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InnerWorkings, Inc. (NASDAQ:INWK)

Q3 2013 Earnings Conference Call

November 6, 2013 05:30 PM ET

Executives

Eric Belcher - Chief Executive Officer

Joe Busky - Chief Financial Officer

Analysts

George Sutton - Craig Hallum

Nate Brochmann - William Blair

Kevin Steinke - Barrington Research

Matthew Kempler - Sidoti & Company

Randy Hugen - Feltl and Company

Operator

Good day, ladies and gentlemen, and thank you for standing by and welcome to the InnerWorkings Incorporated’s Quarterly Earnings Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions). As a reminder, today’s conference maybe recorded.

Now my pleasure to turn the floor over to Chief Financial Officer, Joe Busky. Sir the floor is yours.

Joe Busky

Okay. Good evening everyone and thank you for joining our third quarter 2013 earnings call. This is Joe Busky and I’m the Chief Financial Officer at InnerWorkings. Joining me on the call today is our Chief Executive Officer, Eric Belcher.

Before we begin, I’d like to note this call will include forward-looking statements related to future results that are made pursuant to the Safe Harbor provisions of the federal securities laws. These statements are subject to a variety of risks, uncertainties and assumptions that may cause actual results to differ materially from those stated or implied by the forward-looking statements. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

Listeners to the call are advised to review our SEC filings, including the risk factors contained in our most recently filed Form 10-K. This call will discuss, among other financial performance measures, non-GAAP adjusted EBITDA, non-GAAP adjusted operating cash flow and non-GAAP diluted earnings per share which are our non-GAAP financial performance measures.

Please refer to the company’s earnings release issued earlier today for a reconciliation of these non-GAAP measures to the nearest comparable GAAP measures. As always this call is intended for investors and analysts who may not be reproduced in the media in whole or in part without our prior consent.

And so Eric will provide the summary of the third quarter I will cover the financial results and as always we’ll open it up for your questions.

So with that I am going to turn it over to Eric.

Eric Belcher

Thanks Joe and good evening everyone. I will start by updating you on our core enterprise business which continues to be driving force behind our global growth. I’ll then brief you on two areas of our business that have fallen short of our expectations and the actions we’ve taken to make them successful. The strength of our core enterprise business is supported by two fundamental trends. First we continue to lay our new large enterprise clients, and second we’re successfully expanding existing client relationships into new geographies around the world. I will take you through recent examples on both fronts.

Starting with our new large enterprise client wins, we are really excited today to announce that we signed a new long term agreement with Energizer, one of the world’s largest personal care household goods companies. And once fully implemented, we anticipate this will be a top 20 account for us. In addition to our traditional print management solution this global award includes the management of their permanent in-store merchandizing programs which are use to display the Energizer Eveready and ship product lines.

We were awarded this business because the client believes we were the only company who have the two essential capabilities necessary to effectively execute the program. First, the internal expertise to design and engineer these complex displays and second the global footprint required to manage production and distribution around the world.

We develop these new design and engineering capabilities to our acquisition of DB Studios earlier this year. And we are pleased to see our collaborative selling efforts are already paying off. Our new business pipeline includes meaningful permanent retail display opportunities with several of our existing clients.

And we have also signed new client agreements with two large non-profit organizations, the first is with Easter Seals, an international organization devoted to supporting people living with autism and other challenges. And we will be managing their marketing and fund raising materials as well as improving processes relating to their supply chain.

The second is with feeding American and Asian leading domestic hunger relief charity, we will be managing their entire direct meal campaigns correlated to their fund raising activities. And you consider this new non-profit clients wins along with the existing relationships, we have with Junior Achievement, National Wildlife Federations, St. Jude’s Research Hospital and the World Wildlife Fund, InnerWorkings has become a prudent solution for the non-profit sector. These organizations benefit from our services by reducing costs associated with activities that are considered to be non-core to their missions, while capitalizing on innovations in the marketplace to our consultative on-site long term partnerships.

