SourceForge F3Q07 (Qtr End 4/30/07) Earnings Call Transcript

May.24.07 | About: SourceForge, Inc. (LNUX)
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SourceForge, Inc. (LNUX)

F3Q07 Earnings Call

May 24, 2007 5:00 pm ET

Executives:

Patty Menchaca - IR

Ali Jenab - President and CEO

Patty Morris - SVP and CFO

Analysts:

Stewart Barry - ThinkEquity Partners

Imran Khan- JPMorgan Chase

Joe Maxa – Dougherty

Doug Whitman – Whitman Capital

James Gillman - Cross Research/Soleil Securities

(Name Inaudible) - Thomas Weisel Partners

Denny Fish - JMP Securities

Presentation

Operator

Welcome to the VA Software third quarter 2007 financial results conference call. At this time all participants are in listen only mode. A brief question and answer session follows the formal presentation. If anyone should require operator’s assistance during this conference, please press Star Zero on your telephone keypad. As a reminder, this call is being recorded.

It is now my pleasure to introduce your host, Miss Patty Menchaca.

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Patty Menchaca

Good afternoon and welcome to SourceForge’s conference call reviewing our third 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 risks and uncertainties such as statements regarding current or future financial performance, management’s plans and objectives for future operations, product plans and performance, management’s assessment of market factors, expected contribution to revenue of various products and services offered by SourceForge, and statements regarding the strategy and plans of SourceForge and companies with which it collaborates.

Factors that could cause actual results to differ from our forward-looking statements are specified in SourceForge’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 SourceForge’s annual report on Form 10-K for fiscal year 2006 which ended July 31st 2006, and its quarterly report on Form 10-Q for the second quarter of its fiscal year 2007 which ended January 31st, 2007. These documents are available at the company's website, SourceForge.com, and at the SEC website, www.sec.gov.

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP, SourceForge reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results and the accompanying statements regarding use of non-GAAP financial information which can be found in SourceForge's earnings press release announcing SourceForge's financial results issued after the stock markets closed today and posted on the Company's website.

A replay of this conference call will be made available on our website later today. The replay will also be available by telephone toll-free: 877-660-6853 or 201-612-7415, referencing replay account 286 and call ID 240980.

With that I’ll turn the call over to SourceForge’s President and CEO, Ali Jenab.

Ali Jenab

Thanks Patty. Good afternoon and thank you for joining us today. I'm going to make a few opening remarks and give you an overview of the quarter and then turn this over to Patty Morris, our Chief Financial Officer, to review the financial results. We'll then open the call to questions.

You have most likely noticed that we have changed our name from VA Software to SourceForge Inc. With the assets sale of our enterprise software business complete we’re now focusing 100% of our resources on our network of web property. These sites will be achieved to serve as a connection to the global technology community. Our NASDAQ ticker symbol will remain the same.

Now let’s talk about the quarter. I’m very pleased with what we’ve accomplished in the third quarter. We’ve set complete goals and we’ve accomplished them. We’ve reported strong quarterly revenues from the June operation of $10.3 million, up 30% from a year ago. We had another solid quarter of profitability generating income from continuing operations of $0.03 per share on both GAAP and non-GAAP basis.

We saw a 26% year-over-year increase and a 33% sequential increase in media revenues to $5.1 million. We achieved a 33% year-over-year increase in e-commerce revenue to $5.2 million. We closed the assets sale of our enterprise software business, a move that was good for our shareholders, customers, and employees. We launched a closed data for marketplace in April. We completed the quarter with $56.8 million in cash and investments.

Let me outline some of the highlights for the third quarter. We continue to be encouraged by the progress we’re making with our media business. Our network of websites served an average of 33 million unique visitors per month.

SourceForge.net, the world’s largest distribution and development broadcast for open-source projects continued to experience solid growth. During Q3, registered users increased to 1,570,000 and a number of open-source projects hosted on the site climbed more than 147,000.

We completed ahead of schedule the SourceFogre.net marketplace closed data, and on May 15th 2007 we entered an open data phase which is now live on SourceForge.net. The SourceForge.net marketplace will serve as a global trading platform for open-source related services and support.

Other enhancements at SourceForge.net include the launch of the project based Wiki offering to a partnership with Wikispaces and the integration of code search through collaboration with Google, the leader in search movement and development. These new features expand the depth and breadth of SourceForge.net.

For the quarter, SourceForge.net served 196 million downloads, representing a 32% increase compared to the same period of the prior year. SourceForge.net continued to grow, which reinforces the expanding interest in open-source software within the global IT and development community.

