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NaviSite, Inc. (NASDAQ:NAVI)

F4Q09 Earnings Call

October 15, 2009 5:00 pm ET

Executives

James W. Pluntze – Chief Financial Officer & Treasurer

Arthur P. Becker – President, Chief Executive Officer & Director

Analysts

Analyst for James Breen – Thomas Weisel Partners

Colby Synesael – Kaufman Brothers

Operator

Welcome to the fourth quarter and fiscal year 2009 NaviSite earnings conference call. My name is Keisha and I will be your operator for today. At this time all participants are in listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Jim Pluntze, CFO.

James W. Pluntze

Welcome to NaviSite’s fourth quarter and fiscal year 2009 earnings conference call. Arthur Becker NaviSite’s CEO is also with me today. We will be discussing our financial results and sharing key business highlights from our fourth quarter and full fiscal year which ended July 31, 2009. Before we get started, please be aware that the information we are about to discuss includes forward-looking statements for the purposes of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

Such statements involve risk and uncertainties. The company’s actual results could differ materially from those discussed in this call. Factors that could contribute to such differences include but are not limited to those items noted and included in the company’s SEC filings. The forward-looking information that is provided by the company in this call represents the company’s outlook as of today and we do not undertake any obligation to update forward-looking statements made by us.

Subsequent events and other developments may cause the company’s outlook to change from that which is discussed today. We will also discuss NaviSite’s adjusted EBITA performance for the fourth quarter and full year of fiscal 2009. Please note that adjusted EBITDA is not a recognized measure for financial statement presentation under the United State’s generally accepted accounting principles. The company believes that the non-GAAP measures of adjusted EBITDA provides investors with a useful supplemental measure of the company’s actual and expected operating and financial performance by excluding the impact of interests, taxes, depreciation and amortization.

The company also excludes impairment costs, stock based compensation, severance and other non-operational charges as these items are considered to be non-operational in nature. Adjusted EBITDA does not have any standard definition and therefore may not be comparable to similar measures presented by other reporting companies. Management uses adjusted EBITDA to assist in evaluating the company’s actual and expected operating and financial performance. These non-GAAP results should not be evaluated in isolation from or as a substitute for the company’s financial results prepared in accordance with US GAAP.

A table reconciling the company’s net loss as reported to adjusted EBTIDA is included in the condensed consolidated financial statements in NaviSite’s fourth quarter and fiscal year 2009 financial results press release. Now, I’d like to turn the call back over to Arthur Becker, NaviSite’s Chief Executive Officer.

Arthur P. Becker

We are pleased to report our results for the fourth quarter and for full fiscal year 2009. I’d like to start with the financial result, discuss the operating results for the quarter and discuss some of the actions we have taken and are taken to position the company in the enterprise space. As reported in our press release earlier today, revenue for the fourth quarter of fiscal 2009 which ended on July 31, 2009 was $36.9 million which is at the upper end of our guidance range of $36 to $37 million for the quarter.

Revenue this quarter represents a decrease of 9% compared to $40.4 million recorded in the same quarter last year and is down 1% from the $37.6 million recorded in the third quarter of fiscal year 2009. For the full fiscal year 2009 revenue was $152.7 million representing a 1% decrease over the $154.9 million recorded in fiscal year 2008. The decline in both year-over-year and sequential revenue continues to be related to the planned lower professional services revenue as we have discussed in our previous quarterly calls.

Recurring revenue from our enterprise hosting and application management business was $34.5 million for the fourth quarter and was flat year-over-year and a sequential decline of 2% reflecting the lost revenue of $900,000 from our Las Angeles data center who’s lease we did not renew in the fourth quarter. Excluding the impact from the LA datacenter recurring revenue was flat sequentially. The flat sequential revenue was mainly the result of higher churn this quarter and modestly slower installations as some of our more complex enterprise hosting customers from the first half of the fiscal year.

