Seeking Alpha

Home » Software Stocks » Transcripts

iPass Inc. Q3 2009 Earnings Call Transcript

November 05, 2009 | about: IPAS

Font Size:
Print
Email
TweetThis
- Single Page View

iPass Inc (IPAS)

Q3 2009 Earnings Call Transcript

November 5, 2009 at 5:00 pm ET

Executives

Steven Gatoff - Chief Financial Officer

Evan Kaplan - President, Chief Executive Officer

Analysts

Edward Einboden - Wm. Smith & Co.

Neil Weiner - Foxhill Capital Partners LLC

Justin Orlando - Dolphin Management

Presentation

Operator

Good day ladies and gentlemen and welcome to the iPass Inc. third quarter 2009 earnings conference call. My name is Chris and I will be your operator for today. At this time all participants are in a listen-only mode. We will conduct the Q&A session towards the end of this conference. (Operator Instruction) As a reminder this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Steven Gatoff, please proceed.

Steven Gatoff

Good afternoon everyone. Thank you for joining us to discuss our financial and operating results for the third quarter of 2009. I am Steven Gatoff, Chief Financial Officer of iPass and I am joined here today by Evan Kaplan, President and CEO.

Before I turn over the call over to Evan, I would like to bring the following to your attention. The date of this call is 5 November 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 fourth quarter of 2009 and statements regarding our expectation of achieving full year 2009 non-GAAP profitability, statements containing words such as will, expect, believe, plan, intend 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 that could cause these statements not to come true are set forth in today’s press release as well as in our annual report on Form 10-K under the section Risk Factors filed with the SEC on 16 March 2009, and in our quarterly report on Form 10-Q for the third quarter 2009 that we expect to file on or about 9 November 2009.

Also these reports are made available at www.SEC.gov. Please note that iPass undertakes no responsibility to update the information of this conference call under any circumstances. The press release announcing our financial results is available on our web site at www.ipass.com in the Press Room section under Press Releases. The current report on Form 8-K furnished with respect to our press release is available on our website in the Investor Relation section under SEC Filings.

In addition on this call, we will provide and we will talk about our results using non-GAAP financial measure. The press release on our website includes text and tables that explain how we calculate non-GAAP metrics in our reconciliation of non-GAAP results to GAAP results.

This earnings call is also being recorded for replay, is being webcast and will be available on our website for one quarter until the next quarter’s earnings call. Please note that this webcast is the property of iPass and any copying or rebroadcast of this webcast without the express prior written consent of iPass is strictly prohibited.

With that, I would now like to turn the call over to iPass President and CEO Evan Kaplan.

Evan Kaplan

Thanks Steven. Good afternoon to everyone and thank you for joining us. There is a lot that we would like to talk to you today so I am going to jump right into things. As you know from here amidst the three quarters or so, I am bullish about the opportunity here at iPass, at the same time I am also clear there is a lot of work ahead of us and the areas we need to improve upon. With that in mind, I would like to cover four things in my opening remarks.

First, as expected the team delivered on guidance for the quarter. Second we have a serious issue around state sales tax support for us to take the sales tax charge of $4.8 million. Third, our product development team, specifically the new-opened mobile platform development efforts are on track for delivery. And fourth, the business environment for our existing products continues to be difficult.

First let us start with the operating results. Backing out the impact of the sales tax charges, our overall core business results came in at levels consistent with our expectations in our previous communication. Adjusted EBITDA came in at $1.9 million and as committed non-GAAP earnings per share came in profitable at $0.01 a share. Revenue for Q3 came in at $42.6 million which was at the high end of our guidance of $41 million to $43 million and was the fourth straight quarter that we reported positive cash flow in line with our guidance. In so far as operating metrics, while opmet in usage declined a bit in Q3, importantly the number of monetized users increased, as did our iPass connect fees. Monetized users are an important metric that we continue to look at in terms of how we can provide more visibility to this aspect of the business.

In so far as bookings, our MOB performance of $380,000 was below expectations for the quarter. It was 23% higher than Q2 performance but still below our expectations. Key new account wins in the quarter included YellowBook and Holiday Retirement.