And in addition to winning new clients, a hallmark of a strong business model is the ability to expand a successful solution within an existing client base. And we continue to make tremendous progress on this front. I'll touch on it. Few examples from just the past few months. And the first is the expansion of our relationships with InterContinental Hotels into Europe and the Middle East. After expanding into the Asia Pacific region earlier this year, we are now providing IHG with a global solution for all of their branded print and promotional materials. And we expect our business from IHG to grow by 50% next year as a result of these expansions.

And there is another recent example with Nestle where we have just expanded our print management relationship in the Mexico. Previously, we have been supporting Nestle in four Latin American countries and this expansion extends our work into the second largest economy in the region. And we believe there is significant potential to expand further with Nestle into new geographies. When you consider this recent expansion wins, alongside others signed earlier this year namely Reckitt Benckiser into Brazil, MoneyGram and William Grant in Europe and Unilever now in Russia and Turkey the benefits of our global capabilities are clearly paying off. And from just these expansion agreements I have mentioned, we expected to realize nearly $50 million of new organic revenue in 2014.

So, let me now turn to the two areas that have not met our expectations. I'll explain the shortfalls and outline the actions we have taken to improve our performance. The first relates to Productions Graphics, the European based business we acquired in 2011. This business has not acquired and retained customers as planned and as a result has significantly missed its internal forecast. In October we decided to terminate our relationship with the former owner of this business which the first time we've taken such an action before the completion of an earn out period. We move quickly to install new leadership that we're excited about, including a new General Manager who oversees our operations in Continental Europe and Africa. She spent the last 11 years as the Head of Indirect Procurement at Reckitt Benckiser and we believe she is uniquely qualified for this role. We've also hired a new Head of Finance for the region spent the last 10 years at Cisco and will be focused on improving the profitability of the business.

With these new leaders in place under Yves Rogivue is the President of our EMEA/APAC regions we're confident in our long-term growth potential in the EMEA region where we have realized 10% year-over-year organic growth in the third quarter despite the shortfall coming from Productions Graphics.

Now clearly the acquisition of Productions Graphics has not worked out as we planned. It represents an outlier among an impressive roaster of acquired companies and entrepreneurs who in the aggregate have realized approximately 30% growth under our ownership. We're committed to turning Productions Graphics business around and making it the valuable asset we envisioned it would be.

The second area that has fallen short of our expectations this year is our inside sales group. Despite solid top-line growth over the last few years we haven’t determined yet how to acquire customers at an average cost that allows the business to scale profitably. To-date our client acquisition strategy is relied almost exclusively on coke volume we've been exploring more efficient client acquisition methods. And to that end we've reached an exciting new agreement in principal with the Fortune 500 business services company that serves small and medium size businesses through retail locations across United States. Our two organizations have been developing this partnership for over a year now and it’s one that will capitalize on each of our strengths, for our part we’ll gain access to huge communities, small and medium businesses who have a immediate commercial printing needs.

And our partner will be deleveraging our automated online procurement platform that provides real time competitive quotes and streamline to order processing among other benefits. And this will significantly reduce our customer acquisition costs associated with the segment of the market and allow us to feel the business profitability.

The new partnership revolves around the deployment of the key component of our new technology platform VELO and provides a window into where our technology advances will be taking our business over the coming years.

The development of our client phasing, automated sourcing, ordering and analytics software platform that operates in every major language and currency in the world is progressing nicely. And we believe will not only provide a powerful source of differentiation for our company, but it will enable multiple new revenue streams such as this one as well as our potential future eBay SaaS purchasing platform.

So in summary, we've had a couple of real operational challenges this year, which we are addressing head on with solid plan in place. The big picture is we have a terrific core business with a strong and respected global brand and reputation, a client line-up that improves literally every month and increasing demand in a large fragmented and underpenetrated global market we serve.

So with that I’m going to turn the call over to Joe now. Joe?