Recurring hosting revenue was $140.5 million for the year representing a growth of 7% over the $131.3 million recorded in fiscal year 2008. Our professional services revenue was $1.7 million for the fourth quarter this fiscal year and $9.6 million for the full fiscal year. The $1.7 million for the fourth quarter represents a decline of approximately $4.1 million during the fourth quarter of fiscal year 2009 from the $5.8 million recorded in the same period last year and down slightly from the $1.8 million recorded in the third quarter.

For the full fiscal year professional services revenue declined approximately $13.2 million or 58%. These declines reflect the strategic decision we took earlier in the fiscal year to focus our offerings on our core enterprise recurring revenue business and to integrate the professional services unit has part of our lifecycle management approach to our application services offering. Revenue this quarter also contains approximately $500,000 from our America’s job exchange business compared to approximately $200,000 for the same quarter in the prior fiscal year.

As we have not sold the AJE business the results will now be included in NaviSite’s overall financial results. AJE revenue for fiscal year 2009 was $1.5 million compared to fiscal year 2008 revenue of $300,000. Adjusted EBITDA for the fourth quarter was $8.8 million representing a year-over-year increase of 4% and a sequential decrease of 2%. EBITDA as adjusted for the full fiscal year 2009 was $35.1 million representing an increase of 10% over the EBITDA as adjusted of $32 million in fiscal year 2008. Significant non-operational charges that were excluded from adjusted EBTIDA include the $5.7 million arbitration settlement charge in the fourth quarter of fiscal year 2009 and the $1.6 million gain on settlement in the fourth quarter of fiscal year 2008.

Moving on to a discussion of some of our key business metrics and operational highlights, we recorded bookings of approximately $800,000 of new monthly recurring revenue or what we call MRR during the fourth quarter, an increase of 59% from the $500,000 booked in the third quarter of fiscal year 2009 but down slightly from the $1 million booked in the fourth quarter of fiscal year 2008. For the full fiscal year 2009 new hosting MMR bookings totaled about $2.5 million which represents approximately a 34% decrease over the $3.8 million recorded in the fiscal year 2008.

The level of bookings we saw in the fourth quarter was consistent with what we view as a strengthening pipeline and was consistent with our earlier expectations. Similar to the outlook expressed last quarter, we do see the pace of our bookings accelerating for fiscal year 2010 and expect that more of the larger opportunities with enterprise customers will start to close during the coming quarters.

In the fourth quarter 53% of our MMR bookings came from new customer and 47% came from the installed base representing an approximately MMR booking per new customer of $10,435 compared to MMR bookings of approximately $4,601 per customer from our existing base. That’s a significant change. MMR bookings per customer was up significantly from the prior quarter and reflects our success in closing larger transactions during the fourth quarter. Average contract length for the bookings in the fourth quarter was 27 months compared to 21 months in the prior quarter and 41 months for the fourth quarter of fiscal year 2008. For the full fiscal year average contract length was 25 months compared to 33 months for fiscal year 2008.

NaviSite signed contracts with 39 new customers this quarter compared to 54 customers last quarter and we continue to attract a diverse set of new customers because of our ability to provide a broad range of services. Five of these 39 new customers this quarter were large enterprise transactions which we define as those transactions that contribute an MRR that is greater than $25,000 per month. These transactions totaled approximately $270,000 for the quarter as compared with only one large deal that we booked in the third quarter of fiscal year 2009. This beginning of a trend is consistent with the quality of our current pipeline which has more enterprise opportunities than we have seen in many quarters.

Now, I’d like to share some additional information about some of the bookings that closed during the quarter and reflect our success in attracting customers across a broad range of industries and geographies. I’d like to start with two wins in the UK Harrods the world renowned department store selected NaviSite to host their PCI compliant ecommerce environment named Harrods Direct and [inaudible] International a leading global provider of managed network solutions recently chose us for our 24/7 remote datacenter management and monitoring services.

