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VA Software Corporation (LNUX)

F1Q07 Earnings Call

November 28, 2006 5:00 pm ET

Executives

Patricia Morris - Chief Financial Officer, Senior Vice President

Ali Jenab - President, Chief Executive Officer, Director

Analysts

Douglas Whitman - Whitman Capital

Stewart Barry - ThinkEquity Partners

Joe Maxa - Dougherty & Company

Richard Boucher - Thomas Weisel Partners

Denny Fish - JMP Securities

Jon Hickman - MDB Capital Group

James Gilman - Cross Research

Presentation

Operator

Greetings, ladies and gentlemen, and welcome to the VA Software first quarter 2007 financial results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Patricia Morris, Chief Financial Officer of VA Software. Thank you, Ms. Morris. You may begin.

Patricia Morris

Good afternoon, and welcome to VA Software’s conference call, reviewing our first quarter fiscal year 2007 financial results. Let me remind you that this discussion will include forward-looking statements which will be made pursuant to the Safe Harbor provisions of Section 21(NYSE:E) of the Securities Exchange Act of 1934. Investors are cautioned that statements made during this call that are not strictly historical in nature constitute forward-looking statements, which involve risk and uncertainties, such as statements regarding current or future financial performance, management’s plans and objectives for future operations, product plans and performance, management’s assessment of market factors, market acceptance of the SourceForge product, expected contribution to revenue of various products and services offered by VA, and statements regarding the strategy and plans of VA and companies with which it collaborates.

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

In addition to reporting financial results in accordance with generally accepted accounting principles, or GAAP, VA reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results, which can be found in VA’s earnings press release announcing VA’s financial results issued after the stock market closed today and posted on the company’s website.

A replay of this conference call will be available on our website later today. The replay will also be available by telephone toll-free, 877-660-6853, or 201-612-7415. Access requires account 286, ID number 220053.

Now, I will turn the call over to our President and CEO, Ali Jenab.

Ali Jenab

Thanks, Patty. Good afternoon, and thank you for joining us today. I am going to make a few opening remarks, and then turn this back to Patty, our CFO, to review the financial results. We will then open the call to questions.

I am pleased with our first quarter fiscal year 2007 financial results. First quarter revenue grew 36% year over year in what has historically been a challenging quarter for us. The revenue growth includes a 43% increase in media revenue compared to last year’s first quarter, a 50% year-over-year increase in software revenue, and a 24% year-over-year increase in e-commerce revenue.

The pro forma earnings per share for the first fiscal quarter of 2007, which excludes the costs associated with the expensing of stock options, was break-even compared to last year’s first quarter pro forma loss of $0.02 a share.

We completed the quarter with $52.8 million in cash and investments.

The first quarter was full of accomplishments. Our network of websites served 32 million unique visitors during October of 2006, up from 22 million unique visitors in October of 2005.

Our SourceForge.net website, the world’s largest collaborative development site and repository of open-source projects, served a record number of downloads during the first quarter, averaging 66 million downloads per month during the quarter, a 53% increase compared to prior year periods.

Our Slashdot technology news site launched a beta version of a feature that we call The Firehose.

We entered a strategic relationship with Oliver Smith and Partners Limited in England to sell our OSTG European ad inventory.

We added 23 new advertisers on the media side.

We had sold our SourceForge Enterprise Edition software solution to 178 customers, adding 14 new customers during the quarter, including our first six-figure European transaction through our partner, ASERVO.

Since the launch of our SourceForge EE download program in June of 2006, we closed 11 new license deals. To date, users have downloaded more than 30,000 copies of the SourceForge Enterprise Edition free download.

We continue to view this activity as an incredible pipeline of potential leads and expansion opportunities for the SourceForge EE business since the introduction of this offering in June of 2006.

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

SourceForge.net continues to grow. With over 1.4 million registered users and over 135,000 projects, SourceForge.net continues to serve a tremendous amount of projects and download activity. In addition to a 53% year-over-year increase in the number of downloads, we added 7,650 SourceForge.net projects during the first fiscal quarter.

