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VA Software Corporation (LNUX)

F4Q06 Earnings Conference Call

August 29, 2006 5:00 pm ET

Executives

Ali Jenab - President, Chief Executive Officer, Director

Patricia S. Morris - Chief Financial Officer, Senior Vice President

Patricia Workman - Investor Relations

Analysts

Douglas Whitman - Whitman Capital

Rutiar Leodes - Thomas Weisel Partners

Joe Maxa - Dougherty & Company

Denny Fish - JMP Securities

Kenneth Miller - Bonanza Capital

Steve Tessler - D-Squared Capital

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the VA Software fourth quarter and fiscal 2006 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Patricia Workman, Investor Relations for VA Software. Thank you, Ms. Workman, you may begin.

Patricia Workman

Thanks, Doug. Good afternoon, and welcome to VA Software’s conference call reviewing our fourth quarter and fiscal year 2006 financial results. Let me remind you that this discussion will include forward-looking statements which will be made pursuant to the Safe Harbor Provisions of Section 21E of the Securities Exchange Act of 1934. Investors are cautioned that statements made during this call that are not strictly historical in nature constitute forward-looking statements, which involve risks and uncertainties such as statements regarding current or future financial performance, management’s plans and objectives for future operations, product plans and performance, management’s assessment of market factors, market acceptance of the SourceForge product, expected contribution to revenue of various products and services offered by VA, and statements regarding strategy and plans of VA and companies with which it collaborates.

Factors that could cause actual results to differ from our forward-looking statements are specified in VA’s press release announcing the company’s quarterly results released earlier this afternoon, and the company’s filings with the Securities and Exchange Commission, including VA’s annual report on Form 10-K for the year ended July 31, 2005, and Form 10-Q for the quarter ended April 30, 2006. These documents are available at the company’s website at vasoftware.com or at the SEC site, sec.gov.

The press release announcing VA Software financial results was issued after the stock market close today and has been posted on the company’s website. In addition, a replay of this conference call will be available on the web later today. The replay will also be available by telephone at 877-660-6853 or 201-612-7415 using replay numbers 286, ID number 210594.

Thank you. I will now turn the call over to Ali Jenab. Ali.

Ali Jenab

Thanks, Pat. Good afternoon, and thank you for joining us today. I am going to make a few opening remarks and then turn the discussion over to Patty Morris, our Chief Financial Officer, to review the financial results. We will then open the call to questions.

I am very pleased with our fourth quarter and fiscal year 2006 financial results. Fourth quarter revenue grew 35% year over year, led by a 78% increase in media revenue compared to last year’s fourth quarter. We also had a 22% year over year increase in our software revenue, and there was no seven-figure transaction during the quarter for the software business but the software business had a good fourth quarter, booking 15 orders in excess of $100,000.

We recorded our third consecutive quarter of profitability, generating $0.01 per share of income from continuing operations on both a GAAP and a pro forma basis.

Our total revenue for the fiscal year 2006 grew 43%, led by a 63% increase in media revenue compared to last year, a 32% increase in software revenue, and a 37% increase in e-commerce revenue. We recorded our first full year of profit, generating $0.02 a share on a GAAP basis on continued operations and $0.03 per share on a pro forma basis.

We completed the year with $54 million in cash and investments, an increase of $4.4 million during the quarter.

The fourth quarter was full of accomplishments I want to share with you. We began offering a free download, a full feature version of SourceForge Enterprise Edition. We now have sold this SourceForge solution to 164 customers. We continue to execute on our site architecture and improve initiatives on sourceforge.net, offering the community more robust and powerful search capabilities to find the best of breed open-source solution.

We announced the appointment of Patty Morris as Chief Financial Officer, and we announced the appointment of Mike Rudolph as Vice President for the sourceforge.net market place.

We enlisted the community in a redesign of Slashdot, chose a winner, and executed on a winning design, resulting in an updated look and feel for the site.

We continued to position the media business for accelerating growth through the build out of the sales organization and the addition of a number of innovative marketing programs for advertisers.

Let me go a bit more in detail in each one of these events.

Our launch of the free download version of SourceForge Enterprise Edition makes it as easy as possible for developers to access the power of SourceForge. With this free download, which is a perpetual, no-cost license for up to 15 users, development teams can quickly deploy and reap the benefits from the flexible and collaborative capabilities of SourceForge Enterprise Edition.