In the US Deloitte Touche, selected NaviSite to provide fully managed and secure hosting services for a large US government agency. Deloitte & Touche utilizes our sensitive information access services to ensure that the tightest access restrictions are placed on its account and staying with the government theme we extended recently, our relationship with a larger government solutions entity with additional managed hosting services including storage, security and database management. We also extended our relationship with one of the large global financial institutions by signing a renewal and expansion of its co-location services.

We continue to have success growing our managed applications business. For instance, Platform One, a leader in the mid market delivery of HR business process outsourcing solutions selected NaviSite to provide managed application services for loss and ERP software. NaviSite’s comprehensive solution also includes a managed dedicated hosting component to support complimentary business applications. In addition, the Academy of Art University, the largest private art and design university in the US expanded its contract with us. In addition to managing its cyber campus, NaviSite is also providing hosting and application management services for the university’s PeopleSoft student administration module.

Though much of our recent strategic focus has been on larger enterprise, I’d like to spend a moment talking about the SMB side of our business where we continue to see growth that is similar to our enterprise side of our business is distributed across industries. In the healthcare field for example, Vital Access, a hosted application service provider selected NaviSite for a managed hosting service to support its pathology database for anatomic lab specimens. Another recent win was a large government employee union that selected NaviSite to provide managed application services for Microsoft CRM and hosted exchange. INPUT 1 which provides business process outsourcing and software solutions for the insurance premiums finance industry recently selected NaviSite’s SAS solution for its application.

I would like now to turn over the call to Jim Pluntze, our Chief Financial Officer for a more detailed look at our financial performance in the quarter.

James W. Pluntze

As Arthur previously mentioned, revenue for the fourth quarter of fiscal year 2009 was $36.9 million, down 1% from the third quarter of fiscal year 2009, down 9% over the fourth quarter of fiscal year 2009 but within our guidance range. For the full fiscal year 2009, revenue was $152.7 million representing a 1% decrease over the $154.9 million recorded in fiscal year 2008. This revenue decline as we have discussed is related to the expected and announced lower revenue from our professional services business throughout fiscal year 2009 which is down 58% from the same quarter last year and down slightly from the prior quarter.

Recurring revenue from our hosting application management and cloud services was $34.5 million for the fourth quarter and $140.5 million for the year representing a full year increase of 7% and flat from the fourth quarter of fiscal year 2008. Hosting revenue was also in our guidance range of $34.4 to $35.4 million for the quarter. Revenue this quarter includes approximately $500,000 from our AJE business. As we mentioned NaviSite chose not to dispose of this asset as had been originally planned and disclosed and made the determination that NaviSite could not be certain of an AJE sale within the next 12 months. Therefore, as a result of this decision we will now include the results of AJE in our consolidated results from continuing operations.

NaviSite generated gross profit of $12.9 million or 35% of revenue for the fourth quarter of fiscal 2009 as compared to $12.7 million or 31% of revenue for the same fiscal quarter of 2008 and $12.5 million or 33% of revenue for the third quarter of fiscal year 2009. For the full fiscal year NaviSite generated gross profit of $58.2 million or 33% of revenue as compared to gross profit of $47.2 million or 30% of revenue for fiscal year 2008.

Cash gross profit which excludes depreciation, amortization and non-cash stock compensation was 51% for the fourth quarter of fiscal year 2009 up from 45% for the same quarter in fiscal year 2008. For the full fiscal year 2009 cash gross profit was 49% of revenue as compared to 45% of revenue for fiscal year 2008. The increase in gross profit and cash gross profit for the fourth quarter and fiscal year continues to reflect the decline of our lower profit professional services business through the year.

We reported a loss from operations of $3.5 million for the fourth quarter of fiscal year 2009 which was adversely impacted by the $5.7 million settlement charge booked during the quarter. Excluding this settlement, income from operations would have been $2.2 million for the quarter and $5.9 million for the full fiscal year. Excluding the settlements this represents a 62% increase from the $1.4 million from income from operations recorded in the fourth quarter of fiscal year 2008 and a 39% increase from the full year income from operations of $4.3 million recorded in fiscal year 2008.