Joe Busky

Thanks Eric. Before I go through the typical financial metrics I want to provide a little more context of financial details on the areas of fell short expectations that Eric just addressed. First is intact sales. So in light of a new strategic correction Eric referenced, we have reduced the size of our cold calling staff by 50% and restructured their comp plans. This resulted in a $4.3 million charge for severance and the write-down of remaining prepaid commissions on our balance sheet. We are also eliminating the future use of prepaid commissions which improve our ability to forecast this business going forward. The inside sales division will lose about $5 million this year, a disappointing operational miss for sure. However with our change in customer acquisition strategy combined with our third quarter cost reductions we’re confident this business will achieve breakeven or better results in 2014 and is positioned for long-term profitable growth.

Moving on to the Productions Graphics business we acquired in 2011 that Eric addressed during his remarks. With revenues historically weighted towards the second of the year our revised forecast for this business had a meaningful impact on our Q3 results and Q4 projections. While this business’s current full year revenue forecast of $35 million is flat compared to last, it’s down significantly from our original forecast. And in terms of EBITDA we are currently forecasting about a $5 million loss for this year versus original forecast of $4 million in profit. With the new leadership in place we’re committed to returning this business to profitability in ‘14 and by increasing revenue with new existing customers and exercising more diligent cost management.

As a result of this business’s performance we have released $44.5 million of contingent considerations related to this acquisition in Q3 after assessing a probability of the future earn out targets being achieved. We also assess the fair value of goodwill in the EMEA region and determine that $37.9 million of the $110 million of total EMEA goodwill is impaired. This non-cash charge was recorded in our Q3 results.

I want to emphasize this performance issue in Europe is isolated to the Productions Graphics business acquired in 2011 in fact the rest of our EMEA region is performing well with year-to-date revenues and EBITDA of approximately $65.4 million and $4.5 million respectively and 7% contribution margins.

And the other areas of business that impacted our results was the U.S. based permanent displays since we acquired in March of this year. Our full year forecast for this business is down $50 million and EBITDA is down about $5 million from our previous forecast is primarily due to a large client of frozen spending in preparation for an IPO that’s announced in late August. While this timing issue is unfortunate, we remain confident in our U.S. permanent display team and we are excited about our joint marketing potentials.

Now moving onto the typical financial metrics, we generated revenue were $232.6 million in the third quarter of 2013, an increase of 16% compared to the third quarter of 2012. Enhancing $11 million drop in revenue due to the previously announced from a portion of business from a significant customer, our organic growth for the quarter was 8% and our total same customer spending was down only 2% versus Q3 last year and improvement versus the 4% we saw in the first half of this year.

Now walking through the growth table in the press release you can see the growth in the third quarter was primarily totaled up to $20 million or 10% of organic enterprise account growth. Inside sales revenue of $4 million are flat to Q3 last year. In addition to our organic growth, we realized $28 million of incremental revenue growth from acquisitions and total revenue for the quarter was roughly $15 million below our internal expectations primarily due to the already discussed issues with productions traffic and then reduction in forecasted revenue in the U.S. base permanent displays since we acquired in March of this year.

For the nine month period ended September 30th, our revenue was up $58 million or 10% versus the prior year period with organic growth representing 7%. This growth was driven by $58 million of organic new enterprise growth plus $37 million of acquisitive growth. The growth was offset by $19 million of revenue decline from the previously announced loss of a portion of business from a significant customer and a 3% or $18 million same-customer spend drop.

Looking at our sales channel mix for the quarter; our enterprise channel accounted for 78% of revenue and middle market accounted for 22% compared to our 75%-25% mix in the third quarter of 2012. Gross profit for the quarter increased year-over-year by $6 million from $46.9 million to $53.1 million. Our gross margin of 22.8% represents a 70 basis points decrease in the third quarter versus Q3 last year due primarily to enterprise, middle market mix.

Turning to expenses; SG&A expense excluding contingent liability activity was $45.8 million or 19.7% of revenue in the third quarter versus $36.3 million or 18.1% of revenue in the year earlier period. The increase in SG&A market was primarily due to lower than expected revenue growth for the quarter. The increase in SG&A dollars is primarily due to $6 million related to 2013 acquisitions and $2 million to support our growth in Latin America and expand its existing clients into new European countries.