Historically, we have found that most enterprise software sales cycle include an evaluation period, where potential customers evaluate SourceForge Enterprise Edition for a specified period of time, often with a modest number of users. This is a standard phase in their enterprise software procurement process.

Recognizing this trend, we offer our free enterprise edition download to increase overall awareness of SourceForge Enterprise Edition solution without requiring a large, up-front marketing investment from prospective customers, with goals to increase the number of quality leads for SourceForge Enterprise Edition, reduce sales cycle time, and broaden our already active community around the product.

Since our launch on June 8, 2006, we have served more than 11,000 downloads, demonstrating the power of SourceForge Enterprise Edition solution and efficiency of sourceforge.net in delivering downloads to qualifying buyers.

From these downloads, we have received more than 1100 qualified leads. We define a qualified lead as one where users of our free download have provided us with verified contact information in connection with signing up for community support. We have also signed on two new customers, both of whom purchased additional seats beyond the 15 users permitted by the free download version.

During the fourth quarter, we grew installed base for SourceForge Enterprise Edition, adding Cambrian House, IGN Entertainment, Beta Systems Software, WPS Parking Systems, among others. We have sold our solution to 164 customers during the last five years that we have been marketing the product.

In addition, we continue to sell more to our existing accounts as the viral nature of our product moves through organizations. Some of the accounts that purchased more licenses or services during the fourth quarter include Lawrence Livermore National Laboratories, MetaSolv Software, Myrio, TNO-FEL, and Verisign.

We hired Patty Morris as Senior Vice President and Chief Financial Officer. Her extensive financial background and in-depth knowledge of the media and the software business are instrumental to us as we continue to execute upon our strategy of accelerating growth and profitability.

We also appointed Mike Rudolph, the former e-Bay marketing director, as Vice President of SourceForge.net market place. The SourceForge.net market place will connect corporate and individual adopters of open-source code and application with a vibrant community of service and support providers via an online market place. Mike’s experience at e-Bay and his expertise in developing rich community experiences is a direct fit for this new role.

SourceForge.net hosts nearly 128,000 open-source projects and has almost 1.4 million registered users. This offering will provide a way for open-source projects to monetize their service and support offerings more effectively to the IT community coming to consume the project.

We continue to invest in OSTG media businesses with additional infrastructure to improve site performance, updating our core sites with new look and feel and UI improvements, increased headcount in the sales organization, and continued improvement in content and service offerings designed to meet the needs of the technology community that visit the site.

According to Nielsen, net ratings ad plan summer 2006 report, OSTG was named the number one network for delivering visitors who look for technology news online and for delivering visitors who make hardware and software purchases online.

Our visitors are attracted to advertisers. 75% of our audience are technology and line business professionals, including 51% are IT professionals, 28% corporate developers, 9% professional staff, and 11% of our audience are C-level executives.

This past year, we have focused on improving the visitor experience for our core site, SourceForge.net and Slashdot.org.

On SourceForge.net, to help visitors find open-source projects with ease, we have done major functional and UI enhancements to search and the software map. These improvements have resulted in search and browse becoming some of the most visited areas of the site.

We also upgraded the mailing lists management software, known as Mailman, which today powers more than 1.2 million community e-mails daily on SourceForge.net.

For Slashdot, we engaged the community of visitors that contribute to the content daily to help us in conducting the first major face lift for the site since its inception.

The editors of Slashdot chose from over 250 visitor redesign submissions, selected a winner and executed upon the winning design. In addition to the reader redesign, we have introduced additional web 2.0 capabilities, such as AJAX and CSS to Slashdot to help make the site easier for our visitors to contribute their content to the site.

Slashdot continues to see traffic growth in RSS feeds. We are monetizing this traffic with sales programs that complement the web product in place.

We continue to innovate with industry-leading advertising programs for marketers. These products, such as Slashdot vendor integration program and SourceForge.net category sponsorships, provide unique custom publishing solutions to technology vendors.

SourceForge.net continues to grow, with nearly 1.4 million registered users and over 128,000 projects, SourceForge.net continues to be the largest development and distribution network for open-source projects and applications. We continue to see the developer community register their projects and post open-source code on the site.