I do not think there has been much analytics in the past around renewals but in the spirit of operating with transparency I would like to talk a little bit about this as it is an important dynamic to understand. As of last communiqué we are seeing signs of stress in the market around enterprise renewals at existing run rates. This is not really surprising in the current environment where companies are being confronted with the reduced employee travel and usage in the face of a historically higher commitment levels. As a result, we are seeing more enterprises reduce their re-sign commitment levels when they renew with us. People are willing to do business; they are just not willing to commit to high dollar contracts on a use-it or lose-it basis.

Steven will talk about this in a bit, but it is important to note two things: first, the percentage of customers who renew remains very high, and second, as our new platform gets deployed and business travel begins to recover, we believe we can reverse this trend.

Moving to our 3G mobile broadband business, we ended up at the quarter with about 34,000 monthly subscribers up about 10% from the 31,000 at the end of Q2 and up by more than 60% over the same quarter last year. While the growth was certainly smaller that we would have like, we are encouraged that in an environment which has been pulling back in spending in general and on 3G wireless access specifically that we were still able to drive growth.

Now let us turn to the sales tax issue. The sales tax charge rate, let me talk about the sales tax charges either we identified, quantified or booked in Q3. As you saw in our press release we recognized a charge of $4.8 million or about $0.08 per share in Q3. While I am certainly disappointed by this; I am also pleased that my new executive team has given me with a fresh perspective and doing the detailed diligence in their functional areas. It is a process that I went through when I first transitioned into iPass, has something that see my key direct reports during his transition into their organizations. They are doing excellent job of taking stock of what they have to work with and charting a path forward.

Steve will walk you through the details of the sales tax charges. He will share with you all the facts and information around this but you know what we know. Consistent with what you are seeing from me and the new team here, once we are made aware of this issue we work expeditiously to quantify our exposure. We are addressing the systems and process to correct it and of course we look to immediately and fully disclose it. As you should continue to expect from us, we are working to capitalize on the opportunity in front of us and we will tell you about those. But we will also work hard to find the risks and we will be going to tell you about those as well. I expect Steven and his team to continue scrubbing our policies and processes and see the entire team driving hard to identify any additional exposure areas.

Moving on to the core technology led turnaround that it is underway. I am pleased to report our open mobile beta went live two weeks ago. There is about a 150 clients on it with about 20 of our larger global enterprise customers participating. The team here is excited about the early positive feedback we have been receiving. We believe the platform addresses a lot of the cost, ease of use and security issues that our customers face in their efforts to enable their increasingly mobile workforce. A lot has been accomplished on a very aggressive product development cycle and we are pleased that the new open mobile platform and services is currently on track to go live by yearend as was promised in my Q1 call.

The timing of our release is also in synch with the expected enterprise adoption cycle of the Microsoft Windows OS, Windows 7. This should help speed uptake of our new service as our customers begin to retrofit their existing laptop environment. Also on the technology front, our new Blackberry client was launched in Q3 and we are pleased with its early penetration. In addition we announced that the current generation iPass connect client will be available for use with the new Microsoft Windows 7 operating system by this December.

For the ever-growing Apple presence in the enterprise, a new iPass client was released for the recently-introduced Mac OS X Snow Leopard operating system. Also important to note, yesterday we launched a new light integration open device framework as well as an enterprise-ready Mi-Fi service. The open device framework allows the iPass client to support almost all 3G or 4G network devices out of the box and supports our efforts to separate the customers’ end-user experience from the underlying commodity network. This will allow enterprises to more easily-change network providers and technologies without affecting their end-users.

The enterprise Mi-Fi service allows IT directors to set up an enterprise-grade secure hotspot that is pre-configured by iPass with an enterprise specific ID and appropriate security keys to be used out of the box by employees who need shared access to 3G networks. This is a truly unique service in the market today.

In general, we are very excited about the quality, the speed, and the efficacy of our development team in the US and India. Achievements just noted our indicator of well performing teams with clear direction beginning to reach its drive, look for rapid technology value added innovation going forward.

Finally from a network perspective, with the announcement of a new agreement with China Telecom, we are also pleased that iPass choosers now have access to their 3D network, and over 20,000 Wi-Fi hotspots in China. This footprint expansion provides iPass with the largest Wi-Fi network of any single service provider.