Slashdot traffic was up significantly and is an emerging traffic driver for the site. We had a great quarter in expanding commitments from existing advertisers who are extremely pleased with the performance and results of our audience figures for their campaign.

Microsoft for example, for the first time is participating in our Powerbar integration program with positive results that are getting stronger over time. We work with Microsoft with increasing frequency this past quarter on several additional initiatives including Visual Studio, Vista, and their mixed ’07 developers’ conference. HP is another advertiser that has continued to invest with us with multiple campaigns, increasing its commitment over time.

In addition to a campaign for HP’s public sector group which enjoys a long term, highly successful relationship with us, we also ran campaigns for HP Blade and (inaudible) servers, both of which appeared for the first time on our site within this fiscal year. Expanding upon this success, one of HP’s divisions began running their new multifunction campaign that continues into the fourth quarter.

Both Apple and Sun use our sites with great effect to promote their respective developer conferences. Cisco is having success on our site promoting service oriented architecture initiatives. IBM, Oracle, and SAP are focused on this category as well. For the first time, SAP purchased rich media video manners on SorceForge.net.

We launched a very innovative program with Intel during the third quarter. The program was successfully adopted by the Slashdot community, a highly interactive and open group who fuels the initiative with highly technical questions and conversation on the Intel opinion centre pages at Slashdot.

Concurrently, Intel also ran the enterprise campaign and a Viiv com initiative campaign with us which will extend through our fourth quarter.

In addition to expanding commitments from our existing advertisers, we’ve also had success in bringing new advertisers onto our network. A few examples of new advertisers in the third quarter include Rambus, NEC display, and Sony. Rambus in particular has continued to expand their presence with us on a long-term basis. Sony made campaigns for PS3, Blu-ray players, and Blu-ray movie titles. The compelling BMW campaign contributed to growth our non-endemic advertising on our site.

In addition to our direct sales efforts, we’re also expanding other innovative and monetization vehicles. We’re continuing to build our relationship with Google, optimizing ad placements with AdSense and Google Video campaign. We’re focused on increasing monetization of RSS feeds. Initial results of RSS campaigns on behalf of Sun, IBM, Vario, Waxspace, and CDW have been encouraging.

We’re excited about the growth opportunities for our media business. The market is shifting to the community model we pioneered. Advertises are increasingly embraced in this model, and recognizing the unique role SourceForge plays as the connection to the global technology community. The launch of SourceForge.net Marketplace Open Beta is a significant milestone in the evolution of SourceForge.net, and creates a new scalable long term revenue source.

Turning to our e-commerce business, the ThinkGeek team once again delivered for us. We saw 33% year over year revenue growth in Q3. Let me go into more detail on some of the highlights. ThinkGeek shipped more than 84,000 orders in Q3, a 31% increase year over year. Top sellers included RC helicopters, Sonic Boom alarm clocks, ThinkTank (inaudible), and Shower Shock caffeinated soaps, a regular favorite.

The experience of our largest traffic day ever, on April 1st, was over a quarter million unique visitors coming to see ThinkGeek’s April Fools product. The ThinkGeek products, including the Water Powered Clock and the Shock Shower Soap, were featured on Good Morning America, MSNBC, ABC World News, Jay Leno, the New York Times, and Reuters during Q3 of ’07. The ThinkGeek team continues to uncover unique high margins products that the tech community wants to buy. I’ll turn this discussion over to Patty for financial review. Patty?

Patty Morris

Thanks Ali, and good afternoon everyone. On the outline, how we’ll run through the results, I will start with the discussion of the headlines, including EPS and revenue, and then I will provide more color on the revenue numbers before walking through operating cost. Finally, I will provide guidance for next quarter and turn the call back over to Ali for his closing remarks.

In mind with the guidance we provided on the last conference call, we earned $0.03 per share from continuing operations on both a GAAP and a non-GAAP basis, compared to GAAP and non-GAAP earnings from continuing operations of $0.02 per share for the third quarter of last year.

Third quarter revenue from continuing operations for the company as a whole increased 30% to $10.3 million from $7.9 million in the third quarter of last year. Online media revenue grew by 26% to $5.1 million from $4 million for the third quarter of last year. This was accomplished by driving up the average CPM on our direct sales effort, building and executing innovative advertising programs for new and repeat customers, and better utilization of third party advertising networks.