We are excited about the growth opportunities for the OSTG media business. The international market has a lot of potential for OSTG. Most of our advertising customers are eager to effectively and efficiently reach a global audience of technology professionals. OSTG sites provide that opportunity better than any other technology focused site.

Our sales team here in the U.S. continues to sell the network as a global solution to companies like IBM, Sun, HP, Novell, AMD, EMC, Lenovo, Intel, and Perforce. That said, we are also working to expand our sales representation partnership in Europe, India, and China.

Now I will turn the discussion over to Patty for a financial review. Patty.

Patricia S. Morris

Thanks, Ali. As reported in our press release, net income from continuing operations for the fourth quarter was $0.01 earnings per share on a GAAP and a pro forma basis, in line with the break-even to $0.01 guidance we provided on the last conference call. Fourth quarter revenue from continuing operations for the company as a whole increased 35% year over year to $10.5 million, above the $10 million guidance provided on the last conference call.

Fourth quarter software revenue grew year over year by 22% to $2.7 million from $2.2 million for the same period last year, as a result of the healthy mix of business with new accounts and increased penetration to existing accounts.

Advertising revenue for the fourth quarter increased 78% year over year to $4 million, from $2.2 million for the same period last year, as a direct result of focused sales and marketing efforts to create strong ROI programs for our clients, such as IBM, HP, AMD, Perforce, and Rackspace.

We also increased the average CPN rate 71% year over year to $21.36 in the fourth quarter of fiscal 2006 from $12.52 in last year’s fourth quarter.

Finally, our e-commerce revenue generated by ThinkGeek grew by 15% to $3.9 million in the fourth quarter from $3.4 million from the same period last year.

Total revenue from continuing operations for our 2006 fiscal year grew by 43% to $43.6 million, from $30.6 million in the prior year. The increase was driven by 63% growth in media revenue to $13.2 million, from $8.1 million in the prior year, 32% growth in software revenue to $10 million from $7.6 million in the prior year, and 37% growth in e-commerce revenue to $20.4 million from $14.9 million last year.

Gross margin from continuing operations for the fourth quarter of fiscal 2006 was 58% compared to 54% in the same period last year. The improvement compared to last year was the result of improving margins in our media business. For the year, our gross margin improved by five basis points to 53%.

For the fourth quarter, operating expense from continuing operations increased 9% to $6.1 million from $5.7 million for the same period last year. For fiscal year 2006, operating expense increased 9% to $23.3 million, from $21.3 million for fiscal 2005.

Stock-based compensation expense totaled $232,000 for the fourth quarter, and $731,000 for the year. We incurred no stock compensation expense for the same period in the prior year.

GAAP net income from continuing operations for the fourth quarter was $719,000 or $0.01 per share, and $952,000 or $0.01 per share on a pro forma basis. For the fourth quarter of fiscal 2005, GAAP and pro forma loss from continuing operations was $1.2 million, or $0.02 loss per share.

For fiscal year 2006, we recorded GAAP net income of $11 million, or $0.17 earnings per diluted share. Excluding the gain on the sale of Animation Factory, which was completed during the second quarter of fiscal 2006, we recorded GAAP income from continuing operations of $1.3 million, or $0.02 earnings per share, and pro forma income from continuing operations of $2.1 million, or $0.03 earnings per share, compared to last year’s GAAP loss from continuing operations of $5.6 million, or $0.09 loss per share, and pro forma loss from continuing operations of $5.7 million, or $0.09 loss per share.

Turning to the balance sheet, we finished the fiscal year with a cash investments balance of $54 million, up $4.4 million from our third fiscal quarter.

For our first fiscal quarter of 2007, we expect revenue to be above $10 million, a 30% plus increase from the $7.6 million of revenue from continuing operations reported in last year’s first quarter. We expect our first quarter FY07 earnings per share to range between break-even to a $0.01, excluding the cost associated with option expense required under FAS 123R.

Finally, I would like to update you on the status of our SOX compliance effort. As previously disclosed in our quarterly filings with the SEC, we have implemented certain steps to remediate and believe that we have remediated the deficiencies in our disclosure controls and procedures and material weaknesses in our internal control over financial reporting identified in our annual report on Form 10-K for the fiscal year ended July 31, 2005. As of July 31st, we have completed our internal testing for the fiscal year ended July 31, 2006.