For the nine month period ended September 30th, SG&A excluding contingent liability activity was $131 million which represents 20.2% of revenue, which is up $24 million and 210 basis points for the same reasons just mentioned regarding the quarter SG&A. EBITDA adjusted to exclude stock-based compensation and restructuring charge contingent liability consideration and goodwill impairment was $8.5 million for the third quarter compared to $11.3 million in the year earlier period, due primarily to lower profitability from the European business acquired in 2011 and the spending reduction by large retail counting in the first quarter of 2013. Compared to our most recent internal forecast, Q3 EBITDA was primarily impacted by the performance of Productions Graphics and the revenue mixes of U.S. based permanent display business.

Now looking at our segments reporting in our SEC filing where we're now going to breakout performance of our Latin America business unit from our total international results. Earlier I mentioned on a year-to-date contribution margin in EMEA was 7% was Productions Graphics excluded, in Latin America our contribution margins is at 4% and growing and in the U.S. our contribution margins 9% absent the inside sales area. These margin figures demonstrate the health of the overall business and show our performance this year to be isolated to the two areas already discussed the Productions Graphics business and inside sales.

Non-GAAP diluted earnings per share for the quarter was $0.05 versus $0.10 in the year earlier period and approximately $0.05 of the non-GAAP diluted earnings per share under performance is attributable to the Productions Graphics business versus the same period in 2012. GAAP diluted earnings per share were $0.14 compared to $0.10 in the third quarter of ‘12. The GAAP EPS year-over-year results are primarily driven by a $0.87 impact from the contingent consideration liabilities offset by a $0.73 impact from the related goodwill impairment and a $0.05 impact from the Inside Sales restructuring.

Now moving on to liquidity and balance sheet, we had $1.6 million of adjusted operating cash flow in the third quarter is compared to $1.4 million in Q3 of last year. For the nine months ended, we have $11.8 million of adjusted operating cash flow versus $1.1 million cash outflow in the prior year period.

Our DSOs continue to improve in the third quarter since December 2012 total AR unbilled AR down 6% despite sales being up 12% and as evidenced that our time to invoice efforts are paying off, DSOs are down eight days this year. Despite this progress we still see meaningful opportunities to continue to improve our DSO performance.

At September 30, 2013 our net debt increased by $12 million from Q2 to $91.5 million driven primarily by $12 million of cash outflows for new acquisitions. Our debt-to-leverage ratio including pro forma impact of 2.3 times trailing 12 months adjusted EBITDA.

Looking at our guidance for 2013, we are reducing our revenue guidance range from $910 million to $940 million to $865 million to $880 million which represents 9% to 10% growth for the year. And we are lowering our GAAP diluted earnings per share guidance from a range of $0.45 to $0.50 to a range of $0.16 to $0.20. This revised guidance for Q4 contemplates the impact of the production graphics in our US (inaudible) already discussed as well as a slower ramping expected in Q4 of the larger new enterprise deals landed earlier in 2013.

So with that operator let’s open up the call for questions please.

Question-and-Answer Session

Operator

Sure. Thanks sir. (Operator Instructions) And it looks like our first question in queue will come from George Sutton with Craig Hallum. Please go ahead. Your line is now open. Hello Mr. Sutton your line is open please check your mute button.

George Sutton - Craig Hallum

I apologize. Relative to production graphics, Eric I wondered if you could just give us a sense of are we talking about customer losses, are we talking execution issues, are we talking about just the lack of new customers I know the expectation going back to when you acquired them were for a significant ramp and I’m just curious what specifically changed?

Eric Belcher

George it’s the element of all three of those issues that you mentioned, but the last one the absence of the new clients that we anticipated working together in partnership we will bring on board has driven and that’s the most significant impact on the delta between the original forecast and their performance today.

George Sutton - Craig Hallum

So bringing in a new person to run that business I’m just trying to understand the fixable nature of the problem?

Eric Belcher

Well, the individual that we removed wasn’t performing and we didn’t see that turning around. And so we have known the individual that we’ve brought in to return the business to profitability and growth. For some time she has been a client of ours and she is intimately familiar with our business. And we think a highly capable executive that will in turn deliver on the original promise of the infrastructure that productions graphics provide at InnerWorkings.

