.

Frederick Ziegel – Mackinac Research, LLC

Any sense of timeframe for that to hit commercial availability?

Evan L. Kaplan

Because it’s a SAS oriented platform so it’s not like you just drop a piece of software at time B like you would a package or shrink wrap software. We’re hoping to have customers using sets of functionality on that platform before the end of the year. Now, whether it’s as comprehensive or as complete as we’d like, I’m sure it won’t be but we’ll get customers using the platform.

Frederick Ziegel – Mackinac Research, LLC

Last question and it relates to the revenue guidance, in a business that’s more than 50% fixed contract are people coming back to you and downsizing their contracts? What causes the revenue down draft from $46 million to I don’t know a couple of million sequentially?

Frank E. Verdecanna

Fred, we’re not seeing that on a customer by customer basis. What we are seeing is in the other half of revenue that is not committed and not fixed in nature on the usage side. We did see beginning in November a fairly sizeable impact because of the travel reductions and also because of the enterprise corporate layoffs.

So, for that $20 something million of revenue that is usage based we saw anywhere from a 10% to 15% decline beginning in November and that really carried all the way through the end of January. February so far it hasn’t gotten any worse but our revenue guidance is prudent in the sense that the bottom end would indicate a further decline from where we are today.

Frederick Ziegel – Mackinac Research, LLC

On the new deals are they smaller in size than they were say six months or nine months ago?

Frank E. Verdecanna

We have seen some customers come back pretty late in the sales cycle and reduce the amount they’re willing to commit to because of the uncertainty they have in their employee base and their expectation that they will go through some type of a restructuring. So, we have seen some of the minimum commitment values come down but assuming the service gets fully deployed that would really only have an impact on the actual contractual bookings but hopefully it won’t on the actual usage.

Frederick Ziegel – Mackinac Research, LLC

I know it’s very early but have you seen any interest deployments of WiMAX?

Evan L. Kaplan

We haven’t to be honest with you. We’re riding that initiative pretty hard and in discussions with various WiMAX providers but we’re not seeing the enterprises drive that. We’re looking forward to a point where they show an active interest in that.

Frederick Ziegel – Mackinac Research, LLC

So you’re discussions right now are with the carriers?

Evan L. Kaplan

Yes. Our discussions are with the carriers.

Operator

Your next question comes from Neil Weiner – Fox-Hill Capital Partners.

Neil Weiner – Fox-Hill Capital Partners

I have several questions. Can you illuminate in the last quarter you had $11.9 million in minimum purchase commitments for your network. Can you tell us where that is now? And, can you kind of just outline or give us some more granularity how network costs go up $2 million and revenue declines by $3 million.

Frank E. Verdecanna

On the first question I’m not sure I understood your question. Our total fee revenue for the quarter was $11.9 million. Minimum commitment shortfalls only represent a piece of that.

Neil Weiner – Fox-Hill Capital Partners

I guess the question is you have remaining minimum commitments, has that number come down?

Frank E. Verdecanna

It comes down over time because we actually transition folks from usage base pricing with minimums to an enterprise flat rate model.

Neil Weiner – Fox-Hill Capital Partners

No, I understand that, I guess what I’m talking about is some concern that network access costs have increased because you have committed to buy a certain amount of network access time because you thought six months ago or a year ago that your revenue would be higher and its lower. Are those network access costs going to increase over the coming year? Do they decline, are they variable? I’m kind of confused how network access goes up $2 million in the quarter and your revenues decline by $3 million.

Frank E. Verdecanna

Neil, included in the network access costs there is not any significant amounts for shortfalls on any commitments. So, traditionally we’re way over most of our minimum commitments and I think if you look at the quarter-over-quarter, network access costs didn’t go up by $2 million, it actually went up by $200,000 in the quarter.

Neil Weiner – Fox-Hill Capital Partners

I mean year-over-year they went up $2 million.