The work of our independent registered public accounting firm, which is responsible for testing and evaluating the design and operating effectiveness of our internal controls, and will be asked to publicly attest to such evaluation in our annual report on Form 10-K for our fiscal year ending July 31, 2006, is ongoing. Ali.

Ali Jenab

Thanks, Patty. Before we open this to questions, I would like to make a few closing comments. We had a very good fourth quarter and a very strong fiscal year, and we feel we clearly have reached momentum in each of our business lines. We have a healthy pipeline of software and advertising business for the first quarter of fiscal year 2007. With the offering of the free download of SourceForge Enterprise Edition, development teams are taking advantage of the download at the start of their next project and experiencing the benefit of SourceForge Enterprise Edition first-hand, providing us with a new expansion opportunities for our installed base.

Our current installed base continues to purchase more licenses as the use of SourceForge within the enterprise grows because management and developers see the value of the product.

Judging from the increased usage of our search offering on SourceForge.net, the community is embracing this much-improved tool to find best of breed open source solutions. We are excited to make this site the best resource available to the community it serves.

Our focus for OSTG will be to accelerate online advertising revenue growth in this exciting part of our business, and we will have planned to invest in our outside sales organization to support the planned growth of our media business.

SourceForge.net market place will be invested in with a mind toward revenue generation in fiscal year 2008. We look forward to growing our top-line while continuing to achieve profitability.

Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Douglas Whitman with Whitman Capital. Please proceed with your question.

Douglas Whitman - Whitman Capital

A couple of clarifications. First, going back to the accounting issue. I am a little confused. Are you telling us that this problem is ongoing, or it has been cleaned up? If you could clarify, as a housekeeping item, the material weakness?

Ali Jenab

What accounting issue? Are you talking about the Sarbanes-Oxley update that Patty gave?

Douglas Whitman - Whitman Capital

Right.

Ali Jenab

Okay.

Patricia S. Morris

Doug, for clarification purposes, what I said was we believe that we have put in place remediation for each of the deficiencies that were noted in our 10-K, particularly our 2005, and we have completed our internal testing with regard to the remediation efforts we put into place. The auditors are currently in the process of doing their work on it, and they will be attesting to the results of their audit work in our 10-K, which will be filed in October.

Douglas Whitman - Whitman Capital

Thank you for clearing that up. Could you also comment on, you said greater than $10 million -- what does that mean? It could mean it could be $50 million. I am trying to get some idea of where you think the revenue range is for the next quarter.

Ali Jenab

Let me clarify that. That means it is going to be slightly above $10 million, at 30% plus growth basis. We are trying to be as reasonable with it as possible, but that -- it does not mean $50 million.

Douglas Whitman - Whitman Capital

Well, I would be happy with the 50.

Ali Jenab

Yes.

Douglas Whitman - Whitman Capital

I know historically you have been very conservative overall, so can you talk a little bit about what you are seeing in the business? That is a sequentially down number that you are giving guidance to, so a little bit of a trend by the breaking it out by the three different businesses and what capability is looking like?

Ali Jenab

We try to not, as you know, we are a small company trying to grow our revenue stream, so it is really hard at the beginning of the quarter to try to predict what exactly happened in each lines of business that you have.

We were fortunate in second and third quarter. We had very good turns of events, and we end up being much higher than we anticipated by the end of the quarter. This last quarter, we actually saw some challenges in the market place that, as you have seen, there was a lot of warnings going on, especially in the hardware side of the business. We clearly saw some advertisers delay their campaign and push their campaigns out, pushing them up in July and that was directly in reflection of what they saw in their businesses.

Having said that, August is behind us and we basically are seeing some of those campaigns come back, but it is very hard for us to predict what is going to happen to the end of the quarter.

As you know, on the software business, a lot of it rides on what happens during the quarter and toward the end of the quarter. Last quarter, again without having a seven-figure transaction, we were fortunate enough to basically be able to leverage our broad base installed base and close a lot of six-figure deals, which I am actually proud of what we did in the software business with the $2.7 million revenue stream.