We continue to enhance our sites, including the launch of the beta version of the feature on our Slashdot website, which currently allows subscribers a view into the Slashdot story submissions bin that previously was only viewable by the Slashdot editors.

The Firehose will allow all Slashdot community members to vote on stories in the submissions queue, and provide them with the ability to choose their own custom view of Slashdot.

We have a new partner in Europe, Oliver Smith and Partners Limited, representing our pan-European ad inventory. Oliver Smith and Partners is the leading online sales representation firm in England, selling ad inventory in Europe for media companies and websites like tice.de, one of the largest IT publishers in Germany, CIO Insight, PC Magazine, E-Week, and Le Figaro, the largest daily publication in France.

We added 23 new advertisers during the quarter, including Adaptive Planning, Mozilla.org, Blu-Ray, TiVo, NEC, UBS, Zen, Salesforce.com, TechX, and MX Logic.

According to Nielsen’s NetRatings fall 2006 report, OSTG maintains the number one rank against competitors in key technology categories. These are the categories that we rank number one in:

  • Visitors who look for technology news online;
  • Visitors who go online everyday;
  • Visitors who download software online;
  • Visitors who seek or post product reviews online;
  • Visitors who read daily RSS feeds;
  • Visitors who purchase network equipment and multimedia software;
  • Visitors who have purchased computer hardware and software online in the last six months; and
  • Visitors who have purchased game consoles, MP3 players, or PDAs online within the last 12 months.

Our visitors are attractive to advertisers. According to the annual demographic study done by Wilson Research Group in 2006:

  • 51% of our audience are IT professionals, including IT managers and IT staff;
  • 28% are corporate developers;
  • 11% are C-level executives; and
  • 10% are line-of-business professionals.

All of this momentum is being fueled by the continuous growth and importance of the open-source market, both in the U.S. and globally. Companies like Microsoft, Oracle, SUN, and IBM have recently come forward to express their business initiatives around the open-source market.

For example, during the first quarter of fiscal 2007, Oracle utilized the SourceForge.net site exclusively to support Larry Ellison’s announcement of Oracle providing full enterprise support of Linux.

We are excited about the growth opportunities for the OSTG media business in the next three quarters of our fiscal year.

Turning to our software business, during the first quarter, we continued to grow the installed base for SourceForge Enterprise Edition, adding 14 new customers, including EQ Bank, NuTech Solutions, Indus, Progressive Gaming, Persistent Systems, and Siemens through our international partner, ASERVO.

We have sold our solution to 178 customers since we have been marketing the product. In addition, we continue to sell more to our existing accounts, as the viral nature of our product moves through organizations. Some of the accounts that purchased more licenses or services during the first quarter include CapGemini, Lawrence Livermore National Laboratories, Lockheed Martin Corporation, Pfizer, and U.S. Air Force.

Since the launch of our free download program, we have served more than 30,000 downloads, continuing to demonstrate the power of our enterprise solution and the efficiency of SourceForge.net in delivering SFEE downloads to qualified buyers. From these downloads of our free version, we have received more than 3,300 qualified leads.

We have also signed on 11 new SourceForge Enterprise Edition customers to date who purchased additional seats beyond the 15 users permitted by the free download version.

We entered into a relationship with The FUTURE GROUP based in the Netherlands to be an authorized reseller of SourceForge Enterprise Edition.

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

Patricia Morris

Thanks, Ali. In line with the guidance we provided on the last conference call, our earnings per share on a pro forma basis was break-even. Our loss from continuing operations on a GAAP basis for the quarter was $0.01 per share compared to $0.02 loss per share for the first quarter of last year.

First quarter revenue for the company as a whole increased 36% to $10.3 million, from $7.8 million in the first quarter of last year, again in line with the guidance provided on the last conference call.