Now I would like to talk a little bit about the current business environment. With the customer base expense a significant percentage of the global 2000, we have pretty good visibility with what is going on in the market place, for business travel generally and communication spend more specifically. In our view, the business environment continues to be challenging for both signing new deals and renewing customers to fix commitment.

Travel statistics still indicate a weakening environment albeit at a slower rate. On a year-to-date basis airport traffic fell about 7.5% in the US and Europe compared to the same period last year according to the Airport Council International. The year-over-year monthly decline in August was about 3.5% which would suggest that the rate of decline is slowing.

It follows then while we hear about GDP growth and positive signs to come, we have yet to see this in our customer base. As a result we do not believe there will be dramatic growth in business travel in the near future. Businesses seem to have re-adjusted to a lower spend and a workable way of managing their business at this levels. It does not feel to us like there is an obvious reason that business travel spend would jump back dramatically. We are planning accordingly.

Now I would like to turn toward what is going on in the current quarter. Let me start with an important element of delivering stockholder return. As we are earlier committed to doing, iPass is looking to drive value to its stockholders and has committed to return $40 million of cash. In September we distributed $20 million or $0.32 a share cash dividend to stockholders. Today we announced the final part of this return of capital to shareholders in which we will distribute a cash dividend of $10 million or $0.16 per share to stockholders in December, and in which we are launching a $10 million stock re-purchase program. Steven will provide the details in a moment. But before we get to that I would like to share some high-level insights into what we are seeing in the fourth quarter.

Overall and what I would offer is most important, we are moving forward to capitalize on what we believe is a terrific opportunity. The hard work ahead of us, we are doing what we think is the right thing to do and when I had set out on this charge at the beginning of the year I committed to you that in doing so, we would run the Company profitably this year on a non-GAAP basis. I am planning to hold true to that commitment for 2009. We have been weathering some big challenges both internally and working to turn around many areas of the business as well as external in the economic environment that we and our customers operate.

As we move to the fourth we still see and expect to have some of those challenges impact our ability to maintain profitability in the quarter. But importantly, not be material enough to track from our commitment to living overall non-GAAP profitability for the year. We are looking at a dynamic in Q4 of lower revenue quarter combined with a more challenging environment in prior years and a handful of specific factors that will squeeze profitability including some exposure on the foreign currency side vis-à-vis our overseas carrier cost and some new commitment arrangement that were entered a few years ago on the supply side that will impact marginal profitability.

Before turning back to Steven, I think it is also important to note that we have a new team. We are executing a significant transformation in a difficult economic climate. We firmly believe the negative business cycle identified earlier in my remarks can be arrested and reversed. We believe our technology-led strategy will deliver significantly improved operating results by driving increased utilization of our service.

Finally as I have said from the outset we remained committed to open communication with our shareholders and driving transparency into our business. We are looking at new metrics around modernization of the new platform and success in penetrating our base of customers so we can help provide some leading measures of the business in our new mobility platform. With that I want to thank you for your time and attention. I would like to turn the call back over to Steven for a deeper look at the financial results and some more details on the specific items I discussed.

Steven Gatoff

Thanks Evan. There is a lot to cover. Let me first start with the sales tax charges. As we have discussed our GAAP results for Q3 included a charge of approximately $4.8 million or $0.08 per share related to US domestic sales taxes and we estimate that the Company may owe in various states. As Evan said we have come to learn that we share this issue in common with a lot of tech companies, and as a result the work that we did in connection with the state sales and use tax audit that was initiated earlier this year, we determined that it is probable that we will be assessed additional sales taxes on fees and services that have not been billed to customers.

When I became aware of this issue I had the team work to quantify the exposure and come up with a solution to ensure that we are able to calculate and bill for these taxes. It has been a very detailed data and manpower intensive tasks and at this time we believe that we have gotten our arms around the nature and cumulative amount of the exposure for prior years and the accordingly we booked the charge in Q3 of $4.8 million.