George Sutton - Craig Hallum

Got you. Okay. Joe, you mentioned right at the end a new enterprise, some of the larger new enterprise deals are ramping slower in the back half of the year than you expected. Could you just help us to understand what accounts for that?

Joe Busky

Yeah. George, we’ve had pretty good success in the last couple of years ramping these larger deals and we’ve landed some good type deals this year already larger deals [nonetheless]. And we are always trying to land more of these larger deals and ramp them faster. But this year there has been for various reasons there has been a delay in the expected revenue from those new deals that is going to impact our Q4 results. I will say though that that impact is the minority of the impact when you look at the other impact from the DB Studios acquisition, change in forecast and the production graphics change in forecast, but nonetheless there is an impact there.

George Sutton - Craig Hallum

Got you. And then lastly, I am wondering as you look at this new channel partner for your inside sales effort, can you talk about what you assume across to acquire and new customer would be relative to your prior model?

Eric Belcher

George, we are still working through the specifics of the plan and as you might imagine there will be quite a bit of fairly intensive testing and piloting that will go on before the solutions rolled out more broadly. So we are not in a position right now to talk about any specifics. Sufficed to say that the strategy is new, it’s sleek, it involves automation, it involves a real deep partnership with the new client of ours. And so the plan is early, but the plan is we believe is extremely exciting for both us and for them.

George Sutton - Craig Hallum

Got you. Okay. Thanks guys.

Eric Belcher

Thanks George.

Operator

Thank you, sir. Our next phone question will come from Nate Brochmann with William Blair. Please go ahead, your line is open.

Nate Brochmann - William Blair

Evening gentlemen.

Eric Belcher

Hi Nate.

Nate Brochmann - William Blair

I wanted to talk just kind of similar to George's question there a little bit, but in terms of the production graphics, I know that started to slip at a little bit in terms of expectations last year and we talked about just the seasonality and things in Europe getting a little bit soft. And I know that we are kind of missing expectations slightly earlier this year and I guess how it's kind of back-end loaded. But what happened all of a sudden to have like what seems like the wheels just kind of completely came off in terms of some slippage versus completely reformatting that business and taking all the big charges?

Eric Belcher

Hey Nate we believe this forecast. The business hit its forecast in 2012 as you mentioned even with the heavy back-end loaded nature of the revenue on profit stream. And as this year has progressed, we have been increasingly concerned that new clients were not arriving at the patent size and scale that we have originally expected. And the cost structure however continued to build under the former manager and in anticipation of the business which did not materialize. And so the result was we finally in the third quarter decided that that was it and terminated the individual and put in the new GM and now we're rebuilding the business.

Joe Busky

And Nate, this is Joe. In addition to visibility to land and ramp, the new clients will convert these existing clients into contractual open book transparent full scope enterprise clients which we've seen often with previous acquisitions. He actually started to lose clients and these were high margin transactional-based clients. But nonetheless there were clients that were lost that we expected to generate revenue and gross profit in the second half of the year.

Nate Brochmann - William Blair

He definitely left a few dollars on the table by now. And on the middle market effort and that certainly makes sense with the new channel partner, but you guys also kind of talked a little bit broader beyond that in terms of restructuring that group in terms of how they get away from maybe just a cold calling efforts in terms of again even beyond the channel partner making that business work. Can you talk a little bit about what you’re thinking there in terms of the new customer acquisition strategy in terms of just the approach? And again beyond just the channel partner how you look to make that more profitable in growing the future with that new strategy?

Eric Belcher

Sure. Well, the business has been resized and we now have a team of highly talented really the best of the best in terms of the sales talent that we have in the group we’re able to better support the group, the smaller group that remains in terms of production capabilities in terms of sales management and basically in every way possible. So through a combination of we've really got a great high-end team of performers together with better support together with more marketing efforts and internet regeneration and all sorts of different ways that we're helping that team refocus including a deep focus on specific verticals that are showing quite a bit of promise. We like the business as it stands right now on its own very much. We think it will only be enable that much more with this new development of our partner.