Advertising revenue grew by 43% to $3.7 million, from $2.6 million for the first quarter of last year, due primarily to increased buys by our advertisers, based on their continued building awareness of the demographic value of our audience, and in part to the online media sales organization being fully staffed.

Our average CPM during the quarter was $15.29, primarily due to the mix of ad pipe sold during the quarter.

Our sell-through rate was 9%, due to our total inventory growth from 1 billion impressions in the prior year’s first quarter to 1.5 billion impressions in the current quarter. In addition, we are seeing the trend of more advertisers requesting performance-based programs like costs-per-downloads and costs-per-click. We are finding efficient ways to serve these campaigns and maximize revenue.

Software revenue increased to $2.1 million for the first quarter, from $1.4 million for the first quarter of last year.

E-commerce revenue, generated by ThinkGeek, grew 24% to $4.5 million for the first quarter, from $3.6 million for the same period last year.

Gross margin from continuing operations for the first quarter of fiscal 2007 was 51%, compared to 48% in the same period last year. The improvement compared to last year was the result of improving margins in our media and software businesses.

Excluding stock-based compensation expenses, operating expense for the first quarter increased 12% compared to the first quarter of last year, primarily as a result of investment in sales and marketing associated with growth in the media and software businesses.

The GAAP first quarter net loss from continuing operations was $336,000, or $0.01 loss per share, compared to last year’s first quarter loss from continuing operations of $1.5 million, or $0.02 loss per share.

Turning to the balance sheet, we finished the quarter with a cash and investments balance of $52.8 million.

For our second fiscal quarter of 2007, we expect revenue to be between $17.5 million and $19.5 million, and our second quarter FY07 pro forma earnings per share to be in the range of $0.02 to $0.04 profit, excluding the costs associated with options expensed under FAS-123R. Ali.

Ali Jenab

Thanks, Patty. Before we open this to questions, I would like to make a few closing comments. We had a good first quarter and we feel that the momentum continues to grow. We are committed to continued optimization of the media business, and are focusing second quarter efforts on improving the performance of the advertising experience.

We are deep into development of the SourceForge.net marketplace.

We are conducting further expansion of our international partners strategy.

We are excited to go into our strongest quarter for the ThinkGeek business.

SFEE will continue to drive downloads of the free version to help expand our installed base. Our agile development lifecycle will continue to see improvements for our SFEE customers and our company moving forward.

Operator, we will now take questions.

Question-and-Answer Session

Operator

(Operator Instructions)

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

Douglas Whitman - Whitman Capital

Thank you. One question would just be going back on the e-commerce side of it, for ThinkGeek. Is there one particular product that was driving it? I know the helicopter has been hot, but is it a wide range of products that is driving the strong performance?

Ali Jenab

Yes, it has been, first of all, it has not been a single product. It has been across the board. We always see a really nice trend toward the holiday season of that business picking up steam, and basically in October, the trend was pretty strong and continues to be strong in November. It is not just by a single product. It is across the board on all the products that we have.

Douglas Whitman - Whitman Capital

Okay, and could you give us an idea, Patty, a little bit of last quarter and then maybe what it might be this quarter -- you are developing a new business to go after the opportunity to help provide the services, the guy you brought in from e-Bay, roughly the development of that business, what is it costing you, roughly, a quarter and going forward?

Patricia Morris

Well, Doug, we previously outlined in our call that we expect the marketplace in total to cost probably close to the $2 million range, $1 million to $2 million is what we have expressed on previous calls for the year. We are continuing to trend in line with those estimates, so from a cost perspective, I think that answers the question.

In terms of the development side, we are moving along. We have actually started the development of the product itself, and it is in line with our plan and our expectations.

Douglas Whitman - Whitman Capital

Then, turning to the media side, obviously the opportunity is fantastic, the 50% year-over-year growth. Could you talk a little about, do you have figures on time spent, stickiness, on the average time spent for the visitors? Is that something you are able to have a feeling? Also, obviously, you are feeling good about the outlook for media advertising, I would assume in your numbers, but if you could give us a little more clarification?