Let me provide some color and what the charges comprised of as it consists of three components. First, the bulk of the charge is a $3.3 million charge for the cumulative amount of sale taxes due through 30 September 2009 that we estimated maybe assessed by the States. While sale taxes are our customers’ liability, as an agent of the state we are obligated to collect the tax from the customers and remit those taxes to the States. While it normally does not flow through the Company’s P&L, in this situation there is a high degree of uncertainty around the collectability of these taxes from customers for services that may go back several years and in some cases may involve companies that are no longer customers. Like all companies we nonetheless must remit the amount of the taxes to the States and hence the recording of the charge.

The second part of the sale tax charge is a $500,000 estimate of potential penalties that we believe we may owe to the various states on these taxes. Similarly the third component of the charge is the $900,000 estimate for potential interest charges on the taxes due from prior periods. One of the positives about this situation is that we have engaged with the tax authorities and several jurisdictions and we are working with them on what this looks like how the taxes will be assessed, and the periods involved, et cetera. This is very constructive because the bulk of this involves taxes on internet access which is a fairly complicated tax to source and as relatively new vis-à-vis the mobile nature of internet access.

We will continue to reach out to the states and work through these items in an orderly and constructive way, certainly with the goal of reducing as much of the charges, penalties and interests that we can. Also importantly, so far as moving forward, we have already begun the work to implement the functionality and processes to address these sale taxes on a go-forward basis. We expect the billing for these taxes to be in place in the first quarter of 2010. It would follow then that thinking about the current quarter from a moment, we anticipate a related charge in Q4 of approximately $300,000 as a similar charge for the estimated sales tax liability and potential related interests and penalties for Q4 transactions. As I have stated going into 2010 we anticipate being able to bill and remit these taxes and hence have no further charges in our P&L.

Stepping back a bit I share Evan’s sentiment that this charge is disappointing. When I came on board however, I gave myself six months or so on a planning cycle to ferret out any broad issues. It is always constructive to have a fresh perspective and to look at things differently and that is what I am doing now. I believe there is a terrific opportunity here at iPass. We have a compelling new product, the solid technology development effort and a new team that is rolling up their sleeves and getting it done. I am focused on helping to drive the business forward and I am starting by making sure that we have a level playing field. As I trust you would suspect, if not expect, I am continuing my diligence and deep dive as I go through my on-boarding, and as things unfold, I will continue to keep you informed.

With that I would like to move on and provide some color on our Q3 results. Let us start with the P&L. Total revenues for Q3 were $42.6 million, a decrease of about 3% or $1.1 million from Q2. The decline was in line with the anticipated erosion of dial-up revenues and a seasonal decline in Wi-Fi revenues associated with the summer holidays particularly in Europe. While we certainly are driving for better top line performance, we are dealing with the economic realities in which we operate and are pleased that despite no visible improvement in business travel, our mobile broadband 3G revenues increased sequentially again in Q3 finishing a $4.7 million up nearly 7% over Q2 and nearly 50% over Q3 2008. This happens in an environment in which we are seeing many of our enterprise customers pulling back on their telecommunication spend.

Total broadband revenues came in at $27.1 million in the quarter, down slightly from Q2 by $500,000 but up $800,000 or 3% from Q3 of last year. The largest revenue component WiFi and hotel Ethernet revenues came in at $15.3 million in Q3 a modest decline from Q2 that was primarily related to the seasonal decline of business travel, again particularly in Europe.

Our managed network services or fixed broadband revenues were $7.1 million in Q3 down slightly from Q2. This decline was due to anticipated disconnects of broadband endpoints around home office users and some larger professional services engagements in Q2. Importantly, we are seeing encouraging signs in our NMF pipeline around the core branch office, retail office business.

Moving on to services and software revenues, this line came in at $11.6 million for Q3, up modestly versus Q2 due primarily to growth in end-of-life fees and iPass connect software fees where we have seen an increase in a number of monetized users of the iPass clients. As Evan discussed, however we continue to see pressure with minimum commitments. From a business standpoint there is a bit of a double-edged sword with minimum commitment fee revenue, it is near 100% margin, but the reason you get it is that your customer miscalculated and estimated wrong.

That is not a compelling or a long-term value proposition in an environment of reduced travel and cost pressure, companies are all the more reluctant to recommit to high-spending levels. Importantly, we are finding that our customers are engaged and renewing with us, they are just adjusting the level of spend that they are willing to commit to on a user-to-user basis.