Our average CPM achieved higher direct sales force during Q3 with $20.47, up sequentially 27% from $16.09 reported in the prior quarter. In order to alleviate the pricing pressures that disclosure of CPM creates in our direct sales efforts, this is the last financial results call on which we plan to report average CPM. Despite this decision, we remain very focused on raising our CPMs on key inventory and targeted ad units.

Our total inventory grew 38% to 1.8 billion impressions in the current quarter from 1.3 billion impressions in the prior year’s third quarter, and grew 29% quarter over quarter from the 1.4 billion impressions reported last quarter, reflecting the growth and available inventory. The direct sales for Q3 was 8%.

E-commerce revenue generated by ThinkGeek grew by 33% to $5.2 million for the third quarter from $3.9 million for the same period last year, and the number of orders shipped grew by 31% year over year. Our average order size also increased slightly year over year to $61.73 in the third quarter of this year, from $60.53 for the same period last year. Gross margins for the third quarter of fiscal 2007 increased 29% to $4.9 million.

The increase compared to last year was attributable to revenue growth in both media and e-commerce. Excluding stock-based compensation expenses and amortization of intangibles, operating expenses were $3.5 million for the third quarter, up from $3 million from the third quarter of last year. The increase was primarily a result of an increase in headcount in related personnel expenses and increased marketing expenses year over year.

The GAAP third quarter income from continuing operations was $1.8 million or $0.03 per share, compared to last year’s third quarter income from continuing operations of $1.2 million or $0.02 per share. The GAAP third quarter net income was $6.5 million or $0.09 per diluted share, compared to last year’s third quarter net income of $1 million, or $0.02 per share.

Net income for the third quarter includes $5.7 million, net of tax gain from the sale of the company’s enterprise software business.

Turning to the balance sheet, we generated cash flow from continuing operations of $2 million during the current quarter. The cash flow from continuing operations was offset by cash used in discontinued operations of $1.5 million. We finished the quarter with a cash investment balance of $56.8 million. We also recorded a $6.5 million investment in Collabnet, which resulted from the sale of our enterprise software business.

Before moving to guidance for our fourth fiscal quarter 2007, I’ll first highlight a few fourth quarter expenses and then provide the guidance. As reported in our form 8K dated April 24th 2007, certain corporate overhead expenses such as facilities, IT, and corporate costs previously allocated to the software division are now being absorbed by the remaining business units. We are actively engaged in reviewing all of these costs for expense reduction, and this process will continue throughout this quarter and into fiscal year 2008.

As a part of this process, we are evaluating moving our headquarters as our three year lease currently has under three months remaining. In addition, our fourth quarter operating expenses will include a one time expense associated with our name change and our annual Star Box expenses, which are aligned with the end of our fiscal year.

For our guidance, we expect our fourth quarter FY ’07 earnings per share on a non-GAAP basis to be around $0.02 profit, plus or minus a penny, excluding the costs associated with options expense under CAS 123(NYSE:R). We expect e-commerce revenue to be between $5 million and $5.3 million, or 33% growth year over year. We expect media revenue to be around $5.7 million give or take 5%, or 44% growth year over year and 12% sequential growth. With that, I’ll turn it back to Ali.

Ali Jenab

Thanks Patty. Before we open this to questions, I’d like to make a few closing comments. We had a great third quarter, and continue to build on our momentum. We are focused. The sale of our enterprise software business allows us to focus our energy and resources on building an even stronger business serving the global technology community. We’re executing well. Sourceforge.net Marketplace is now live on the site, Open Beta will officially launch… it’s currently live, and it will officially launch in fiscal year 2008.

We have found what others are trying to do. The media industry continues to march towards a publishing motto built on community generated content and interaction. Ad dollars continue to migrate from traditional media to online. We are at the right place at the right time, and we’re doing the right thing. Our continued focus and execution while maintaining a growing profitable business which paves the path for future growth in our network of web properties, and looking forward to the remaining months of our fiscal year 2007, and our fiscal year 2008.

Operator, we'll now go ahead and take questions, please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. All lines continue to be in listen-only mode. If you would like to ask a question, please press Star One on your telephone keypad. A confirmation tone will indicate that your line is in the question queue.

Our first question comes from the line of Stewart Barry with ThinkEquity Partners.

Stewart Barry - ThinkEquity Partners

Good afternoon, and congratulations on a very solid quarter. Could you clarify, when you say “8% sell-through rate”, what does that mean to the other 92% of your advertising? Does it mean that all that is being run through Google AdSense? Or is just part of that other 92% being run through Google's AdSense? And what's the opportunity to bring on additional ad networks, maybe hire CPM ad networks to better that, and perhaps bring on different advertising categories like BMW?