Ali Jenab

Yes, Doug, on time spent, we have some data but probably not enough solid data for me to share with you at this point, because we want to be able to trend it. Once you say a number, you have to keep saying it to move it forward, so we are looking at that time spent piece. We are getting more comfortable. As you know, we just released our new downloads for the quarter, how many downloads we got and also the new metrics as far as the unique visitors on the site.

Overall, on where --

Douglas Whitman - Whitman Capital

I would take from that release we are going in the right direction, without knowing exactly what the number is.

Ali Jenab

The number was, I read it, that we went to 32 million uniques in the month of October for the total network, a year ago in October it was 22 million.

Douglas Whitman - Whitman Capital

Right, but the average time sounds like it is going up as well.

Ali Jenab

Yes, it is but there is not enough solid data for me to be able to tell you that at this point. It would be irresponsible to talk about it right now without having more data on there and more historical trend to be able to say what it is, but we are seeing some positive usage on the site.

Your last piece was on how we feel about the media revenue moving forward. Naturally, we have always said we feel very optimistic, and the ad inventory again grew by 50% year over year. The ad, basically the impression served on the site. We went from 1 billion last year to 1.5 billion this year, but the key to us is, as I had mentioned earlier, to position ourselves for fiscal year ’07. We worked on it to some large account and I am hopeful that we can get our fair share going into fiscal year ’07, which we hopefully will see some of that in the January timeframe, but again, we are seeing some positive trends there, but until you actually have been in this business long enough, until you actually get to ordering the check, yeah, it is not done.

Douglas Whitman - Whitman Capital

Thank you.

Operator

Our next question comes from the line of Stewart Barry with ThinkEquity Partners. Please proceed with your question.

Stewart Barry - ThinkEquity Partners

Good afternoon. Just a few questions. Ali, could you talk about how successful, or to what degree you have been successful in involving campaign-oriented ad spend to longer-term media buys? I know right now it is an important time as you try to lock in calendar year ’07 media spend, your advertisers’ media budgets, and just wondering whether or not you have made some progress on that end.

Ali Jenab

As far as progress, I think earlier in the year, during the third quarter of last year, we had pretty good success as far as getting some long-term contracts done, and we continue to have I would say medium-term contracts, but at this point, last quarter we really did not benefit from a long-term trend that helped us, so very much going out there and winning every deal for the quarter that we saw last quarter.

As I mentioned to Doug, we positioned ourselves and we are getting some positive feedback from large accounts at the high level that they really like our network. We are working with them to tweak this thing to what they exactly need for the year to be able to get the larger spend out of it.

So early indications are positive, but until we get those deals closed and done and running through my revenue line, it is not done, but we feel pretty optimistic that we should be able to start trending in 2007 in the right direction.

Stewart Barry - ThinkEquity Partners

Given that your sell-through rate was 10% last quarter, 9% this quarter, on your premium inventory, there seems to be more of an immediate opportunity, perhaps, in better monetizing your remnant inventory. I was wondering if you could talk to your efforts in signing up additional ad networks.

Ali Jenab

Rich has been focused on that, as of about a month, month-and-a-half ago. He has been really looking at it. I have nothing to announce at this point, but we have talked about that in the past, but we are looking at it. Because initially, we went full board, we are going to go direct sell, and that is the best way to grow revenues, but clearly right now, as our inventory is growing the way it is, optimization through ad networks is becoming a priority and we are looking at that, but nothing for me to announce at this point.

Stewart Barry - ThinkEquity Partners

On the CPM pricing on the premium inventory, that is down from $20 last quarter, and you have spoken about a $20 to $30 target range. How should we think about that? Obviously you have a lot of unsold inventory. Maybe it is better just to lower the price to $10 and sell double or triple the amount of inventory.