Frank E. Verdecanna

If we’re looking year-over-year from Q4 2007 the main difference there is just the product mix. So, if you looked at Q4 2007 we had dial revenues of $13.4 million of which we have $7.4 million in this quarter and the growth offsetting that was all in broadband so it’s a significant product mix that we’re looking at.

Neil Weiner – Fox-Hill Capital Partners

The next question is for Evan, Evan the three objectives you outlined, they do not include returning to profitability. I guess the first question is do you intend to return to profitability in ’09? And, can you tell us what the objectives are of the company or what’s the operating metrics or goal? Can you outline a sense of a plan that you have?

Evan L. Kaplan

Let me answer the second question first Neil, my role in being brought in by the board is to drive a plan that will provide long term growth and significant above average returns. While I can’t comment on future guidance beyond what Frank has given you I will say that it’s certainly my mandate to develop and implement a strategy that will grow the business and provide compelling financial returns to investors over time.

Neil Weiner – Fox-Hill Capital Partners

I guess my question is can you tell you why you think growing business will get us to profitability instead of restructuring what we have?

Evan L. Kaplan

I guess that’s a question of so having done a deep dive and looking at what options were on both sides of the coin despite the fact that we looked hard at long term growth, is we came to the conclusion that to drive the greatest shareholder value that investing in the business made sense. Given these economic times it wasn’t widely investing in the business it was investing solidly, it was pulling costs out, it was figuring out where to invest it back in to minimize short term pain associated with those investments.

Neil Weiner – Fox-Hill Capital Partners

Frank, where do you think cash will bottom out? Does anybody have a number?

Frank E. Verdecanna

We don’t have any guidance out there beyond the first quarter. I think if you look at our bottom line guidance we would expect to be a user of cash in the first quarter because of the restructuring and because of the challenge on the top line. But, I think Neil you know the company well that we’ve always tried to minimize any cash burn and that will still be the same focus going forward.

Neil Weiner – Fox-Hill Capital Partners

So you would expect a small cash burn outside of restructuring at the end of the quarter?

Frank E. Verdecanna

In the first quarter, correct.

Operator

Your next question comes from Justin Orlando – Dolphin Management.

Justin Orlando – Dolphin Management

Evan did we write down all of the GoRemote business acquisition?

Frank E. Verdecanna

Yes, the write down included all the GoRemote business and most of the business on Safe 3w and Mobile Automation with the except of some customer contracts that were still valued. But, the vast majority of the goodwill and acquired intangible balances were written off.

Justin Orlando – Dolphin Management

First of all is that $27 million of fixed broadband revenue profitable? Second of all, do we have any plans to [inaudible] since we’re not spending there anymore?

Evan L. Kaplan

From a top level objectives point of view, the intent was to try to in the restructuring bring that business to profitability first of all. The secondly, it was to give it some very specific focus and so we’ve done some relatively tactic things like aligning sales executive directly with that business and isolating it at much as possible so they could focus on producing the numbers. So, the idea was to streamline it, to focus it and to have it deliver on its targets for the coming year.

I will say that the interesting thing about that business is, is it appears to be benefitting from the economic recession in that people are moving off of the more costly frame relay and ATM circuits and moving on to our Internet based share circuits for provisioning that fixed broadband business. So, it does have a little bit of a tailwind. We should be able to report more as we come in to next quarter but definitely the restructuring impacted that business and hopefully focused that business.

Justin Orlando – Dolphin Management

So you’d like that business to be profitable but no at the current time you’re not thinking about monetizing that set of profits?

Evan L. Kaplan

I’d like the business to be profitable. Beyond that I’m not sure it’s worth talking about. I’d like the business to be profitable.

Justin Orlando – Dolphin Management

Where are the sort of $7 million in annual cost cuts coming from specifically?

Frank E. Verdecanna

Well, the majority are coming from sales and marketing. I would say we did have some reductions on the development side but we’re also reinvesting there so I would say over 50% is coming from sales and marketing, the rest coming from ops and G&A.

Justin Orlando – Dolphin Management

Network ops and G&A?

Frank E. Verdecanna

Correct.