First quarter is always weak after you ended your year, because it is just the natural cycle of it, and we also have the month of August in there, so we feel like it is prudent guidance moving forward.

As you know, where we are cycle-wise, we are working very hard in some of our large accounts because ’07 spending, especially on the media side, a lot of companies plan annual plans for 2007, and that annual planning happens in September and October timeframe, so we are working with a lot of accounts that we are working with to make sure we are well-positioned and get our fair share of the revenue as their ’07 planning is being done. So that is basically what we are seeing in general in the market place right now.

Douglas Whitman - Whitman Capital

So if I paraphrase, basically on the media side, you are off to a good start this quarter but you are a little gun shy, given what happened at the end of last quarter to feel much confidence that it is going to continue throughout the quarter?

Ali Jenab

That is the way you are putting it, but basically what we want to do, I am always fairly cautious when we give guidance to make sure it is a reasonable guidance from what we see in the pipeline, and that is basically what I see in the pipeline right now. We feel comfortable with doing that.

Douglas Whitman - Whitman Capital

Just to make sure I understand it, the jump in cash, because receivable base sales stayed relatively constant, is a result of payment from somebody?

Ali Jenab

Yes, but it was also stock-option exercises that generate potential cash during the quarter for us.

Douglas Whitman - Whitman Capital

Okay, so it is stock options and good cash management by your outstanding chief financial officer. Got it. Thank you.

Operator

Our next question comes from [Rutiar Leodes] with Thomas Weisel Partners. Please proceed with your question.

Rutiar Leodes - Thomas Weisel Partners

I have a few questions on the headcount. You said there were some additions to the headcount in this quarter. Which area did the headcount coming from, the sales and marketing side? How do you see it going forward this year?

Ali Jenab

We had some addition in the sales and marketing front. Also some addition, such as Mike Rudolph coming in on basically the market place around SourceForge.net.

Going forward, we continue to look at, on a reasonable manner, to increase our sales headcount basically, and a little bit on the marketing side, and also we will have some additional engineering resources that we are going to add to make sure we are doing the right thing around the market place as we are building that forward.

But it should not be huge numbers and it should be basically throughout the year. It is not going to be a one-time shot where we are going to hire a whole bunch of people. It is going to be added on a quarterly basis moving forward, based on anticipated revenue growth.

Operator

Our next question is from Joe Maxa with Dougherty and Company. Please proceed with your question.

Joe Maxa - Dougherty & Company

Thank you. Regarding the SourceForge enterprise download, did I understand you had two of those customers, or two of those downloads actually turn into customers in the quarter?

Ali Jenab

Correct, as additional revenue, yes.

Joe Maxa - Dougherty & Company

When they sign up for community support, is there any revenue at all attached to that?

Ali Jenab

No, there is not, but let me tell you how the download works. First of all, we launched it on June 8th, so it has been going on for a little over two-and-a-half months now. You can come in and download the software, and 11,000 of them have been downloaded, without giving us any information who you are. We do not want to have -- we actually took a page out of the open-source arena and you do not have to give us any information to do the download.

As you do the download, you can only use up to 15 seats. It is hard-coded in there, so if you want additional seats, you have to come back and buy from us. If you choose to buy maintenance, which would be basically a 20% fee on the license fees, you can buy the revenue maintenance from us.

We also give an option that if you want to use other customers to ask a general level one type questions from, we built this community support environment so you can actually sign up and leverage everybody else’s knowledge base to get information. As you sign up for that, you have to give all your detailed information to sign up.

We have had 1100 people to date have signed up for that community support. It is not a revenue stream -- it just basically gives us visibility into who has done the download and who is actually using the product.

Joe Maxa - Dougherty & Company

Then you are going back after these 1100 customers?

Ali Jenab

We do not -- we could, if we wanted to. We are not proactively going and spamming them -- they are actually coming back in a lot of cases, asking for additional seat pricing. We actually have quite a few leads that they came back to us and we are following, but two have come close, but we have others that we are working that actively.

Joe Maxa - Dougherty & Company

Were the two that closed, were they sizable at all?

Ali Jenab

No, they were still pretty small, but they both could be very sizable down the road. They are both major, major accounts.

Joe Maxa - Dougherty & Company

Any traction internationally with your SourceForge Enterprise?