Ali Jenab

Let me tell you. It was not intentional that we lowered the price to try to get the inventory sold. If we would have done that, hopefully we would have done more than 9%. It just happened to be the mix of the inventory that we ran. We did not have enough larger, more higher-paid campaigns running earlier during the quarter. So in the month of August and September, we did not have really higher-paying premium ads running. Because of the mix for the quarter, it ended up being $15.26.

Naturally, we are going to be focused on trying to get more of those premium ads sold so we can get it back online to the $20 to $30 range that we have always focused on. It is just how the advertising campaigns fell for the quarter.

Stewart Barry - ThinkEquity Partners

Finally, the media cost of revenue jumped it looks like 500 basis points from last quarter. Could you comment on that?

Patricia Morris

Within the media, we have a couple of things on a GAAP basis that is also including FAS-123R, and it is also related to the cost of the serving of the ads on the double-click side.

Stewart Barry - ThinkEquity Partners

Okay, and that just came up from the prior quarter?

Patricia Morris

Yes.

Stewart Barry - ThinkEquity Partners

Okay, great, thanks a lot.

Operator

Our next question comes from the line of Joe Maxa with Dougherty and Company. Please proceed with your question.

Joe Maxa - Dougherty & Company

Thank you. I also just wanted to talk a little bit about the guidance, your guidance, the $2 million range. Is that primarily set on whether you close seven-figure deals in software? I also just want to get a sense what your thoughts are on the various revenue line expectations for your different segments.

Ali Jenab

We do not give guidelines guidance. It is tough enough giving one number guidance than trying to do each line of business because there are so many moving parts within each line of business.

The reason the guidance is wide is actually our revenue is growing quite a bit, and as it grows, and also the e-commerce revenue is quite fluctuating through the Christmas holidays, so we do not know where that range ends. It is a mixture of all combination that we feel like we are, we wanted to target the middle of the range, which is about $18.5 million, and it was prudent to widen the range because last time, we would only give one number and say we were going to exceed it. It is better to give a range to say this is what we are shooting for.

I am not prepared to give any breakdown on the three different lines.

Joe Maxa - Dougherty & Company

So to hit the high-end of the range, do you have to have a big seven-figure software deal hit or just more out-performance on the ThinkGeek side than you are expecting?

Ali Jenab

There are multiple ways to get to the high-end of the range. Do fantastic on the media side. You could do fantastic on ThinkGeek. You could do fantastic without a seven-figure transaction on the software side of the house. You know, it is a range we feel like looking at our pipeline of all three businesses. We have really done a detailed analysis of what the different pieces could come in and add up, and we felt like that is a good range to include.

Naturally, the EPS range of $0.02 to $0.04 would depend on how well the software and the media business do to range the $0.02 to $0.04.

Joe Maxa - Dougherty & Company

Okay, so are you looking that your margins, you expect to tick up in your gross margin on your media side in the quarter?

Ali Jenab

If the revenue grows, it will expand, correct.

Joe Maxa - Dougherty & Company

Right.

Ali Jenab

But remember, this quarter ThinkGeek is a strong contributor, so because their gross margin is lower, the average blended gross margin for the quarter will be lower than what we have seen this quarter but again, historically compared to last year, the second quarter should be improved.

Joe Maxa - Dougherty & Company

Thank you.

Operator

Our next question comes from the line of Richard Boucher with Thomas Weisel. Please proceed with your question.

Richard Boucher - Thomas Weisel Partners

On the e-commerce side, what was the average transaction size and number of transactions that happened during the quarter?

Patricia Morris

On the e-commerce side, our average transaction size is around $65 for the quarter. Our volume of orders year over year increased 26% to about -- I think the number is 56,000 orders for the quarter.

Richard Boucher - Thomas Weisel Partners

Okay, and again, on the SourceForge side, what was the average contract size?

Ali Jenab

The average contract size for the quarter was $65,000. One key thing we saw during the quarter is the number of new accounts that we added because of the free download. As I mentioned, to date we have added 11. We added two last quarter. We added nine customers that did a free download that came back and bought additional seats from us, so that piece of it is very positive for us because we feel like we are really expanding our base by this free download program and we have 30,000 of it out there, so we are hoping that as those accounts use that software more and more, we should be able to get leverage off of that.