Evan L. Kaplan

One step further, to be even clearer, a lot of those activities are coming from pure business developed activities in geographies that we’re pulling back from, parts of Europe even parts of Asia. Much of the marketing stuff has to do with using expensive outside firms and pulling back and trying to do more of that work ourselves. But, in general the discretionary marketing budget will be focused on the existing customers and the end users and that will maintain a similar level of investment that it has had before.

Justin Orlando – Dolphin Management

With respect to R&D and cap ex for 2009, in your current plan is that number differing from ’08 and by how much?

Frank E. Verdecanna

I wouldn’t expect it to differ much at all from ’08. For the last few years we’ve been right around $4 million to $5 million in cap ex so I would expect that to be similar in 2009.

Justin Orlando – Dolphin Management

And on the R&D line?

Frank E. Verdecanna

On the R&D line I would expect it to be very similar to 2008 also. Like we said earlier we are making some cuts but we’re also reinvesting there so I think it’s going to look pretty close to what it did in ’08.

Justin Orlando – Dolphin Management

So I guess I want to take up Neil’s question around profitability for the company, we’ve talked a lot above this over the last three or four years about this company and wanting to get to profitability. It seems now that we have a new strategy here where the profitability really is not a near term goal. I think that’s a step backwards for this company. Can you give us more sense on your answer of what you think profitability for ’09 is going to look like and whether that is a goal for you? It’s something that we need to discuss it’s what shareholders are interested in.

Evan L. Kaplan

While I’m not going to comment with any more forward-looking statements than we’ve already provided I do want to be clear is one of the things that we are most excited about in this business is fundamentally a different view on this whole 3G market than might have been had before. We are already in the US seeing 3G margins better than we have ever seen in Wi-Fi. So, the fundamental belief is this is not the time to pull back but this is time to assert ourselves specifically in the 3G markets where we know we have enough selling capacity to penetrate our existing customer base.

This is the time to monetize that customer base. So, we are doing everything we can to penetrate further in to 3G and drive that activity which we think is a relatively low cost way of establishing a foothold for long term growth. So, if you just look at a couple of factors, that would be one of the big factors to say assert yourself now. So, some of these unfortunately are timing issues. As a new CEO comes in looking at a long term growth, starts peeling back the layers and feels there’s a very specific opportunity. So, we’re making some choices to try and pursue that opportunity.

Justin Orlando – Dolphin Management

I think I understand that, I guess where I am is you need to do some convincing at least of this shareholder and I think of others that we’re not throwing good money after bad. We’re not profitable today, we have not been profitable for quite a while and investing more in this business today and having cash burn of any consequence should yield near term growth and profitability not long term growth and profitability. If you can’t do that, then I think you’ve got a very hard sell for this shareholder base and so that is what I think we would all like to hear in your open letter. That’s what we’d like you to be thinking about when you’re writing to us.

Evan L. Kaplan

Justin, first of all I come in to this position with the recognition of just how much shareholder value was lost over the last three years in this company. So, that is a very strong factor in my thinking and my organization around this opportunity and I would affirm that I have a lot of convincing to do. Unfortunately, that won’t be one simple shareholder letter or one simple earnings report, or one simple quarterly call.

Hopefully, that will be a pattern of communication with you, being as transparent as possible and evidencing progress against a specific plan. I think that will be the strategy for creating long term shareholder value and I recognize that the onus is on me and our team here to evidence that commitment.

Justin Orlando – Dolphin Management

I guess I understand it but the plan has to be one that is going to generate shareholder value in the near term. That’s what I am saying to you. Thank you for admitting that there’s [inaudible] and lots of shareholder value lost not on your watch including $84 million in an acquisition now written down to zero just three short years later. But, what we need is a plan that is going to help near term not long term and so that’s where I would like you to spend some time and some focus because that’s what I think your shareholders are going to be paying attention to the most.

Evan L. Kaplan

Okay. Thank you Justin.

Operator

Your next question comes from [Kenneth Traus].