Again, excluding the settlement, the increase in income from operations in the fourth quarter and full fiscal year compared to the prior year reflects the increase in gross margin and lower stock compensation charges offset by higher reserves for bad debt that we took during fiscal year 2009. Net loss attributable to common shareholders including the arbitration settlement charge for the fourth quarter was $8.6 million or a loss of $0.24 per share compared to a loss of $1.2 million or a loss of $0.04 per share in the fourth quarter of fiscal year 2008 which also included a settlement gain.

Net loss attributable to common shareholders including the settlement loss for fiscal year 2009 was $18.5 million or a loss of $0.52 per share compared to a loss of $11.3 million or a loss of $0.33 per share for fiscal year 2008. Excluding the settlements in both years the loss would have been $2.8 million or $0.08 per share in the fourth quarter of fiscal year 2009 and $12.7 million or a loss of $0.36 per share in fiscal year 2009 as compared to a loss of $2.8 million or $0.08 per share and a full year loss of $12.9 million or a loss of $0.37 per share for the adjusted fiscal year 2008.

For the fourth quarter NaviSite recorded adjusted EBITDA of $8.8 million representing a 4% year-over-year increase and a decrease of 2% over the $9 million of adjusted EBITDA reported in the third quarter of fiscal year 2009. For the full fiscal year NaviSite recorded an adjusted EBTIDA of $35.1 million which represents a 10% increase over the $32 million recorded in fiscal year 2008. The increase in fiscal year 2009 adjusted EBITDA was mainly as a result of our improved gross margin as we scaled back our lower margin professional services business as previously discussed.

Customer churn as defined as the loss of a customer or a reduction in a customer’s monthly revenue run rate for all of our customers increased during the quarter to approximately 1.7% per month compared to 1.2% per month in the fourth quarter of fiscal year 2008 and compared to 1% per month for the third quarter of fiscal year 2009. Churn increased during the quarter from our historical range was mainly due to the loss of two large customers in the quarter one a larger auto maker that filed bankruptcy and the other customer that moved all of its IT functions to a global outsourcer.

We have seen an increase in economy related terminations during the fourth quarter but do believe that as the economy improves these type of terminations will decline. Cash generated from operating activities was $4.1 million for the quarter and was up 4% from the $3.9 million generated in the fourth quarter of fiscal year 2008. For the full fiscal year cash generated from operating activities was $21.6 million an increase of 261% from the $6 million generated in fiscal year 2008.

Operating cash generation for both the quarter and the fiscal year increased due to strong collection efforts which reduced our DSOs or days sales outstanding to 40 days in the fourth quarter of fiscal year 2009 from 44 days in the prior quarter and down from 42 days in the fourth quarter of fiscal year 2008 and was also positively impacted by an increase in deferred revenue as we had a large customer pay NaviSite in advance for services.

During the fourth quarter we invested approximately $1.1 million in capital expenditures and for the full fiscal year we invested approximately $10.6 million. This compares to an investment of $3.2 million and approximately $12 million for the fourth quarter and full fiscal year 2008. The lower amounts in fiscal year 2009 mainly reflect the lower level of bookings during the fiscal year 2009.

The company’s cash balance at the end of the quarter was $10.5 million which was an increase from the $2.9 million at the end of the third quarter. The increase was mainly the result of the strong operating cash flow and an additional $2 million borrowed from our revolver and held at the end of the quarter. We had $10 million outstanding on our revolver at the end of the fourth quarter after borrowing $5 million for the arbitration settlement payment and an additional $2 million that we drew down to counter perceived uncertainties with one of our lenders.

With that said, I’ll turn the call back over to you Arthur.

Arthur P. Becker

At this point I’d like to update our investors on some topics mentioned on prior calls and to update investors on our strategic technology initiatives. A quick update on the status of our previously mentioned asset sales; as we have stated we’ve retained investment bankers to solicit interest in certain of our non-strategic co-location datacenters in the US. This process is progressing and we are currently negotiating the documentation for the sale of certain of these datacenter assets in the co-location customers within these datacenters. We anticipate that we will close some or all of these transactions before the end of this year.