Ali Jenab

First of all, thanks Stewart. And then, on the 8% sold, the other 92% is a mixture of everything else: it's Google AdSense, it's Google video ads, it's actually some of the other campaigns that are not CPM related that we run, such as downloads and other activity.

We also have tried with some other networks out there, as you've been well aware of. They're small, still. We really put a lot of emphasis on our Google relationship, trying to optimize our site. We gained quite a bit by that over the last quarter, and continue to see good results on it.

Bottom line is, obviously there's a lot of opportunity to enhance all around, and part of the struggle with the 8%, I don't know if you caught this or not, but Patty mentioned our inventory grew to $1.8 billion from $1.4 billion in the quarter before, which is nothing to be ashamed of. But what happens is, when your inventory grows and actually your prices are up, you are just still not looking like you are selling a lot of sales by organization, but we did a pretty good job last quarter.

So it was a mixture of all, and we're evaluating some of the other opportunities that we potentially could do. One thing that we don't want to do is go through an ad network that potentially could compete with our direct sales organization on impression-based advertising. Because we feel like we can get a better price when we sell directly than if we go to a generic ad network that can sell to basically the tech community the same ad that they would have to buy through us. So we have to be careful to make sure we don't cause that conflict.

Stewart Barry - ThinkEquity Partners

Right. And you're predicting a pretty solid sequential growth into what is usually the seasonally weak quarter for the advertising industry, predicting 12% sequential growth into your fourth quarter. What sort of visibility do you have on that, that you can make a projection? And what is your pipeline look like for the second half of the calendar year? What sort of visibility do you have on advertising spending there?

Ali Jenab

Well, you're talking about beyond 4Q, so let me answer 4Q first. We basically, the way I see it, is evaluate what we have done already, basically deals that are complete, that are running for the quarter. We look at that volume, and then we look at what type of activity that we have, from verbal commitments, to possible commitments, from evaluating all that, we basically mix them all together and say, “OK, last quarter, we were at this spot, and we felt comfortable with this much additional revenue that we were going to get, and we did it”. And then this quarter we use the same metrics basically, to provide the guidance.

So, it's a pretty intense week that we go through to make sure we're responsible in what we're doing. And we feel like the activity that we've already done to date is the strongest we've ever had as a company. And we feel good, and we kind of count on July possibly being a little bit weaker. So we kind of factor that in a little bit: sometimes it is, sometimes it isn't.

But given all we said, we're really working to try to work through some of the summer slowdown by being more effective in any accounts that we're working in. We went through a list of all the accounts that we're working on. So I basically feel the same way I did in the previous quarters, given the guidance for this one.

Stewart Barry - ThinkEquity Partners

And just finally, one thing on the downloads. I believe the average monthly download comes out to about 66 million, which is a little bit down from last quarter. It's not year-over-year, I know, but it pulls it a little bit down from last quarter. Can you give us some color on that?

Ali Jenab

You know, basically what happens is that downloads move all over the place from month to month, depending on project releases and what activity is happening on a site. So that's something that moves around, and it's still quite healthy compared to what we saw a year ago. And I know we had a pretty interesting release in January, I recall, I'm going off memory now, that we had a really strong January that made the average up last quarter. But we basically hover anywhere in the 60 million to low 70 million range, depending on what month and what activity exists.

Stewart Barry - ThinkEquity Partners

Wonderful, thank you.

Ali Jenab

OK, thanks Stewart.

Operator

Imran Khan with JPMorgan Chase & Co.

Imran Khan- JPMorgan Chase

Hi, this is actually John for Imran Khan. Thanks for taking the question. You generate a fair amount of traffic from the international market. Can you give some color on how sizable the international traffic is compared to…

Ali Jenab

You know, we think it's very sizable in two forms. One is we have a pretty interesting audience. They're all tech-savvy, and they're very valuable to companies worldwide. And let me answer in three folds. One is, we sell multiple campaigns to companies in the US that are interested in moving products and also shaping the opinions of people or internationally. So we run campaigns for major tech companies that run in local geographies.

The second thing we do, we naturally monetize it through Google-type ads to internationals. I think that can be improved because of the ability to do local matching, so we're working to try to do that.