[Kenneth Traus]

As shareholders we particularly appreciate your comments of your commitment to greater transparency going forward. Listening to Justin and Neil’s comments just a moment ago, I would like to echo the collective frustration of not getting good quality information to really be able to access our investment. I’ve recently increased by investment in iPass because I do see that there’s a future here but I think what we’re all hungry for is better clarity on what your plan is going forward and particularly how you’re going to bring the company in to profitability.

We’ve heard a commitment to greater transparency but we’d like to start seeing that and now is a good opportunity for you to do that. So, for one thing I wonder if you could comment to give us better clarity on your cost structure because when we look at the projected $7 million of cost cutting you mentioned that a good portion of that is coming from sales and marketing. But, could you go through each of the line items starting with network operations and give us some idea of how much cost you expect to cut in this restructuring plan, question one?

Question two, could you please give some clarity on your network access costs? Neil raised the point and I see that he’s talking about it and in note 10 of your last 10Q you mention that there’s a commitment of $11.9 million for minimum purchase commitment for network access so do you anticipate using that full amount of commitment in this year?

Frank E. Verdecanna

Just to talk a little bit I’ll start with your second question first so I can knock it off the table, on the minimum purchase commitments the majority of that are for contracts that were exceeding by a significant amount. So, our expectation is that we’ll utilize all those in the normal course of business. There is probably about $1 million of that amount that is in a 3G service in a geography that we’re not very well penetrated currently so there is some risk there but it’s only about $1 million in 2009 and that’s only if we were not to be able to get the traction that we need to meet that minimum commitment.

On the first question, on the detail of the cost cutting, we did say about $7 million of annualized savings that we expect. We said earlier about 50% of that is coming from the sales, marketing and business dev organization. On the op side we expect probably a little bit over $1 million in annualized savings and about the same on the G&A side. The remaining piece on the sales and marketing and on facilities that obviously play a factor in all departments. Ken, is that the type of detail you were looking for? We mentioned in the press release about 70 employees?

Operator

Our next question comes from Randy Bassett – Value Investments, LLC.

Randy Bassett – Value Investments, LLC

I have three questions, first when will you file the 10K?

Frank E. Verdecanna

The 10K will be filed on March 16th.

Randy Bassett – Value Investments, LLC

If you can tell me how many full-time equivalent employees would you say are working for the company in India that utilize $16 million of annual R&D expense?

Frank E. Verdecanna

We have about 175 people before the reorganization in India. That does generate some of the $16 million annualized R&D expense but clearly not all.

Randy Bassett – Value Investments, LLC

What portion?

Frank E. Verdecanna

Probably 25% to 35% of that number.

Randy Bassett – Value Investments, LLC

And the rest is spend domestically?

Frank E. Verdecanna

Correct.

Randy Bassett – Value Investments, LLC

My third question is you talk about in calendar ’08 in the first quarter of ’09 FAS 123R charges for stock-based compensation. Given the fact that the stock has gone only down is the stock-based compensation because you’re given the employees the stock?

Frank E. Verdecanna

It is the normal amortization of stock comp from grants in the past and also any grants in the first quarter.

Randy Bassett – Value Investments, LLC

So in effect they are not options, they have no costs they’re being granted outright stock with or without restrictions?

Frank E. Verdecanna

No. We’ve issued in that past both options with exercise prices and then restricted stock with both vesting requirements and some performance based restrictive stock.

Randy Bassett – Value Investments, LLC

Do you have any plans to reset the prices on outstanding options?

Frank E. Verdecanna

We currently don’t.

Operator

Your final question comes from Neil Weiner – Fox-Hill Capital Partners.

Neil Weiner – Fox-Hill Capital Partners

Can you just illuminate something for me, are you then going to move away from offering access or coming out with clients for the iPhone, Blackberry? Are you dropping those plans to offer access that way? I guess, can you annunciate a little bit more clearly one in terms of the R&D spend this year what we’re going to get for that and two, how come we’re so late in the new client releases?