Moving on, dial-up revenues in the third quarter were $3.9 million versus $4.6 million in Q2 which was about a 16% decline right in line with the expectations. For Q3, noteworthy that dial-up represented just 9% of total revenue.

Looking at our international operations and considering our global footprint, iPass continues to maintain a strong global brand and presence and in the third quarter international revenues accounted for 40% of total revenues.

Moving on to COGS and gross margin, lower network access costs which came in at $17.6 million were certainly impacted from lower revenues for the quarter. As we discussed last quarter, we have been successful in renegotiating carrier supply arrangements and part of the improvement in Q3 was a full course worth of this cost optimization in our domestic 3G infrastructure.

Overall, we saw a gross margin percentage for Q3 however, come in slightly lower to Q2 by about 24 basis points at 58.6%. Now this was a result of several factors, while network access costs were down in aggregate dollars overseas net were higher due to unfavorable foreign currency rates in the quarter that saw a strong Euro drive carrier cost incrementally higher. Gross margin percentage was also impacted by the decline in our MMS revenue as mentioned earlier, and as well as the miscellaneous one-time items that were immaterial.

Looking at operations and excluding network access costs which I just discussed, operating expenses increased by about $5 million in Q3 over Q2 primarily driven by the $4.8 million sales tax charges that are recorded in the G&A line item.

Network operations were about the same in Q3 over Q2, a net result of lower operating cost offset by an increase in mobile data card replacement costs during the quarter.

Our G&A increased by a net $4 million in Q3 over Q2 due to the tax charge and this is partially offset by one-time Q2 expenses associated with a proxy contest that were not repeated in Q3. R&D expense was slightly higher in Q3 due to our continued investment in our secure mobility platform and finally, sales and marketing expenses, incrementally higher by about $860,000 due to severance charges in Q3 as well as higher stock compensation expense in Q3 versus Q2 which I would provide some color on in the aggregate.

Stock compensation expense is included in the GAAP numbers and is broken out in the tables that we provide. Overall, stock compensation was higher in Q3 from Q2 by about $600,000 in total and this was a result of re-pricing of employee stock options in Q3 associated with the $20 million cash dividend in the quarter as well as lower stock compensation expenses experienced in Q2 as a result of employee terminations.

Moving on to the restructuring expense line item, this was about $900,000 higher in Q3 over Q2, as a result of true up of sublease assumptions on our restructured facilities. Looking at the bottom line, we were pleased to report net income and earnings-per-share profitability on a non-GAAP basis. We had non-GAAP net income in Q3 of approximately $900,000 or $0.01 per diluted share versus net income in Q2 of $1.8 million or $0.03 per diluted share.

On a GAAP basis, due to the sale tax charges, the increased stock compensation expense and the additional restructuring expenses, we reported a GAAP loss of $6.1 million or $0.10 per share. Again, as discussed, the sales tax charge contributed $4.8 million or $0.08 per share to that.

Turning to our cash flow and financial position, during Q3 we generated solid adjusted EBITDA of $1.7 million. To be clear and consistent, this adjusted definition of EBITDA, a boxed-out stock compensation expense restructuring charges and the sales tax charges.

We ended Q3 with more than $50 million in cash and investments and continue to have zero debt. Our accounts receivable and AR aging continue to be in good shape as our cash collections continue to be robust and similarly our net DSO's are at two year lows.

With that I would like to talk a bit about what we are seeing in our guidance for the fourth quarter. Please note that the following statements are based on information available to iPass today. These statements are forward-looking and actual results may vary.

As we discussed, we anticipate a continued difficult economic environment for booking new business. There has not seemed to be any recovery from the significant decline in business travels and that continues to put pressure on our enterprise customers, both from a volume of mobility usage standpoint and in their willingness to re-sign contracts of similar commitment levels.

Additionally, we expect a continued, albeit a sequentially smaller decline in dial-up revenue in Q4. Given these factors, we anticipate total revenues for Q4 to be in the range of approximately $39 million to $41 million. So far as our cost, as we move through the fourth quarter, we still see and expect to have some challenges that likely impact our ability to maintain profitability in the quarter.