The third fold is, we signed up Oliver Smith, and they've done a pretty good job at ramping nicely. It doesn't always happen that when you sign up a partner do that, they don't instantly generate a lot of money for you, but over time they would. So they're doing a good job, and we're getting some nice win from them in the UK, and we're also looking for other vendors to go to different geographies, basically other partners that we can get to.

But one thing I think that reaches an immediate opportunity for us is really maximized through some of the third parties, to run their ads through their third-party networks internationally to monetize further. We're re-evaluating all that, and we're still pretty early in it.

Imran Khan- JPMorgan Chase

Great, thank you.

Operator

Our next question comes from the line of Joe Maxa with Dougherty.

Joe Maxa – Dougherty

Thank you, and nice quarter. The question I have is, you mentioned one-time expenses in the coming quarter. Can you give a little monetization what that would be?

Ali Jenab

Yeah, Joe, I actually decided to do that because we wanted to highlight in the fourth quarter that we have certain costs. All that is impacted, basically, in the guidance that we gave you. So we may change that money. Star Box is always steeper in the fourth quarter. It was just a reminder item to say, and then it was the allocation of corporate overhead that is going to move to the rest of the businesses. With all that factored in, we felt we can have a $0.02 quarter, plus or minus a penny. But I want to put a little color into it, that those are all factored in when we give this guidance.

Joe Maxa – Dougherty

OK.

Ali Jenab

I'd rather avoid giving you each line item in specific instances, you know. Stuff moves around a little bit.

Joe Maxa – Dougherty

Are you guys going to be able to recognize, does this revenue include revenue associated from the CollabNet sale, the $500,000 on June 30, is that part of revenue?

Ali Jenab

So, to answer your question, the $500,000 is a cash collection. They won about $200,000 worth of media each quarter, and as far as whether we're going to be able to recognize it or not, I won't know that until end of fourth quarter, and after we go through all of our auditors and everything. We're going to take a conservative stance on it.

Joe Maxa – Dougherty

So, you're not including that in guidance, but it may come back where you have to restate that it wasn't in your revenue, at some point at the end of the quarter?

Ali Jenab

Yeah, there was no revenue in CollabNet in the third quarter, and all I'm saying is, you're asking me what I have in my guidance. I'm saying, we don't know if we are going to recognize that revenue yet, or not.

Joe Maxa – Dougherty

OK, so that's not in your guidance.

Ali Jenab

Well, guidance is guidance, right? I can't give you each line item, what's in the guidance or not.

Joe Maxa – Dougherty

OK, I was just trying to get, the revenue guidance you gave for media, whether that included the CollabNet 500K or not. And it sounds like...

Ali Jenab

I'd rather not get into detail on what I have inside guidance, if I may, you know? It's just that we have $5.7 million guidance, and we feel like we have enough there to be able to achieve that.

Joe Maxa – Dougherty

With or without that 500k?

Ali Jenab

Correct. It’s 200k not 500k. Let me correct you. It would not be 500k under any circumstance. So it is a 500k only cash payment. The actual media they want is limited to $200,000 per quarter.

Joe Maxa – Dougherty

Can you break down the percent of your media revenue that was from your CPM-based inventory versus the media revenue that you received from other news?

Ali Jenab

Generally as a percentage of revenue, your question is specific to the remnant versus the cash advertising?

Joe Maxa – Dougherty

Yes, I want to see because then you also have your downloadable programs and whatever else.

Patty Morris

Most of the revenue is going to come from cash advertising which is consistent with what we’ve recorded prior quarters. So we’ll see about 20% coming in from the remnant side.

Joe Maxa - Dougherty

Lastly, you’ve talked about this market place. When to you expect to see some meaningful revenue or when you be able to give us more color on that?

Ali Jenab

I’m looking to do that at our next earnings announcement. We just went open-data, as I’ve mentioned on May 15th. We’re watching it very closely. We’re still very limited in the way we let projects go on. We want to make sure we have great revenues. We’re going to keep to that for the next couple of months and we’re already seeing from data as far as behavior and activity and we’re hoping that by the August announcement we’ll have a pretty good feel as far as how these things play out.

Joe Maxa - Dougherty

Lastly, a few other tech sites have indicated tech advertising was much slower in their calendar Q1 in January and then improving throughout the calendar year so far. Did you see similar trends? I understand January was the last quarter, but I’m trying to get an idea.