Evan L. Kaplan

First of all on the handheld question, just again hopefully exhibiting some transparency here, we are actually having some success on the iPhone platform that is out there. Without giving out discloseable numbers we have a fair number of paid users and it’s primarily only for consumer. It does not service our enterprise needs and will hopefully in the short future, perhaps by the end of the second quarter. In with regards to Blackberry and those platforms, the plan it to continue to develop those and to have clients available for it, enterprise customers on those platforms. Clients that are easy to deploy and tie in much better with the enterprise infrastructure than the clients before.

So, it’s clearly part of our strategy. In terms of just so you understand how I’m thinking is the way that I view that today is that those are primarily Wi-Fi oriented devices for us. The 3G is provided by the telecommunications provide that provides it and you know if you use one of those devices that’s how you get a big part of your data access. So, I don’t view those as gigantic opportunities for us to monetize 3G networks or the movement to 3G. I view them in fact as tactical advantage for making useful Wi-Fi connectivity for enterprises.

In terms of the rest of the platforms netbooks and those sorts of things, more full feature most likely to be deployed by your telecommunications provided, much more likely to be bought by IT, those still represent gigantic opportunities for us. I hope that answers your question.

Neil Weiner – Fox-Hill Capital Partners

I guess my more fundamental question is it seems like you can get your email on Blackberry without tapping in to corporate network. Why is it necessary to develop applications for those types of devices?

Evan L. Kaplan

That’s interesting and I’m not sure how much we need to go in to on this call but from a sheer market point of view what you saw with the iPhone is something very, very different let alone the iPod touch also. You saw all of a sudden people really being aggressive about the use of browser based application whether for social network or enterprise network, all of a sudden the browser was real on a handheld device.

That was probably the most significant thing of the iPhone platform. The expectation over time is that the browser gets much more evolved in that enterprise communication and you want to be able to do that very often on the Wi-Fi, on the faster local network particularly when you’re in your house or you’re traveling to a place where there is Wi-Fi available and that’s why the opportunity continues to exist and persist and potentially grow.

Neil Weiner – Fox-Hill Capital Partners

Can you also offer a little more granularity right now on the type of SAS services that you want to provide? What kind of value added that will give to an enterprise and what kind of profitability that could throw off?

Evan L. Kaplan

I can give you an indication architecturally, I can’t give you an indication of exactly what those are partly because we’re already in discussion with some folks about those. But, the idea functionally being that if we own that relationship between the cloud and access before virtually any other enterprise apps touch in place then our value added services that we can add to our platform as defined by they would be in the cloud, they would be hosted by somebody else, they would be things that we could add and the work for us is to build a platform that is capable of integrating those fairly quickly and making them available to our installed base fairly inexpensively.

It’s a very different way of approaching it than perhaps buying a software company and trying to deploy out to these end points and managing servers inside of the enterprise. It’s much more of a light away touch and in general where much of the enterprises want to see the new applications coming from.

Neil Weiner – Fox-Hill Capital Partners

As a follow up does it make sense to outsource that development to another company than to spend all this R&D that we really haven’t gotten anything in two years from this R&D?

Evan L. Kaplan

I was very clear with you about the status of this next generation platform. All along the way we’ll evaluate what parts could potentially be outsourced or maybe even procured with a license. So, I am not orthodox about the way we approach that. I know for the core platform it’s going to make sense for us to build the core mostly because we’re pulling so much legacy information and product forward we sort of need to do that development on the core to get there.

Operator

I’d like to turn the call back over to management for any closing remarks.

Evan L. Kaplan

One is I want to thank everybody for joining us today on this call. Again, the recognition of what the last few years has brought with iPass. I am very much looking forward to the future and we plan on executing our way through this difficult time and providing value for our shareholders. I look forward to meeting many of you in person wherever possible and I look forward to communicating with you regularly. Thank you for your time today.

Operator

Ladies and gentlemen than you for your participation in today’s conference. That does conclude the presentation. You may disconnect. Have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!