As part of our strategy to focus on our core enterprise hosting and application management business, we have decided also not to exercise our option to lease the co-location space in London at the [Wilkin] datacenter. I’d like to take just a minute to discuss the status of our America’s Job Exchange. While as stated, this is not a core asset and yes, it is a small business our efforts to solicit a buyer at an acceptable valuation were not successful during the past year in part because of the declining unemployment market and in part because of the economic condition broadly.

AJE has however achieved steady growth throughout fiscal year 2009. Revenue in the fourth quarter of fiscal year 2009 reached approximately $500,000 compared to $200,000 in the same period a year ago and for the full fiscal year AJE revenue was $1.5 million compared to $300,000. Throughout this period AJE was modestly EBTIDA positive for fiscal year 2009 and we’ll continue to run it modestly EBITDA positive.

According to independent studies the AJE website consistently ranked among the top 12 career website in the US in terms of traffic. Monthly visitors to the site averaged over 1.1 million in the seasonally slower months of our fourth quarter and by the end of the year of fiscal 2009 there were approximately 41,000 registered employer accounts compared to 34,000 a year ago. Throughout the fiscal year AJE, as I mentioned before, as maintained approximately 500,000 job postings on the site.

As Jim mentioned since we did not consummate a sale of the AJE business last year the revenue and operating costs are no longer classified as discontinued operations. We’ll continue to revisit the opportunity to sell this asset at some point in the future but we’ll continue to run the business so it will not be a drag on EBITDA or cash flow for NaviSite itself.

I’d like now to address NaviSite’s perspective and positioning on cloud computing. Cloud is very clearly a major disruptive technology for the traditional hosting industry with certain risks and also significant opportunities and a greatly expanded addressable market. The wide acceptance of virtualization coupled with the emergence of next generation unified computing capabilities have accelerated the ability of traditional hosting providers and new entrants to bring to market next generation utility computing solutions.

NaviSite has decided to leverage its expertise and experience in complex hosting solutions and application management to this utility computing paradigm. By offering customers the benefits of enterprise hosting, management, performance, security, coupled with the desired cloud characteristics, scalability, elasticity, transparency and control. This week we announced the launch of our next generation hosting platform NaviCloud Managed Cloud Services. NaviCloud is a fully managed enterprise class cloud solution that provides customers a secure elastic managed environment including servers, storage, memory and bandwidth all as a service.

These services are on demand, scalable, usage billed and fully managed to ensure the same high service levels in the cloud as dedicated environments. NaviCloud is a robust enterprise class platform based on VMware’s virtualization, CISCO unified compute and IBM XIV storage solutions. We are currently in discussion with a number of early adopter customers and plan to launch the production environment beginning in December 2009. We expect our NaviCloud managed cloud services to appeal to both our existing customer base as they embrace utility computing to more effectively scale their IT resource requirements and new customers seeking a truly enterprise class managed cloud computing solution.

As we stated last quarter, NaviSite will not be issuing guidance for the first quarter of for the fiscal year at this time. We expect to continue this practice until we have concluded the sale of our co-location assets. On behalf of NaviSite, at this time I’d to thank you for your attendance today and now I’d like to open up the phone lines to questions from our listeners so I’ll turn the back over to the operator.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Analyst for James Breen – Thomas Weisel Partners.

Analyst for James Breen – Thomas Weisel Partners

I just had a couple of quick questions, one was I was wondering if you could talk a little bit more about the trends in gross margin and kind of how we should see those going forward and whether or not this level is kind of sustainable and if there’s any more room for improvement there? Also, if you could talk a little bit about churn, if you think we’re going to see a little bit of an elevated level because of the economy and such or if you expect maybe that it will kind of go back down a little bit more to your historical rate?

Arthur P. Becker

Jim, why don’t you tackle gross margins.