Ali Jenab

As you know Joe, we’re trying to work with a bunch of clients and we’re so specific on what we’re doing and with your small business trying to grow, the trends are month to month sometimes, not a big reflection of what’s happening out there. I’m not a multi-billion dollar business to be able to get trend analysis. You know, we felt good right off the shoot, we felt activity was good throughout the quarter and we feel activity is pretty good at this point in time.

Joe Maxa - Dougherty

OK, thanks a lot.

Operator

Our next question comes from the line of Douglas Whitman.

Doug Whitman – Whitman Capital

Nice quarter guys. I apologize, I know you went through the numbers but if you could do them again for me because you went pretty quickly and I didn’t catch all the numbers. You were talking about unique website growth on a year-to-year basis and I didn’t quite catch all that.

Ali Jenab

$33 million was my part, which I said. The other growth item was the 32% year-to-year increase and the downloads from the net, 896 million downloads.

Doug Whitman – Whitman Capital

Unique was what percent increase year-over-year?

Ali Jenab

33 million uniques.

Doug Whitman – Whitman Capital

OK. I didn’t know what it was a year ago.

Ali Jenab

And then we also pumped the peak number which I gave that was basically a 31% year-over-year shipment improvement and a little bit of price improvement and I think most of Patty’s quotes were revenue based. We had the inventory growth was $1.8 billion, up 38% year-over-year. So that’s how much our inventory grew and then the CPM for Q3 was $20.47, up 27% sequentially from the quarter before.

Doug Whitman – Whitman Capital

And if you guys could talk a little about pipeline looking forward on a longer-term basis. I know the question was already partially asked initially but you’ve always talked about this being a growing project with gradual growth. If you could talk a little about what you’re getting from major advertisers that you’re trying to go after and where that effort is in the cycle?

Ali Jenab

Ya, we’ve been doing a job of drawing broad-based advertisers. One thing we try to avoid is to just go after one big advertiser to get a lot of money because if that advertiser starts to pull back, then you have no place to run to. So we’ve got a broad base of advertiser and we’re working with clients on multiple campaigns. Campaign starts, campaign ends.

I know sometimes investors get excited when such and such campaign ends. But the fact of the matter is advertising campaigns start and they end. And then new campaigns start. We’re working to build a good experiences for all of our customer base, largest clients specifically, to try to get more and more of their budget. Earlier on I said we feel good about the fair share we’re going to get in 2007. That was represented in the last quarter and we continue to build on that momentum.

We have guidance at this point one quarter at a time and frankly we feel good about the activities we’re working on and naturally we’re going to keep building on that moving into the second half of the year also.

Also, fourth quarter values is the first indication that we feel like we have enough activity right now to see some sequential growth even with the summer slow down that we know we’re going to experience in July.

Doug Whitman – Whitman Capital

OK, and a quick accounting question so I understand Patty. The account receivables include stuff that you have outstanding still on the software side and discontinued business, but monthly revenues?

Patty Morris

Those software receivables are reflected in the line called “current asset but discontinued operation”.

Doug Whitman – Whitman Capital

Which is $1.37 million?

Patty Morris

Correct.

Doug Whitman – Whitman Capital

And what’s the normalized receivable? What do you think your receivable stays on normalized basis going forward? What’s a reasonable range without the software business in there?

Patty Morris

Currently we’re running a little bit longer. We’re at 91 days now and we actually had some transition in that group related to maternity leave so we’re working at driving those numbers down and I’d like to see them in the high 70’s to low 80’s on a go forward basis.

On accounts receivable with agencies, you typically have a longer payment cycle related to the fact that the agencies get paid from the clients and then the agencies pay us. So we continue to wok with the agencies to improve that process but generally it extends out your receivables time frame.

Doug Whitman – Whitman Capital

Thank you for the results and outlook.

Patty Morris

You’re welcome.

Operator

Our next question comes from the line of James Gillman.

James Gillman - Cross Research/Soleil Securities

Good afternoon. Several questions here. This is going to follow up on previous questions in reference to pipeline and outlook. Last quarter you mentioned that your objective was to get more of the 2007 budget. We’re half way through there. Based on your expectations, how do you feel you did and how does it compare to last year?

Ali Jenab

We did great. Sequential up from $3.8 million to $5.1 million. I also feel like we’ve made very nice progress with big accounts on numerous campaigns and they’re getting very good feedback to us that they like the campaigns and they like to continue going with their new campaigns and different campaigns, so overall I think we did great.

Last year we also had a nice sequential up. That was mainly driven with one player, AMD, that we had a great win with. This time was a broad-based multiple account that was able to help us sell that. I also feel like another indication, looking at this quarter we’ve had previous success that we can maintain some of the on-going campaigns going forward this quarter also.