Nate Brochmann - William Blair

Okay. And then just final question I’ll turn it over. But on a positive note, I mean obviously the enterprise core business continues to the do well a little bit slippage in the same customer spend rate, but happy to see that trying to get a little bit incrementally better from the second quarter. Can you guys talk about the pipeline in terms of where that stands and kind of just the direction of that same customer spend in terms of even throughout the quarter whether that seemingly got a little bit better in terms of looking into the fourth quarter and even into next year?

Eric Belcher

Hey Nate on the same customer spend it did improve a little bit, as you know from these numbers. We like it to be better, but at the end of the day that statistic doesn’t really drive our business and the decision that we make regarding growing it. So the pipeline is solid. Would we like some of these discussions that we've been involved in for some time, the sales cycle as you know is very long, it’s deep, it’s consulted and it’s intense. Would we like some of them accelerate a bit? We would. But and move with their natural course and we’re not the name of trying to pull things forward going to do anything that doesn’t allow us to service them, as well as we've been servicing our clients since the origin of this business. And so it’s lumpy when you are out talking about the corporations about their sensitive brands and materials and who is going to manage them going forward, but we really like the pipeline. The fact that we've got now a global or legitimate complete comprehensive global offering is a huge point of differentiation and interest and we've got so many discussions going on right now which I’d be shock if a number of them didn’t materialize in the coming quarters.

Nate Brochmann - William Blair

Okay great. Thanks guys.

Eric Belcher

All right. Thanks Nate.

Operator

Thank you. Our next question will come from the line of Kevin Steinke with Barrington Research. Please go ahead, your line is open.

Kevin Steinke - Barrington Research

Good afternoon, gentlemen. With regards to the DB Studios customer and that revenue going away or being delayed, is that something that you think will eventually come back and how large was that customer relative to DB’s overall revenue stream?

Joe Busky

Kevin that customer was definitely one of their larger customers in their customer base. And it’s unfortunate for them and us that the timing of the freeze of this spent occurred. So this was a company that initiated an IPO process in August and their marketing team froze their spent on the permanent display rollout to all their locations. And so there was significant amount of revenue that we expected in Q3 and Q4 at high margin, fairly high gross margin to come through. And it got pulled at the last minute after we put out the last guidance on the second quarter earnings call.

We don’t know if that spend is going to come back for sure, we think that it will, but we can’t say that for sure. Obviously the team at DB is still in very active discussions with the marketing team at this client. And so we’ll keep working at it and hope that it comes back next year. We still have a lot of confidence in that team and are still very happy that we did that deal because there is a lot of collaboration going on between our existing client base and them and this was one of the reasons we did that deal on the first place that we knew there were opportunities, cross selling opportunities with our existing clients where we could bring that DB team in to sell their permanent display fixtures, their design and engineering and roll out they do so well.

And in fact the deal, the new Energizer deal that Eric mentioned at the beginning of the call, they are big part of that deal, big junk of that work is going to be permanent fixtures that they are coordinating for us solely. It’s still very good deal for us, just unfortunate that timing of their IPO, their customer client happened in the second half of this year.

Kevin Steinke - Barrington Research

Okay. And thanks for the color there. In terms of the enterprise client ramp being a little slower than you might have expected, would you say that’s fairly isolated or is that across number of clients?

Eric Belcher

Across the couple, we’ve had some large wins this year as Joe mentioned. We’ve also been talking about on this call wins that we might have anticipated occurred maybe few months earlier. And so it’s a couple of clients where the ramp is slow, a couple of clients that we thought we would have on boarded earlier in the year. We don’t think its representative of anything that’s endemic in our business or any cost for concern on our part, it is just timing.

Kevin Steinke - Barrington Research

Okay. Would any of those couple perhaps be related to some of your newer international operations or maybe there is less experience or is that am I reading too much into that?

Eric Belcher

You’re reading too much into it, that's not a play.

Kevin Steinke - Barrington Research

Okay. And just in terms of your overall enterprise growth expectations for 2013, aside from a little bit of a slower ramp, does the lower than expected PG revenues impact the goal that you had originally targeted for this year?