Importantly, as Evan called out, these are not material enough to detract from our commitment to deliver overall profitability for the year. As we have discussed, we see some pressure from foreign currency exchange rates impacting our overseas net where Euro denominated carrier costs are expected to increase marginally in Q4 versus what we experienced in Q3. Additionally, we have some carrier supply minimum commitments that begin in Europe; we were not seeing the business to fund those obligations. Accordingly, as a function of lower anticipated revenues and pressure on the cost line, we anticipate GAAP EPS for Q4 to be in the range of a loss of $0.06 per share to a loss of $0.04 per share.

As noted earlier, this GAAP estimate includes a charge of $300,000 for potential sales tax charges in Q4. We anticipate that this charge will not be incurred going forward, as we are working to put the systems in place to address the tax issues in 2010.

On a non-GAAP basis, we expect non-GAAP EPS to be in the range of a $0.03 loss per share to break even for Q4.

I would like to close things with our return of capital initiatives. As Evan said, we are focused on driving value to our stockholders and as you know, we are committed to returning $40 million of cash. In September, we distributed a $20 million or $0.32 per share, special cash dividend and today, we announced the second part of this return of capital to shareholders for $20 million and this consists of two elements.

First, we will distribute a special cash dividend of $10 million or $0.16 per share to stockholders in December. The record date for this dividend is December 4, 2009 and the payment date is December 18, 2009. The second component of this return of capital is that we announced today that the Company is launching a $10-million stock repurchase programs.

The program extends through March 31, 2011 and we further committed that any portion of the $10 million that is not used to buy back the Company’s stocks by March 2011 will be given as dividend out to stockholders by April 15, 2011. We have talked here a lot today; I have to say that it is important to realize that we are in a midst of a transformation and that we are in a challenging business environment.

We are optimistic about the opportunity in driving value, and we are going to work to capitalize on it. We appreciate your participation and support and with that, I would be glad to open the call for any questions. Operator?

Question-and-Answer Session

Operator

(Operator instruction) Our first question comes from the line of Ed Einboden, please proceed.

Edward Einboden - William Smith & Company

You guys have been talking a little bit about the technology driven turnaround and that being on-track. Can you guys maybe provide us with some high level outlook? How you view iPass’ new position in this environment, you allude to some cloud computing and sort of where you are going to position yourself and where you see the opportunity?

Evan Kaplan

Sure. I will try to get some color on that. So, the proposition is really quite simple. We are engaged, our customer lists includes 3,300 with the pre-dominance of those customers, enterprise, and larger enterprise representing most of the revenue. What we are doing with the new platform is we are trying to become the connection service of choice. The challenge our customers face is when they have a laptop deployed, every new network provider carrier and some sort of connection manager, connection capability to facilitate that employee’s use of their specific network.

The existence of value-added opportunity to create a connection manager of choice and as many of our customers, let us say about 10% today, we already to do that on the older platform. After digging in-deep with those customers and determining why they use iPass in that way, we felt like that model was extensible if we can improve our technology, our platform, or delivery then that model was extensible to a larger portion of our customers.

So, if we can become a connection manager of choice, that is a very strategic point in their deployments starting with the laptops and both PC and Mackintosh and also going out to the mobility. It allows us to do some things that are super important to our customers. One is, drive the cost of supporting those end users on mobile networks down dramatically. One interface no matter what the network that source us. The ease of use to support cost.

Two is, it allows us to report on and control costs in real-time and so the new client in the platform is having enforcement bust at the client’s side allows the customers specify some policies to say how we want those networks to be used. Free Wi-Fi, paid Wi-Fi, 3G, 4G, that sort of stuffs based on a cost model. And thirdly, perhaps most importantly on the cost side is the ability to mix-and-match your networks around the world while maintain the same user’s experience. So, the employees in The Netherlands who are using T-Mobile and employees in the US are using Verizon and employees in Washington DC are using AT&T, they can see the same user interface. It unlocks the commodity of the network underneath from the user’s experience which gives the enterprises control in the environment they do not currently have.