James Gillman - Cross Research/Soleil Securities

I guess last quarter and this quarter there’s been nice upside surprises to the e-commerce business and it seems that’s going to continue into fourth quarter, doing a little better than the media business. What do you attribute to the success there and how long do you think that will be able to continue?

Ali Jenab

Let me correct one thing. Doing better than the media business, I don’t understand that piece of history because we guided media business to be up 44% year-over-year and e-commerce of 33% so I want to make sure we highlight that. The second piece of that, (inaudible) keeps doing a great job and we continue to see that business expands on us. They do a fantastic job on it. Frankly, we normally don’t even expect a 33% growth. All they said was growth was around 25%, and they’ve done better than that. You know, we monitor that business on a daily basis, so we kind of see how they do year over year on a daily basis, and the gross number that we project, 33%, is basically maintained.

James Gillman - Cross Research/Soleil Securities

Did you disclose headcount during the quarter, or what you ended up as for the quarter?

Patty Morris

I didn’t disclose it, but I can give that to you. We have 99 employees at the end of Q3.

James Gillman - Cross Research/Soleil Securities

OK. And were there any additions to the net…additions to the cell force?

Patty Morris

Not in this quarter.

James Gillman - Cross Research/Soleil Securities

OK, and, my last question here, Ali, is the use of cash… do you have any plans there for the use of cash in the balance sheet?

Ali Jenab

Not at this point. We’re going to actually keep growing our business, and we’re going to use it as needed to grow the business. But, at this point, we feel like no needed action on the cash.

James Gillman - Cross Research/Soleil Securities

OK. Thank you, no more questions.

Ali Jenab

OK, thanks James.

Operator

Our next question comes from the line of (inaudible) with Thomas Weisel Partners.

(Name Inaudible) - Thomas Weisel Partners

Hello. Nice quarter there. Just, I had a question on the sales side. You have it as direct sales of somewhere around 60 to 40 is that correct?

Ali Jenab

I’m sorry, I didn’t hear the first part. I heard 60-40, but I didn’t hear…

(Name Inaudible) - Thomas Weisel Partners

The thing is that direct sales to sales to (inaudible) channels like (inaudible).

Patty Morris

The question is specific to… are you alluding to the 60% sell through rate from the direct sales organization?

(Name Inaudible) - Thomas Weisel Partners

That’s correct.

Ali Jenab

Yeah, long term obviously our goal is to have 60% of our inventory sold directly to a sales organization. We’re going to maintain 40% to the ad networks, correct.

(Name Inaudible) - Thomas Weisel Partners

Where would you be currently?

Patty Morris

We’re approximately, for the quarter, it was about 20% on the third party ad networks sites, with the remainder of 80% being on cash advertising.

(Name Inaudible) - Thomas Weisel Partners

Alright, alright. And, on the account side, how many employees actually moved over to Collabnet ,and did you see any redundancy expenses down the main for those who got laid off.

Ali Jenab

Yes, at the beginning of Q3, we had 33 employees that were part of that group. We had a few people that left, we had a total of about mid-20’s that moved to Collabnet, and we had five or six people that were reduced as part of the transition. But, all of the direct people that were related to that business are out.

That was part of the corporate overhead that supported…it wasn’t necessarily just headcount related, we’re looking at how we can get some of that cost out. We will get that cost out over the next quarter or two, to make basically the overhead more efficient as the company overhead is concerned.

(Name Inaudible) - Thomas Weisel Partners

Alright, and the EPS guidance that you have given out takes into account that expense? I mean, you have reduced that expense or added it back?

Ali Jenab

Yeah, the EPS guidance includes all the factors that we talked about.

(Name Inaudible) - Thomas Weisel Partners

OK, so it’s (inaudible)?

Ali Jenab

Yeah, it’s a net number in the guidance that we gave.

(Name Inaudible) - Thomas Weisel Partners

On the video ads that you have been talking about, do they actually have a higher CPM rate, and what is the kind of pipeline that you have, and pipeline in terms of mix?

Ali Jenab

Yes, video ads, both the Google Video ads have higher CPM rates that we get from Ad Sense. And also, direct video ads that we want, because we also sell direct video ads, and they’ve posted a higher CPM also. We don’t separately disclose that, but they both are quite a bit higher than other people’s. And there’s still a small percentage that we go in, and there’s opportunity to grow that feed.

