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SourceForge, Inc. (LNUX)
F4Q07 Earnings Call
August 28, 2007 5:00 pm ET

Executives

Patty Morris - CFO
Ali Jenab - President and CEO

Analysts

Denny Fish - JMP Securities
Neal Doshi - ThinkEquity
Joe Maxa - Dougherty & Co.
Douglas Whitman - Whitman Capital
James Gilman - Cross Research
Jeff Osher - Harvest Small Cap
Karim Bengalone - Trivium Capital

Presentation

Operator

Welcome to SourceForge, Inc. fourth quarter and fiscal 2007 financial results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ms. Patty Morris, CFO for SourceForge. Thank you, Ms. Morris, you may begin.

Patty Morris

Good afternoon and welcome to SourceForge's conference call reviewing our fourth quarter and 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 21E of the Securities and 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 fiscal year and 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 its fiscal year 2006 ended July 31, 2006, and its quarterly report on Form 10-Q for the third quarter of its fiscal year 2007 ended April 30, 2007. These documents are available at the company's website, SourceForge.com, and at the SEC site, 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 in the accompanying statement 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 also be available on our website later today. A replay will be available by telephone toll-free 877-660-6853 or 201-612-7415, referencing replay account 286 and call id 251542.

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

Ali Jenab

Thanks, Patty. Good afternoon and thanks for joining us today. I'm going to make a few opening remarks and give you an overview of the quarter and fiscal year 2007, and then turn this over to Patty Morris, our CFO, to review the financial results. We will then open the call to questions.

Let's start by talking about the just ended Q4, which contributed to a very strong full year for us. We recorded strong quarterly revenue from continuing operations of $10.1 million, up 29% from a year ago. We had another solid quarter of profitability, generating income from continuing operations of $0.02 per share on a non-GAAP basis. We saw a 24% year-over-year increase in media revenue to $4.9 million. We achieved a 34% year-over-year increase in e-commerce revenue to $5.2 million. We completed the quarter with $57.6 million in cash and investments.

While we continued to achieve meaningful revenue growth, the fourth quarter was a challenge on the media side of the house. We didn't close the deals we expected to close, particularly in the second half of the quarter. We didn't have enough bandwidth in our sales organization, which impacted our ability to execute. We can do better and we will. We are hiring to put more feet on the street, and have already made progress toward this objective in July and August. I will cover that in a few minutes.

On the flip side, our ecommerce business continued to perform remarkably, driving consistent growth year over year and delivering an incremental revenue stream that leverages the technology communities we have built.

As I said earlier, our full year was strong. Despite the challenges we faced in the fourth quarter, we achieved our second consecutive year of profitability, putting up 35% revenue growth year over year. These are very good results. That revenue growth was led by a 32% increase in media revenue compared to last year, and a 38% increase in ecommerce revenue.

Our income from continuing operations increased to $6 million or $0.09 per share from $3.9 million or $0.06 per share in fiscal year 2006. On a non-GAAP basis, earnings per share from continuing operations increased to $0.11 per share from $0.07 per share in fiscal year 2006.We completed the year with $57.6 million in cash and investments, an increase of $3.6 million during the year. Fiscal 2007 was a very good year for us and we're looking forward to an even better 2008.

That said, let me walk you through some of the successes and challenges we faced in the fourth quarter. On the media side of our business, we experienced what I would define as short-term execution disappointment in Q4. We had a strong pipeline going into the quarter, but we were not able to close enough business during the second half of the quarter. Simply put, we saw a reluctance to running campaigns in July, and that reluctance continued in early August. We saw it in deals we were trying to close and opportunities that we were pursuing. At the same time, we did not have the sales bandwidth to overcome the shortfall within the quarter.

Despite these short-term glitches, we're optimistic about the prospects of our media business and expect it to continue to grow rapidly. Our network of websites serve an average of 32 million unique visitors per month. HP expanded its advertising program with us to now include its blade server, storage, low-end servers, and multifunction printer businesses. We added 19 new advertisers this quarter, including Packeteer, 3M, Optical Systems, Replay Interactive, Finality, Sonic Ball, VeriSign, Amazon.com, OpenLogic and Palm Inc. We also saw increased investments from TrendMicro and VMware and AT&T began an enterprise campaign with us.