Joe Busky

Yeah. That's right Kevin. So we are at $58 million of new enterprise account growth through the first three quarters. And you’re factoring the guidance that we just updated for Q4. We’re going to be short of the $100 million plus of new enterprise growth pool that we put out at the end of the year. But it's driven by the two things that we just mentioned, it’s the production graphics business and that former owner’s ability to land and ramp new deals that we expected to land this year, as well as the slower ramp in the US a couple of those larger enterprise deals.

Kevin Steinke - Barrington Research

Okay. And then lastly are there any more contingent liabilities to be released related to PG or is that pretty much the end of it?

Joe Busky

There is some less, Kevin. I mean the earn-out for that deal runs through 2015. And so it's actually a very complex process and calculation that we do every quarter we're running [Monte Carlo] scenario on the probability of those earn-out targets being hit within that valuation firm. And based on that with the release those scenarios, the probabilities of those scenarios and the release that we just talked about, there is going to be about $8 million or $9 million of contingent liability remaining for that acquisition Productions Graphics acquisition in specific.

Kevin Steinke - Barrington Research

Okay. And if I’m going to sneak in more Eric you referenced in your opening comments perhaps rolling out more of a technology licensing model for enterprise clients I believe. Could you just talk a little bit more about that and how that might work and how far along in the development stages you are with that?

Eric Belcher

You are right. I think we're about 9 to 12 months away from rolling out VALO internally around the globe. Elements of it are already in place. Elements of it are already customer facing being utilized by our clients to make purchases every day. The development is really coming along nicely. As you know we have a substantial investment in this new technology platform and we believe that there is a market for a software solution distinct from our traditional enterprise BPO model, outsourcing the non-core function as elegant is that and compelling is that concept can be, it’s not for everybody, it’s not draining the culture of every major organization and there is a demand for a global system that allows for a collaboration and global reporting and all of the different tools that are being developed by our team right now.

And of course the platform is first and foremost for our procurement team to utilize and delivering the value that we deliver for our clients every day, but as an extension of the development of this tool, we do expect that we will roll it out as a product into itself.

Kevin Steinke - Barrington Research

All right. Thanks for taking my questions guys.

Operator

It looks like our next question will come from the line of Matthew Kempler with Sidoti & Company. Please go ahead sir, your line is now open.

Matthew Kempler - Sidoti & Company

Just wanted to come back to Production Graphics and what makes us confident that the issues we’re seeing there, isn’t specific to that company or the management team and may be -- might be an issue more of InnerWorkings’ positioning in Europe within a competition over there in general?

Eric Belcher

The rest of our business is doing extremely well in Europe. We organically grew 10% in the quarter and the pipeline is solid. We've made some other acquisitions in Europe in the year. All of them have exceeded forecast. We've got a great management team in place. It’s just obvious in terms of looking at the date and the results and the performance that we have a situation. It’s been isolated to really one business. And I should mention that within that business, we've got some outstanding talent and some great long-term clients that we expect to grow. The management of the business though was not up to the standards that were used to and so that change, we actually believe will go a long way.

Matthew Kempler - Sidoti & Company

Okay. And then going back to the inside sales force, you reached the determination that their model for scaling the business and acquiring customers through telesales wasn’t effective. But how did it change to that level in 2013 versus 2012 where it seemed like we were getting scale and were effectively acquiring customers?

Eric Belcher

We have been effectively acquiring customers from the get-go with this business. We piloted it and then we scaled it. And at the end of the day and looking at our cost to acquire client versus the profitability that we are able to generate off of these smaller spend on a per client basis, we just haven’t been able to universally make the program work. Now that said of the remaining team that lead team that we now have in that group, a number of them are profitably acquiring clients and a number of them we believe have the potential to do so.

So we just haven’t been able to figure out on the scale that we had originally designed, I think we are up to over 200 sales reps in a very short period of time, but with this smaller sleek team, some of the new focus and the way we’ve been supporting them in a way that we had been able to support the broader team, we believe we’ve got the solution now figured out. So we scale perhaps too fast, too hard, too heavy and now we’ve ingested those learnings. We scaled back and we have a business that we expect on a quarterly basis to at worse now breakeven and in the future of course generate profit and that’s without any potential synergy that might come down the road with this new channel partner we’ve been discussing.