Ali Jenab

The contract that we have in place is working well. They have been following leads. We have not had any major closes to date to report, but I feel really pretty pleased as far as the activity level, and we are hoping that we are going to get some nice results out of them, but to date, I have nothing further to report on that one.

Joe Maxa - Dougherty & Company

One last thing -- the cash flow from operations in the quarter?

Ali Jenab

The total cash -- oh, from just operations piece of it, it was slightly positive. It was I think a few hundred-thousand.

Joe Maxa - Dougherty & Company

Okay. Thank you.

Operator

Our next question comes from Denny Fish with JMP Securities. Please proceed with your question.

Denny Fish - JMP Securities

Thank you. A couple of quick questions. Just a clarification on what you are talking about on the media side of the business on some of your hardware advertisers. Did I understand it correctly that hardware advertisers that had pulled back a bit have come back now and are no longer dark or have renewed contracts, there has not been any leakage or loss from some of those key customers? Is that a fair statement?

Ali Jenab

What happens is customers, when they feel pressure on their bottom line, they push programs and defer programs to a later date. Some of them have come back. Some of them are planning to come back within a short period of time at a different program, so it all depends on who you are talking about and it is a little different from each account, but it has not been a situation that “I do not want to advertise with you, I am going somewhere else” -- it has just been their budget that has been pulled back and they are coming back at different levels, so that is what has happened.

Denny Fish - JMP Securities

When you say they are coming back at different levels, does that imply a lower level?

Ali Jenab

No, it just depends on the campaign that they have. As you know, these guys run advertising based on the campaigns that they have. Sometimes the campaign side is different. Sometimes it is a different campaign that they are running and it varies quite a bit. It is kind of hard to have a generic answer to it because in some cases it could be at a higher dollars.

Denny Fish - JMP Securities

Could you just give a sense of what linearity looks like in the quarter in the media business?

Ali Jenab

What does linearity look like?

Denny Fish - JMP Securities

Yes, in terms of May, June, July, in terms of revenue?

Ali Jenab

As you know, we do not break that out by a monthly basis.

Denny Fish - JMP Securities

On the software business, you mentioned you did not close any seven-figure transactions during the quarter, which actually seems like a nice quarter, given you did not close a seven-figure transaction. What about the pipeline? Are there any seven-figure transactions in the pipeline currently?

Ali Jenab

As I have said in the past, we always work on a handful of seven-figure transactions, and to try to speculate when those transactions close is really a tough thing, because as you know, those larger transactions are, until you close it, you have not closed it. We continue to work on a handful of those, but more importantly, we really are focused as when you have a broader presence and you have a broader base, you have a better chance of success. So we have really focused on trying to make sure we get larger lead flows and to make sure we have a more stable rather than depends on a single transaction in the quarter.

But to answer your question, absolutely there are a handful that we are working on, but I cannot make any commitments as far as when the closing on them is going to be.

Denny Fish - JMP Securities

Understood. Is there any seasonality associated with the e-commerce business from the July to October quarter, and how we should think about that?

Ali Jenab

July to October -- summer time is always slow, and I think you have seen a lot of general -- every online business reported slower sales, but we basically see October coming back, September, October starts to come back again and actually in November and December go off the chart with it.

One thing I will say about the growth that you saw year over year if you compare that business, fourth quarter last year, it was a big launch of the Star Wars lightsabers, and there was a big Star Wars push, so we had a pretty strong fourth quarter last year, so the growth actually, we have been pleased in the way that business is tracking along, although the growth only shows a 15% year-over-year growth, fourth quarter last year because of the lightsabers was a pretty strong quarter for us.

I feel like that business and overall, I have always said that business is going to grow between 25% to 30% on an annualized basis. We actually saw a 37% growth last year for the entire year.

Denny Fish - JMP Securities

That is on the media business. What about the software business? What are you seeing these days in terms of what you think that longer-term growth rate is in that business?

Ali Jenab

I think software business, we feel comfortable with annualized 30% growth rate on the software side of the house.

Denny Fish - JMP Securities

Okay, then one last quick question and I will turn it over. Just looking at the margin, it looks like the online media margin ticked down a little bit. Any reason for that in particular?

Patricia S. Morris

Are you looking at the fourth quarter?