Patricia Morris

Richard, I just wanted to clarify something I provided earlier. The average number of orders shipped for this past quarter was 69,000.

Richard Boucher - Thomas Weisel Partners

On the ThinkGeek side?

Patricia Morris

On the ThinkGeek side, which is a 26% increase over prior year’s first quarter.

Richard Boucher - Thomas Weisel Partners

Okay, just a note here. The average contract value for the software side of the business has gone down on a quarter-on-quarter basis to 65. I believe in the previous quarter it was $147,000.

Ali Jenab

Yes, that number fluctuates based on the size of the deals that we do, so we did a lot of smaller deals this past quarter, and a lot of the new accounts that we add are smaller transactions. Last quarter, we did 15 six-figure transactions bookings. This past quarter, we did six, so it is all a factor of what size deal and what kind of deals we did during the quarter.

Richard Boucher - Thomas Weisel Partners

On the headcount side, what was the headcount at the end of this quarter?

Patricia Morris

Our headcount is 127 as of the end of our first quarter.

Richard Boucher - Thomas Weisel Partners

I believe at the end of FY06, it was 121.

Patricia Morris

That is correct.

Richard Boucher - Thomas Weisel Partners

Where have you seen increases in the headcount?

Patricia Morris

Primarily in the sales side of the business.

Ali Jenab

And in the marketplace.

Patricia Morris

And in the marketplace.

Richard Boucher - Thomas Weisel Partners

That is basically sales and marketing, most of them happened there?

Ali Jenab

And then the marketplace, building the marketplace on top of SourceForge.

Richard Boucher - Thomas Weisel Partners

Okay. That will be classified under R&D, right?

Patricia Morris

I’m sorry, could you repeat that?

Richard Boucher - Thomas Weisel Partners

That headcount will be classified under R&D?

Patricia Morris

For marketplace, yes.

Richard Boucher - Thomas Weisel Partners

Okay. Thank you very much.

Operator

Our next question comes from the line of Denny Fish - JMP Securities.

Denny Fish - JMP Securities

Thank you, just a couple of quick questions. The first one you talked about that you've had discussions with Sun, Oracle, Microsoft, IBM about business initiatives. I am just curious to hear a little bit more about that. Are these the types of initiatives that could lead to campaign at the scale that AMD or IBM may currently be doing?

Ali Jenab

Hi, Denny. First of all, I said that companies like Microsoft, Oracle, Sun, and IBM have recently come forward to express their business initiatives around the open source marketplace. So it was more of a generic market discussion. I didn't specifically call out that we were talking with them. We do happen to talk to all four of them regarding initiatives to do stuff on the site. Those are some of the players that we're talking to, to try to basically bring the value of our audience, especially now that they're focusing in this space, to get more of their ad dollars for fiscal year '07.

Denny Fish - JMP Securities

Thank you. The follow-on is you added 23 new advertisers; is that correct?

Ali Jenab

Correct.

Denny Fish - JMP Securities

Media business is sequentially down. Can you point to specifically what led to the sequential decline in the media business from Q4 to Q1?

Ali Jenab

There was not one thing, just every quarter you have to go win the business. It's not like you start the quarter by having the business and you lose it, you're just trying to win the business all over again every quarter. Based on the activity that we had and the level of business we're able to win during the quarter, it came out to be $3.7 million for the quarter. It wasn't a single contributor to it.

Denny Fish - JMP Securities

Is it a reasonable expectation that the media business will be sequentially up next quarter?

Ali Jenab

Again, we're not guiding by each line, but, I would focus on year-over-year growth that we should, I would say on an annual basis we should grow between 30% to 50% on a media line of business. Sometimes we exceed that number and we hope that we can be at the higher end of that spectrum.