Matthew Kempler - Sidoti & Company

Okay. And I know you are not ready to discuss the particulars of this new channel partner, but could you just give us a sense of the basic mechanics of how this relationship is supposed to work?

Eric Belcher

We are under a very strict confidentiality agreement with this new partner that we want to make sure we do everything possible to do it here to. So if you don’t mind I’d like to answer every single question that comes across the line, but on that one I think we just need to respect client confidentiality there.

Matthew Kempler - Sidoti & Company

Understood. Okay, thank you.

Operator

Our final question comes from the line of Randy Hugen - Feltl and Company. Please go ahead. Your line is open.

Randy Hugen - Feltl and Company

Thanks. Looking at your earnings per share guidance for the remainder of the year, it looks like next quarter you are anticipating a loss of $0.06 to $0.10. Just wondering if there is any restructuring or anything if that is incorporated into that estimate?

Joe Busky

It’s actually the math should work out to the loss, the range will be loss of $0.03 to one penny. And there is no other planned restructuring in there. That resulting EPS is due to the issues we had already talk through with Productions Graphics and the drop in the DB Studios forecast as well as the slightly slower ramp with some of the enterprise deals.

Eric Belcher

And Randy, we are as frustrated as our shareholders are in our inability here to forecast the business well. So, for instance things like the possibility of the return spend of the client that Joe was talking to that temporarily put on hold their marketing budget due to their plans to go public. We are not factoring that type of turnaround into the forecast. And so that’s what we’ve decided would be most prudent to put out.

Randy Hugen - Feltl and Company

Alright. So then we’ll still be expecting SG&A in terms of total dollars kind of ramp in the next quarter as it seems when we have, even though revenue isn’t going to correspond that?

Eric Belcher

Yes, some element of that, that’s correct.

Randy Hugen - Feltl and Company

And then as you try to look out into next year, obviously margins this year have been somewhat disappointing, you know what is going to hold you back next year towards margins at similar levels or are you going to be able to move towards margins like 2012 levels or what's your ramp anticipated now?

Eric Belcher

We of course expect to move north from the disappointing margins of 2013 and 2014. We expect to do over $1 billion of revenue next year, with margins improving and not just because of the obvious, which is simply correcting for through the restructuring, the loss that we incurred and inside sales, which is about $5 million in 2013 and correcting for the loss we expect to incur for 2013 for our Productions Graphics business, so about the same amount, I mean right there, that huge margin list. We also believe that growth I just mentioned will provide operating leverage and that our corresponding margins of course will improve.

We haven't provided a forecast yet on the specific margin range that we expect for 2014, but that's how we are viewing the business and we're also going to make sure that despite a couple of these operational misfires that we have had, we don't lose sight of the big picture and that we don't cut into the bone and that we remain focused on executing on our larger and more ambitious plan.

Randy Hugen - Feltl and Company

And then in terms of adding a very large multinational client, you feel like you are making progress there, you feel like your quarter closer now or is it just, still too difficult to predict when that might happen?

Eric Belcher

We're at quarter closer ended, too difficult to predict when it might happen, it's both. I mean that those discussions are going on and they are exciting and when we are looking forward to talking about that more at some point in the future.

Randy Hugen - Feltl and Company

Thanks a lot.

Operator

Thank you, sir. And with that, that does conclude our time for questions. I'd like to turn the program back over to Mr. Eric Belcher for any additional or closing remarks.

Eric Belcher

Thank you. Look we've had a couple of operational issues this year and we take full responsibility for not only their occurrence but also in rectifying the situation as soon as possible. And I would just say that these issues shouldn’t mask the success that we're having in continuing to roll out our solution to many of the world’s most famous and best managed companies. We're very proud of our track record on a reputation of the business that we're continuing to build. So we thank you for joining our call and hope everybody has a nice evening. Thanks.

Operator

Thank you gentlemen and thank you ladies and gentlemen. Again, this does conclude today’s call. Thank you for your participation and have a wonderful day. Attendees, you may now all log-off at this time.

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