So, our challenge was how you build the platform, a SAS based platform that could very quickly deliver those clients at high speed. Two is can we build an end user’s experience that worked almost out of the box for all the end users and support all the devices on those networks. When we took that challenge up and that is what we are rolling-out, a big portion of that, we are rolling-out in data.

If we are able to deliver on this I think the exciting vision for us or the exciting ability is we get to monetize a lot more users. Those of you who followed our business for some period of time know that we have got a steady move towards what we called EFR pricing or Enterprise Flat Rate pricing. If we can get more of those users on EFR, we are seeing that happen every single quarter, they pay us for use of the software whether to use our network or not. So, if we can get that software useable on everybody’s desktop who is in our client-base then we will get more network off usage which we will be able to monetize. We will get more networks on usage dramatically more and those of you who would remember from previous conference calls how disappointed actual usage we actually did get when I first looked at it.

We have not the ability to transform this business, but obviously we have to shift the platform, we have to migrate the customers, and we have to evolve it and so that is why the technology piece seems so important in this turnaround. So, what I would say to our investors looking forward is to look for a steady stream of announcements around technology additions and things like that and if there is any part of the turnaround that is more advanced than the others, it is the product development cycle.

I feel like we have got a very high performing development team that is delivering on that commitment and I could not be more pleased with that effort. It’s a long way to answer but I felt like with a kind of conference call we have had, you probably deserve the long winded answer for that particular question.

Edward Einboden - William Smith & Company

No, I would appreciate it. I was wondering maybe going forward or we are looking a providing metrics that would allow us to gauge the penetration or usage patterns as you referencing the EFR pricing and acceptance of how well these platforms are performing.

Evan Kaplan

Absolutely, there is no question. Given the nature of our business cycle and the service oriented revenues and those stuffs. Giving you more visibility on that is better for us, so we just have to figure out exactly once we delivered those metrics, how we can make sure those were the same metrics over a long period of time so they are reliable.

But look for the next quarter call, for us to be more specific about the kind of things we are looking at and to introduce some metrics that will give you more visibility.

Edward Einboden - William Smith & Company

Okay, great and maybe Steven, can you talk a little bit about what is you believe some of the cost cutting measures that is still out there. I know you mentioned you are going to hire and have hired a senior person to address those kinds of cost cutting measures and the negotiations. Can you address what kind of progress you have made on that front?

Steven Gatoff

Sure, I think you maybe referring to [Marcio Avilez] who is the new VP of Supply Management so it is not really a cost-cutting, cost-centric position. It is really to maximize and run-and-own the carrier side of the business and it really has not had that senior level ownership for many, many years. So, he has recently joined and it is a really nice job and I know he is actively engaged with the carriers, domestically, and international to look at our cost structure. So, that is an area of interest for us that will see and expect to see some improvements overtime. Beyond that probably we could not give you percent of dollar savings on that, but it is an area for sure on the gross margin line if you will that we were looking for improvement overtime.

As far operations we absolutely made a commitment and we continue to do what we need to, to adjust our operations and scale that appropriately so that we are running the Company on a non-GAAP basis to be profitable.

Edward Einboden - William Smith & Company

Okay, and maybe can you talk about the monthly order book? How it is bearing currently—I know you said last quarter there was some slippage of contract signed, is that the effect that we saw with the bump this quarter, especially considering the guidance you provide on revenue?

Evan Kaplan

Yes, I would say it is in-line just to be as clear as I can be. It is in-line with my earlier comments about the economic environment. I do not see a dramatic change or shift-upwards some channels. I see us trending along at this kind of rate. Hopefully I would like to see them improved and obviously we are still in the midst of the quarter. But, the business environment, to us, does not look like things are going to change dramatically till we could get this product out and begin engaging the customers differently which we have started to do but mostly it is in beta and is not shipping.

Edward Einboden - William Smith & Company

Okay, great and I guess the question that I have is…

Evan Kaplan

Ed that is four questions…,

Edward Einboden - William Smith & Company

I know the last question that I would have is that how you address the kind of different environment you guys spoke about which was the lack of commitment by customers and working with them and understand their situation and accommodate that at the same time grow commitment and you keep that as a recurring revenues stream?