Denny Fish - JMP Securities

The fourth quarter, yes. There’s a tick down, like 77%, 75%. I did not know if that was a function of a little bit more investment as you start working on the market place, or what could have caused that.

Ali Jenab

It was small enough that probably it was just some infrastructure spending that we have done on SourceForge.net on a regular basis, and it is a pretty minor piece of it, but it was probably some of the investment that was done on the SourceForge front.

Denny Fish - JMP Securities

Okay, I know…last question, but just one more -- on your market place itself, how should we think about the investment for that in FY07?

Ali Jenab

For the entire year, it is probably going to be about a couple of million.

Denny Fish - JMP Securities

How much do you think will hit operating versus capital lines?

Ali Jenab

It would probably be more 60% operating and 40% capital.

Denny Fish - JMP Securities

Okay, great. Thank you.

Operator

(Operator Instructions)

Our next question comes from Kenneth Miller with Bonanza Capital. Please proceed with your question.

Kenneth Miller - Bonanza Capital

Quick question -- have you seen any improvement in traffic or page views or other operational metrics since you have redesigned the Slashdot site, and how could those pertain to your media business?

Ali Jenab

We have seen some user improvement on Slashdot since the redesign. The redesign was not really a major, other than a facelift, it was not a major redesign. We actually saw activity increase on the site, but nothing in a major manner on the Slashdot front. Some of the usability, and by the way, we have a full enhancement plan on Slashdot for the remainder of the year, so there is going to be continuous enhancements to the feature and functionality of Slashdot moving forward.

One thing we did see on SourceForge.net front, as we improved search, we have seen tremendous amount of usage on search. To give you a scale idea, in the last month, in August, we monitored the amount of downloads that happen on SourceForge. We hit 60 million downloads for the month of August, although the month is not up yet, but it is 60 million downloads. To compare to a year ago, it was 40 million, so we clearly have seen a nice year-over-year growth and also a sequential growth as we have done improvement to the usability of the site. We have seen a direct reflection of it.

Operator

Our next question comes from [Rutiar Leodes] with Thomas Weisel Partners. Please proceed with your question.

Rutiar Leodes - Thomas Weisel Partners

I guess I got cut off last time around. On the e-commerce side, what were the number of orders that we saw in the previous quarter?

Ali Jenab

What was the number of -- I am sorry, I did not…orders, you said?

Rutiar Leodes - Thomas Weisel Partners

Number of orders.

Ali Jenab

We had over 50,000 orders. I do not have the number right in front of me, but basically to give you an idea, ASP did not move much for us. Our average selling price remains in the high 60’s, so if you do a direct division by the revenue, it tells you how many orders it would be.

Rutiar Leodes - Thomas Weisel Partners

What was the closing headcount for sales and marketing, R&D, and G&A?

Ali Jenab

We do not normally break the detailed headcount in that front. If you want per business, I will tell you we have 10 sales reps, direct sales reps for the media side of the business and, not counting our partnership on the software side, we have 6 direct sales reps. We also have as many in ST organization on the software side of the house, and then we have a PS organization that delivers services. So those are the two fronts that we have.

Rutiar Leodes - Thomas Weisel Partners

There was another news release by Google that they would also allow, or they are setting up a whole site and infrastructure for people to upload their software projects. How do you see this in relation to your business?

Ali Jenab

Google announced late July that they basically are offering a subversion with a tracker on top, which is really Google’s search acting as a tracker. Our viewpoint is they are very limited offerings.

What we have done, we actually worked very closely with them to embrace what they are doing to make sure we do not fracture what is happening in the open-source community. To date, we have seen basically a month of that side, no impact on what we have seen as far as our traffic, as far as those new projects, as far as any activity that is going on our site. It is tracking very well versus last year and also very well sequentially versus July timeframe. We monitor both projects being added -- we actually added more projects this month in August than we did in the month of July.

We have also added a new feature. For example, if somebody wants to use Google subversion as their SPM on a SourceForge platform, you can point to that and use that as a toolset.

Out of 8,000 subversion projects that we have on SourceForge, 34 of them have linked to the Google toolset, which is a little surprise to us because we thought there might be more of a connection there, but we have not seen that much in that front.

That is basically a recap of, give you a live update as far as what we have seen to date on that front. Does that answer your question?