Our primary objective coming out of fourth quarter is to further broaden and deepen our customer base. We have recruited five new sales employees in July and August. Two were replacements and three were additions to our sales organization. This expands our direct sales force from 12 employees at the beginning of Q4 to 15 as of today. We would like to see further expansion to around 18 by the end of the calendar year. In addition, we remain committed to working hard to attract top dollars from the blue-chip companies seeking to reach our desirable visitor demographics.

Attracting advertisers, be they Fortune 500 or mom-and-pop, means we have to deliver the people they covet. Nobody does that better in IT than we do. Take Slashdot, for example. While the rest of the media industry experiments with adding commentary to their editorial mix, an approach that we pioneered, we continue to add features that reinforce Slashdot's position as a standard by which all other efforts are measured. Taking what made Slashdot great and making it either better, we officially launched Firehose . This extends the power of voting to Slashdot users, giving them the ability to weigh in on story selection and create their own personal versions of Slashdot. We also announced the public beta for Ajax-based publishing system. This is a dramatic update to our Slashdot discussion forum that turns them into a dynamic back and forth between readers and the server. We are essentially letting people see what they and others are posting and commenting on in real time. The new system also gives us more information about what is going on inside of stories, helping our editors build a fuller picture of what people are doing, and allowing us to tweak this site to serve them better.

Turning to SourceForge.net, the world's largest distribution and development platform for open source projects, we continued to experience solid growth. During Q4, registered users increased to 1.6 million, and the number of open source projects hosted on the site climbed to more than 155,000. For the quarter SourceForge.net served 184 million downloads, representing a 21% increase compared to the same period of prior year.

Last quarter we told you about the beta launch of SourceForge.net Marketplace. It is a groundbreaking new vehicle to sell services around open source projects hosted on SourceForge.net. The marketplace is still in open beta and performing as expected. We are seeing great growth in listings and working to add even more, which is part of our strategy. We are also seeing higher than expected average listing prices for services offered. We're still controlling what sellers we're letting into the marketplace as part of our beta strategy, but excited about the interest we are seeing so far. We will continue to invest in this as a long-term strategic product for the company, and begin to focus on increasing traction on the buy side of the marketplace.

Turning to our ecommerce business, the ThinkGeek team once again delivered for us. We saw 34% year-over-year ecommerce revenue growth in the fourth quarter. We shipped over 78,000 orders in the fourth quarter, a 35% increase year over year. Top sellers included the ever popular R/C Helicopters, a USB turntable, and Clocky the alarm clock. The ThinkGeek Bluetooth retro handset is still going strong, as are our digital photo frames and LED blow on and off candles. We have even seen a $200 USB digital microscope do pretty well. While our media business remains the focus and biggest opportunity for SourceForge, ThinkGeek gives us a very attractive incremental revenue stream that flows from our technology community. Overall, I'm very pleased with the stellar performance that the ThinkGeek team has achieved. They are doing a great job of growing their business.

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

Patty Morris

Thanks, Ali. As reported in our press release, net income from continuing operations for the fourth quarter was $0.01 earning per share on a GAAP basis and $0.02 per share on a non-GAAP basis, in line with the $0.02 guidance we provided on the last conference call. Fourth quarter revenue from continuing operations for the company as a whole increased 29% year over year to $10.1 million. Media revenue for the fourth quarter increased 24% year over year to $4.9 million from $4.0 million for the same period last year. Despite the significant year-over-year growth, media revenue did not meet our guidance of $5.7 million plus or minus 5% provided on the last conference call.

Our ecommerce revenue generated by ThinkGeek grew by 34% to $5.2 million in the fourth quarter, hitting the upper range of our guidance from $3.9 million for the same period last year. Total revenue from continuing operations for our 2007 fiscal year grew by 35% to $45.6 million from $33.7 million in the prior year. The increase was driven by 32% growth in media revenue to $17.5 million from $13.2 million in the prior year, and 38% growth in ecommerce revenue to $28.1 million from $20.4 million last year.

Gross margin from continuing operations for the fourth quarter of fiscal 2007 was 49% compared to 48% in the same period last year. The improvement compared to last year was the result of improved margins in our ecommerce business. For the year, our gross margin improved to 43.1% from 42.5% in the prior year, with the increase being a result of improved margins in our media business.