(Name Inaudible) - Thomas Weisel Partners

Alright, I guess that will be all. Thanks a lot.

Operator

Once again, ladies and gentlemen, if you’d like to ask a question, please press Star One on your telephone keypad. Our next question comes from the line of Denny Fish with JMP Securities.

Denny Fish - JMP Securities

Alright, thank you. Nice quarter on the media line. Just wanted to ask… I just want to make sure that I’m perfectly clear on sort of the G&A line. If I compare the $1.4 million to what was disclosed in the 8K acquisition, which suggested corporate overhead allocation in that six month period around $4.3 million, is it reasonable to assume that once you apply that, sort of X-ing out one time expenses, were sort of in that range of $2 million a quarter on the G&A line? That’s my first question and I have a follow-up.

Patty Morris

Denny, with regards to your question, I think what we would generally expect is $2.2-2.3 million on that line.

Denny Fish - JMP Securities

OK, great, thank you. And secondly, just thinking about the media business during the quarter, did you have any 10% plus media customers during the quarter, and if so, how many?

Ali Jenab

The answer on total revenue is now, the biggest advertiser we had was in the $600,000 range, and I'd rather not divulge their name. And we had another one right behind it at $500,000, so we had a couple of them that were mixed mid seven figures.

Denny Fish - JMP Securities

And do you expect the same advertisers to be 10%, say by next quarter?

Ali Jenab

We expect to have some at 10% rate. It depends on what campaigns their running. It could be them, it could be somebody else.

Patty Morris

Yeah, generally the advertisers move around. Your top 10-15 move around based on their marketing activities and the campaigns that they're running with...

Ali Jenab

Sun Microsystems always has their fourth quarter as a big quarter for them. This quarter, actually (inaudible) is a pretty large advertiser for us, and then, you've probably seen them, there's whole handfuls of them that are on a regular basis quite large with us.

Denny Fish - JMP Securities

Yeah, absolutely. On Microsoft, you had commented on the Powerbar, and it looks like an interesting campaign. I'm just curious, is that CPM-based? Is that download-based? Can you give us more color on what you're doing with that there?

Ali Jenab

Well, the Powerbar is a monthly rate. So it's not CPM-based.

Denny Fish - JMP Securities

OK, so it's not based on click through or anything like that?

Ali Jenab

No, no.

Denny Fish - JMP Securities

OK. And then just the last question. I know this has been asked in a slightly different way. Just recently, we've had a number of infrastructure software vendors with North American on the technology front. Are you seeing any evidence at all that your customers are getting more cautious as we head forward, or no?

Ali Jenab

I'm happy to say that I'm not in the enterprise software business any more, so I track them. So my concern is, overall, if that continues across the board, I've always said we depend on spending. This spending, and the customers working on, we have not seen any evidence to that at this point. But that doesn't say if it doesn't achieve for the next three or four months, you might see it later down the road. But we have not seen it.

Denny Fish - JMP Securities

Great, thank you.

Operator

Our next question comes from the line of Douglas Whitman.

Douglas Whitman - Whitman Capital

Just a follow-up question. One was, you launched Marketplace last quarter, and if you give some idea, does that have an increased expense to the last quarter? And kind-of a little bit of guidelines going forward?

Ali Jenab

So, Marketplace has been in ongoing spending for the last five or six quarters, and actually, as you get toward the end of it, it's more. So there's a good chance that the spending we did last quarter. Some of it, is capital expenditure that has been has been capitalized. This quarter remains to be a good expense level for us, and we really believe that that's the area we want to invest in, and we're going to continue to grow it.

As you mentioned, it launched last quarter in closed data. We just do limited open data now. We're really looking at the full-blown launch, probably in the early first quarter 2008 time frame.

Douglas Whitman - Whitman Capital

And a last question is, given the low stock price and the fact that you are now pure media-oriented property, for a lot of acquisitions in the places that are going around now, is there any thought by the board about doing something to protect the company, so we don't get bought out too cheaply?

Ali Jenab

I don’t’ know how to answer that one. As you know, we’ve got a staggered board so you can’t do a hot dog take-over. But other than that, it’s been on the company forever, since it was created. So, no, we’ve not done anything specific.

Douglas Whitman - Whitman Capital

OK, thank you.

Operator

Thank you. Ladies and gentlemen, this concludes SourceForge’s third quarter conference call.

Ali Jenab

Thank you very much for joining us and we’re looking forward to talking to you next quarter. Thank you.

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