Denny Fish - JMP Securities

Lastly on your international partnership that you signed, did you get any contribution from that deal during the quarter? If not, when would you expect contribution from that?

Ali Jenab

To answer your question, nothing material last quarter because we signed the contract, I can’t remember -- was it October? We had a couple of small transactions during October before that transaction. But we're beginning to see some activity this quarter from it. That's Oliver Smith that you're talking about on the media side, correct?

Denny Fish - JMP Securities

Yes. Great. Thank you.

Operator

Our next question comes from the Jon Hickman - MDB Capital Group.

Jon Hickman - MDB Capital Group

Hi, can you tell us what your inventory level was last quarter in July?

Ali Jenab

For the July quarter, $1.2 billion.

Jon Hickman - MDB Capital Group

$1.2 billion and now it's $1.5 billion. In the past you talked about being able to launch, at least preliminarily, the marketplace product by the end of this calendar year. Can you discuss if you're still on track to do that?

Ali Jenab

We're probably going to be doing the beta site early next year. Mike has come in and done a fantastic job to review all the dependencies to build the site properly. As we've always guided, there's no revenue expectation for fiscal year 2007. We want to launch this thing correctly right off the chute. So I would say right now the beginning of next year is where a beta, again, it's going to be a very prelim version of it and we've got to tweak it for the first six months of 2007 to get it to the right level. We would expect in fiscal year 2008, which starts on August 1, for it to contribute to us financially.

Jon Hickman - MDB Capital Group

That's it for me, thanks.

Ali Jenab

Thanks.

Operator

Our next question comes from the line of James Gilman with Cross Research. Please proceed with your question.

James Gilman - Cross Research

Thank you. Good afternoon, Ali and Patty. In reference to the software deal breakouts, the number of deals greater than $100,000 greater than $1 million. Did you disclose that? If not, could you do that please?

Ali Jenab

Yes, six and zero. So six deals greater than $100,000, zero greater than $1 million.

James Gilman - Cross Research

On the balance sheet, the inventory is the highest it has been over the last few years. Even with the seasonality included, is that due to your anticipation for the coming quarter with ThinkGeek?

Ali Jenab

Yes.

James Gilman - Cross Research

In reference to the advertising you had mentioned Oracle and Microsoft. Has Oracle come to you in reference to advertising its unbreakable Linux? Have they discussed that with you?

Ali Jenab

Microsoft has an unbreakable Linux campaign, I believe Oracle does too, but they exclusively ran the announcement at the end of October on SourceForge.net. We were the exclusive channel for that.

James Gilman - Cross Research

And in reference to Microsoft, are they looking to promote their agreement with Novell? More specifically, the coupons? Are you familiar with that?

Ali Jenab

Yes, I'm very familiar with it. Naturally we're in discussions both with Novell and Microsoft to see what kind of campaigns they want to run over the next few years moving forward with them, but nothing specific right now to announce.

James Gilman - Cross Research

Going to the online media, Patty, you had mentioned earlier about performance-based advertising. If I heard you correctly, is that something new or is this something that's expanded with what you're doing?

Patricia Morris

Well, I think it's something that we've always talked about. It's an expansion of the ad programs that we run based on the needs of our clients. We are starting to see more people ask, it's very similar to the download type of program we offered a couple quarters ago. So we're going to continue to see expansion of those types of programs on a go-forward basis.

James Gilman - Cross Research

Is this something that the advertisers came to you with or is it something that you went to them with?

Patricia Morris

Well, we collaborate with our clients both them coming to us asking questions and providing ideas and opportunities for them based on how we view our users looking at the ads. So it's really a combination of those two things.

James Gilman - Cross Research

That does it for me. Thank you.

Operator

We'd like to apologize, we are running out of time for questions. Management, do you have any closing remarks?

Ali Jenab

No, we don't, if there's not any further questions, we thank you for your participation and we look forward to talking to you next quarter.

Operator

Ladies and gentlemen, this does conclude today's teleconference.

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