Rutiar Leodes - Thomas Weisel Partners

Yes, that does. The final question, have you seen a change in the traffic pattern, more international visitors than earlier?

Ali Jenab

Traffic patterns is really a funny thing, because you have to make sure you are looking apples to apples on an annual basis, because year to summer traffic patterns slow down and then it picks back up. To give you an idea on SourceForge, Germany was always our number two traffic site. In the month of June, they dropped way down and actually Brazil became number two. I think World Cup Soccer might have had something to do with it.

We monitor this very closely. If I can explain the answer in a two-year horizon, we have actually seen an international growth, especially on the SourceForge site, substantially versus the other sites. I would say two years ago, we probably had a 60%-40% split between international and U.S.-based. Now we are more 78%-22% split, with 78% international and 22% North America.

It is not that North America is shrinking. It is just that growth is coming from international and as broadband becomes available, the international presence is going up. That is another reason in my script I basically talked about selling internationally is key to us, and that is one thing Rich Marino is working on, to set up the right partnerships for us to sell in those international markets.

Operator

Our next question comes from [Steve Tessler with D-Squared Capital]. Please proceed with your question.

Steve Tessler - D-Squared Capital

Thank you for taking my call. Related to the online media space, in the past, you guys quoted an average CPM number, and in the past, you guys have also provided percentage of inventory sold. Do you have a number there that you could provide?

Ali Jenab

Yes, the percentage of inventory sold on a CPM side of the house was 10% of the inventory last quarter.

Steve Tessler - D-Squared Capital

So that is actually down from last quarter, where I think it was 15?

Ali Jenab

…sponsorship went up quite a bit. We worked a lot of sponsorship transactions that the sponsorship revenue increased during the quarter, which basically showed a flat last quarter.

The inventory sold was basically a direct reflection of telling you what I explained earlier, as far as some campaigns being pushed in the month of July out and it impacted what the percentage sold was.

Steve Tessler - D-Squared Capital

That makes sense. Also, the last couple of quarters in the press releases, you quote a 30 million page view per month, I think is the number.

Ali Jenab

30 million unique visitors.

Steve Tessler - D-Squared Capital

That number does not seem to have changed over the last three or four quarters. Does that mean that there actually is not any growth in page views, or is that just a canned number?

Ali Jenab

It has not moved around substantially, so we are basically reporting that the number is around 30 million. It bounces around. To give you an idea, on SourceForge, we see anywhere from 22 million to about 25 million uniques, depending on the month. It fluctuates. Slashdot, we see about 6, 6.5. Then we go and [de-dupe] that number for the entire network to report the 30 million, so we do not go through the [de-duping] every month. We take a snapshot every six months or so, but traffic has not significantly changed for us.

Steve Tessler - D-Squared Capital

I guess that runs counter to my expectations, but in evaluating various reporting sites, it looks like there is a nice step function in the various sites and traffic that is happening there, but I guess what you are telling me is it is kind of coming from every place else and it kind of averages around 30.

Ali Jenab

Correct. Are you talking about third-parties like Alexa report that shows a step up?

Steve Tessler - D-Squared Capital

Yes, exactly.

Ali Jenab

On third-party guys, sometimes they change their methodology of how they measure the traffic, and all of a sudden they provide a better representation of our audience and the number just jumps.

We actually do use Google Analytic to measure the actual traffic and this is the actual traffic that we have. It is not a sample size that is extrapolated to get the overall traffic. I think as they do a better job of representing our type of audience, the right mix of Internet Explorer versus Firefox, if they do the right mix, they are going to show a better representation of our traffic.

Steve Tessler - D-Squared Capital

Thank you.

Operator

We have a follow-up question from the line of Denny Fish with JMP Securities. Please proceed with your question.

Denny Fish - JMP Securities

Actually, my question has been answered. Thank you.

Operator

Our next question comes from David Carson with Whitman Capital. Please proceed with your question.

David Carson - Whitman Capital

My questions have been answered. Thank you.

Operator

There are no further questions in the queue.

Ali Jenab

Great. If there are no further questions, thank you very much for joining us. I am looking forward to talking with you next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: VA Software F4Q06 (Qtr End 7/31/06) Earnings Call Transcript (LNUX)
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