James W. Pluntze

If you look at gross margins we obviously seen a reasonable improvement over the fiscal year and really sequentially quarter-by-quarter. I think that mainly reflects as we said the fact that our professional service practice has declined as a percentage of our revenue so along with the revenue many of the costs are variable and we’ve been able to reduce those costs in line with revenue. It’s been a relatively low margin business so I think that’s fundamentally a significant portion of the margin increase. So, in a sense our hosting margins have been understated because of our professional services business. So, as we become more of a hosting company our gross margin has increased.

I think going forward we certainly have margin room. I think as we’ve talked about before as our hosting revenue grows, it’s fairly significantly accretive to margins, it’s incrementally EBITDA positive, that sort of 45% level and can be gross margin positive at even the sort of 75% to 80% level. So, as we grow our hosting revenue we certainly feel like we can expand our gross margins.

Arthur P. Becker

With respect to churn Jim?

James W. Pluntze

Churn was increased as we said to 1.7% during the quarter and if you looked at our range over the last say five quarters we’ve been in the 1% to 1.3% range and as I mentioned, the cause of us sort of getting out of that range were mainly the result of a couple of accounts that went under this quarter. We did see a few, and I mentioned on the call, a few customers in that sort of other group that sort of went out of business because of the economy. I certainly believe that with the effort we’ve undertaken in our account management group to reduce churn and other efforts that we’ve undertaken that we can get back to that 1% level. I wouldn’t shock me if churn was a little higher but we certainly aren’t planning for churn it’s just one of those things. We plan for maintaining our services with all of our customers and the economy is improving so my view is that along with an improving economy we’ll see improving churn.

Analyst for James Breen – Thomas Weisel Partners

So the churn sounds like it spiked up this quarter?

James W. Pluntze

I look at it as a spike, I don’t see it as a trend.

Analyst for James Breen – Thomas Weisel Partners

But gross margin providing the professional services businesses maintaining that same level this could be an elevated level for gross margin going forward?

James W. Pluntze

This should be more of the normal level going forward. If you look at our pro services revenue over the past three quarters it’s been in the sort of $1.6 to sort of $2 million. But, before that in the prior fiscal year we’d been doing sort of $5 to $6 million per quarter so it’s come down significantly. It’s been relatively stable the last couple of quarters and so we certainly won’t see the same year-over-year changes but we can certainly improve as our hosting revenue grows.

Analyst for James Breen – Thomas Weisel Partners

Then just a housekeeping questions, what was cap ex for the quarter?

James W. Pluntze

It was $1.1 million.

Operator

Your next question comes from Analyst for James Breen – Thomas Weisel Partners.

Analyst for James Breen – Thomas Weisel Partners

My question is what services are new customers demanding that’s causing new bookings ARPU to be over twice the existing customer base?

Arthur P. Becker

It’s not a specific service that’s being requested it’s a collection of services by larger companies. So, as we’ve been talking about for the past three or four quarters we’ve tried to focus our sales force and our marketing and lead generation efforts on attracting larger customers as opposed to the more dedicated hosting customers that some of our other vendors in this space approach. We’ve had some success with that and that’s evidenced by both the number of the larger transactions that we closed during the quarter which was five. It’s also evidenced by the fact that the total bookings from those five customers was $270,000 which is an average of over $55,000 a month per each of those customers and that’s a good trend for us. I don’t know if we’ll manage to continue that exactly that trend but I think we were very pleased to see that we had some success in that area.

Analyst for James Breen – Thomas Weisel Partners

Are these new high end customers, are they trending towards using managed hosting services versus your software as a service/email hosting application hosting type services?

Arthur P. Becker

I would say there’s no definitive answer. One or two of those customers was an application management customer and the other customers were more involved with complex managed hosting.

Analyst for James Breen – Thomas Weisel Partners

I have a follow up on the last question regarding churn. What would revenue churn have been including the $90,000 in lost revenue from the Los Angeles datacenter?