For the fourth quarter, operating expense from continuing operations increased to $4.9 million from $3.3 million for the same period last year, or a 24% net increase excluding the impact of corporate and facilities-related allocations formerly absorbed by the software division. The increase primarily reflects increases in sales and marketing headcount and related costs, a full quarter of corporate and facilities allocations formerly absorbed by the software division, and the one-time corporate name change expenses we announced on our last call.

For fiscal year 2007, operating expense increased to $16.3 million from $11.9 million for fiscal 2006, or a 30% net increase, excluding the impact of corporate and facilities-related allocations formerly absorbed by the software division. The increase primarily reflects increases in sales, marketing and engineering headcount and related costs and increased stock-based compensation expense, offset in part by lower Sarbox costs. We continue to focus on achieving additional operating efficiencies following the successful disposition of our software business.

Stock-based compensation from continuing operations increased to $561,000 for the fourth quarter from $145,000 for the same period last year, and increased to $1.3 million for fiscal 2007 from $435,000 for fiscal 2006. GAAP income from continuing operations for the fourth quarter was $700,000 or $0.01 per share, and $1.3 million or $0.02 per share on a non-GAAP basis. For the fourth quarter of fiscal 2006, GAAP income from continuing operations was $1.2 million or $0.02 per share and $1.3 million or $0.02 per share on a non-GAAP basis.

For fiscal year 2007, we reported GAAP net income of $8.7 million or $0.13 per diluted share compared to GAAP net income of $11 million or $0.17 per diluted share in fiscal year 2006. Excluding the effects of discontinued operations, we recorded GAAP income from continuing operations of $6 million or $0.09 per share, and non-GAAP income from continuing operations of $7.4 million or $0.11 per share compared to last year's GAAP income from continuing operations of $3.9 million or $0.06 per share and non-GAAP income from continuing operations of $4.4 million or $0.07 per share. Turning to the balance sheet, we finished the fiscal year with a cash investment balance of $57.6 million, up $800,000 from our third fiscal quarter.

Before moving to guidance for our first fiscal quarter of 2008, I want to highlight a few items that you may soon see begin to impact results during fiscal 2008.As Ali mentioned earlier, we expanded our sales organization to 15 early in 1Q08. We are also planning to invest in our infrastructure, which will improve user experience on our website. Finally, as we announced during Q4, we are planning to move our corporate headquarters to Mountain View, California in October.

For our guidance, we expect our first quarter FY08 EPS on a non-GAAP basis to be around $0.01 profit, plus or minus $0.01, excluding the costs associated with options expense under FAS 123R, and net of any possible restructuring expense related to our planned move out of our Freemont facility. We expect ecommerce revenue to be between $5.6 million and $5.9 million or 29% growth year over year and we expect media revenue to be between $4.5 million and $5 million or 28% growth year over year.

With that, I will turn it over to Ali for closing comments.

Ali Jenab

Before we open this to questions, I would like to make a few closing comments. We are making great progress in building our long-term business. We had a fantastic year in fiscal 2008. We achieved our second straight year of profitability. We successfully divested our software business and are now fully focused on our web property. We have taken immediate actions to address the short-term issues we had in Q4, and setting up for fiscal 2008 by more aggressively building our sales organization and broadening our customer base. We are also investing in our data center, and continuing to put the weight of SourceForge behind our marketplace.

I also wanted to let you know that this will be our last conference call from the Fremont office. Our next call will be from our new location at 650 Jasper Street in downtown Mountain View. As you would expect, we are excited about this move as it is much better-aligned to our web focus and will improve our ability to attract and retain talent.

With that, I look forward to updating you again in fiscal 2008 as SourceForge strengthens its position as the media and ecommerce hub of IT. Operator, we will now take questions, please.

Question-and-Answer Session

Operator

Your first question comes from Denny Fish - JMP Securities.

Denny Fish - JMP Securities

On the new sales hires, the three incremental adds, where do they come from?

Ali Jenab

First of all, we hired five, and three are incremental adds. Three of them are from CMP, one is another media company and the other one is from IDG.

Denny Fish - JMP Securities

On the media revenue, was there any contribution from your GLADNET relationship during the quarter?