Evan Kaplan

That is a good question. So we have to separate the idea of commitment versus revenue billing. The truth is, we have to accept that we are living in a world where customers right now are not willing to make big commitments and so, we have to earn that business as we go, as opposed to book it and then come back to it in a year or 15 months and try to win it again and the idea is the kind of discipline in the sales force, kind of discipline in the selling process that says, we are providing value on a continuous basis and most of that is network and technology-led value and that drives the actual usage going up.

The commitment it helps us get visibility on cost which is very helpful, and so I am not sure that will be the best leading indicator forward but having committed to giving it to you, we will continue to give it to you. My view is I do not see it changing dramatically in the short-term much along the lines with business travel in our operating environment.

Operator

Our next question comes from the line of Neil Weiner, please proceed.

Neil Weiner - Foxhill Capital Partners

If you would indulge me, I have three-four questions. I guess, given the guidance, going forward and your comments of customers who are reluctant to make minimum commitment, can you define or give us some guidance on how you are going to cut costs, given these new revenue kind of levels, the key profitability?

Steven Gatoff

Rather than give specific guidance on how we are to do it, certainly we have to live it in the operating environment. We have to live in the operating environment that we are living in. I would rather not give specific guidance in this point. We are looking efficiencies across the business. The work of [Marcio Avilez] is doing on the next side should help a bunch. But we have got a work to cut out.

Neil Weiner - Foxhill Capital Partners

But are you committed then, given this revenue environment to do what you can on the cost side excluding what you have defined in the fourth quarter to stay profitable?

Steven Gatoff

We are in the middle of 2010 planning cycle. I have made my commitments for 2009. I am looking forward. I am not going to make that commitment till I have better visibility. We are very deep into the numbers now, so.

Neil Weiner - Foxhill Capital Partners

Okay, and I guess, the next question on the tax liability, a couple of things. When was it identified? Because it seems that that kind of money has been know and is something that is known from at least a year or two past in terms of the size of the charge and if this was known earlier, when was the Board made aware of this?

Steven Gatoff

Sure, I would tell you that as far as I know, when I came in, I did the work and I found out about this and informed the Board immediately, kind of that day if you will. So the issue really is not, and so far as when this was known per se, the harder part and the focus here at the Company is we are working on this, we received an audit for example, back in Q1 of this year from one of the states, looking at kind of a typical sales and used tax audits, looking at this area and that is kind of when the Company really started focusing on this and started thinking about, “Alright, what is this tax? How do we quantify it? Where do we look at? Is it the address of the user? Is it the company headquarters? Is that the actually usage, the pop, where the mobility access came in.” So the issue really here was how to quantify it? What do you look to? How much is this? Is it material? Is it a big dollar amount or not?

That is something that the Company has not known as far I know, until the last few weeks.

Neil Weiner - Foxhill Capital Partners

So is this something you can appeal given the number of the liabilities is something that is appealable or can be reduced or is this the number?

Steven Gatoff

Yes I am not sure I would use the word appeal but what we have done is definitely engage with the states in a pretty constructive relationship to work this out. The topic of internet access as it relates to the mobility space, companies like iPass is very new. So the States kind of look at us and then I am not really even sure how to assess the tax and how to measure it and so one of the larger States is working with us to say, “Okay iPass,” and this has been going on obviously since Q1, “let us talk about the systems and traffic and how you track user information and data records to see what makes sense, what is feasible, what is reasonable.”

So what we did was we really took a view to seeing where we are registered, what States we are registered in, where we are not, where we have next, where we do not and took a view that if we were to be taxed based on the regime there that this would be the gross amount of tax to be incurred. Are there scenarios where they can come down because we are working constructively with the State or because interest is at a lower rate than we have assumed in a worse-case scenario if you will? I am sure that that potential exists but we did not have that upside updates in any of these.

Neil Weiner - Foxhill Capital Partners

Okay so that is the maximum liability that you are assuming?

Steven Gatoff

The information that we have that is what we believe.

Neil Weiner - Foxhill Capital Partners

Okay. Steve, can you just say how much the FX, how much impact it had on the network operating cost in the quarter?

Steven Gatoff

Probably somewhere around $300,000 to $400,000 up in gross margin, so kind of an economic cost not a P&L line item of gain or loss if you catch the difference.