Arthur P. Becker

Well you’d just have to divide the $900,000 by the $35.4 million or so of revenue, whatever the revenue is and you’d have a percentage number.

Analyst for James Breen – Thomas Weisel Partners

What total monthly recurring revenue is the Los Angeles datacenter responsible for?

James W. Pluntze

It’s around $300,000 a month.

Analyst for James Breen – Thomas Weisel Partners

So since you guys are investigating churning off additional datacenters do you not foresee that this churning off would result in any higher revenue churn from customers not wanting to switch datacenters.

Arthur P. Becker

Just to clarify, LA we didn’t renew the lease which you can call it a churn yes, but churn is usually just related to revenue. In this case we not only terminated the customers that were doing business with us but also terminated our operating expense associated with it. In the discussion of the sale of co-location assets, what we’re selling there is both the datacenter leases, the infrastructures as well as the customer revenue. So, you could constitute it as a sale but it’s not a shutting off it’s a sale. So, we’ll see hopefully a dollar transaction that will be generated that will reduce revenue but it will also reduce expense.

Analyst for James Breen – Thomas Weisel Partners

So you’re not trying to transfer the customers?

Arthur P. Becker

No, we’re not doing any switching or transferring. What we did in LA is it just happened to be anecdotal to a lease situation where the landlord wanted to squeeze us out and take over the infrastructure and what we’re doing in the sale of our co-location datacenters is the sale of those datacenters that are specifically providing co-location services which we consider not to be the best value add for NaviSite comfort.

Operator

Your next question comes from Colby Synesael – Kaufman Brothers.

Colby Synesael – Kaufman Brothers

I have a few question and I guess they’re all tied together. I’m just curious as you start to talk about assets that are important to the company going forward and which ones are not, I wanted to get your thoughts on net aspect as it relates to the loss of Kronos software which you’re currently supporting. Also, I’m curious what your thoughts are on Jupiter and Alabanza all companies I think you acquired about two years ago, how important are those to the company going forward and are those being thought of in a strategic fashion in terms of potentially getting rid of? Also, I was hoping you could talk a little bit about some of the management changes you’ve made over the last year, the guys you’ve brought in and just talking about kind of how you see them benefiting the company. It seems like you’re kind of taking the company in a different direction now as it relates to some of the employees you brought on.

Arthur P. Becker

Let me just take it from middle to back and then front. The Jupiter and Alabanza acquisitions are fully integrated in to what we call our SMB practice which is headed up by Sumeet Sabharwal and that’s really a business unit that’s focused on selling to smaller and medium sized businesses obviously and generating revenue from those customers as well as managing those accounts a little differently than we have in the past. The enterprise focus which is the bulk of the revenue of the company and where we think our truest value add and best differentiator is compared to the vendors in this country that provides those kinds of services, is the other part of our focus.

So the answer to Jupiter and Alabanza is that it’s firmly integrated within the SMB portfolio. With respect to net aspects, the loss of Kronos practice is an interesting one for us because it is an application management practice which we value as the highest value of some of the services we provide. It is towards a slightly smaller customer base but it’s clearly something that’s very important to us.

The third question you asked about management. You know Brooks Borcherding has come on, he’s been on since April. I think he had his six month semi anniversary the other day. He’s been instrumental in helping us to focus on the enterprise space and to change and reorient and reengineer the way we go to market with respect to our sales organization. I think that’s been a very big contribution and it’s yet to realize itself yet, these things do take time as you can imagine but he’s also been able to attract a number of other real veterans to the space. Roger Schwanhausser who runs our service delivery was over 30 years at IBM and is now taking over the reins of running all service deliver with us and we’ve hired a couple of general managers too that are running regions, sales organizations from large IT companies as well. I see a real shift in the leadership of the business at the operating level yet I’d have to say it’s just a little early to see the results from that.

Operator

There are no further questions in queue. I would like to thank everyone for your participation in today’s NaviSite fourth quarter and fiscal year 2009 conference call. This concludes the presentation. You may now disconnect your lines and have a great day.

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