Ali Jenab

Yes, the project relationship contributed to the quarter.

Denny Fish - JMP Securities

How much contribution?

Ali Jenab

We don't break it out because we don't break out any individual customer, but we have sized it in the past as far as what the ballpark target number is. But they clearly had a choice of how much they are spending with us. So they could go higher than that number that we previously said, but for their sake we don't want to just specifically break it out.

Denny Fish - JMP Securities

Is it fair that it was at least $200,000?

Ali Jenab

Yes. Because we told you in the past that is what it would be.

Denny Fish - JMP Securities

The guidance looking forward, does that imply GLADNET contributions for Q1?

Ali Jenab

On a regular basis, since we're recognizing it this last quarter it will be recognized as revenue going forward.

Denny Fish - JMP Securities

What are you building in there for GLADNET contribution?

Ali Jenab

I'm not going to break it out as an individual line item.

Denny Fish - JMP Securities

Looking at what happened during the quarter, clearly you had some summer seasonality last year and that played out this year. I am just curious, what changed so dramatically between the beginning of the quarter and sort of halfway through the quarter, because obviously you guys had a high degree of confidence?

Ali Jenab

Yes, this quarter we actually saw it a lot more dramatic than we saw a last year, because last year it was really one major account related. This one was clearly across the board. Frankly, as we talked in the last earnings announcement, we had the strongest closed business going into our earnings announcement three months ago. Clearly late June all the way to early August we clearly saw the ability to close business at a fast rate, and the main reason was the advertisers were saying, hey, I don't want to run much during July and August. I want to start my campaign in September. We saw it in a dramatic fashion. It was a lot worst than we anticipated as we went into the quarter, and that is what contributed to it. But we realized it in early July, and we tried to scramble, tried to get additional business from other accounts, but clearly as we went to try to build additional business, they also were not as interested to run major campaigns in July and August.

Just one last thing to add. We even saw it in our remnant ads that we run through other networks that detect spending on the remnant side, it slowed down dramatically in the month of July also. It was a network-wide issue, and our partners basically told us this is the seasonality that we are seeing at this point.

Denny Fish - JMP Securities

Just the last question. On the corporate headquarters move, can we expect this vast transaction itself will be accretive on an ongoing basis or dilutive?

Ali Jenab

Transaction?

Denny Fish - JMP Securities

Essentially when you adjust for everything.

Ali Jenab

Eventually the headquarter that we're going to reside in Mountain View will be a lower general operating cost and total cost than the building we're in today. But there is a transition that you've got to go through to get to get to that stage. We are marketing this building, and we have got some interest in it, and it depends how that plays out. There could be a charge associated with this building as we make the move. But on an ongoing basis the new business will have a lower operating cost than the building we're in right now.

Operator

Your next question comes from Neal Doshi – ThinkEquity.

Neal Doshi – ThinkEquity

The first question I have, going back to the media side and expanding on what Denny asked, is this an industry-wide phenomenon that we are seeing in terms of slowdown in technology advertising? I know CNet announced that they had noticed a slowdown on PC advertising as well.

Ali Jenab

When CNet announced it earlier in the year, we weren't seeing it. When we had made our earnings announcement, clearly we had pretty substantial done business and a pretty substantial pipeline for the quarter; stronger than I have ever seen that. Just our ability to close that business was surprisingly low, just the percentage hit that we had in closing, which I basically focused that it was us only doing it, and we tried to figure out what we're doing with our sales organization. But post that transaction, the more comments that I'm hearing from other people is just they clearly experienced it. Nothing we saw by the time July was over, when we looked back on the remnant ad that were running and we saw the results in what our partners were seeing in remnant ads, it was really quite dramatically that really it was a seasonality issue that everybody experienced in the tech world. That is what made me make the comment that we did. I can tell you the last two weeks we have seen a dramatic shift back to the higher activity level.

Neal Doshi - ThinkEquity

Of the 19 new advertisers that you signed, were any of them long-term contracts?

Ali Jenab

Six months is the longest term contract that we have on any of those deals that we covered. Again, they are ongoing advertisers, like HP consistently has multiple campaigns with us that they run.

Neal Doshi - ThinkEquity

You guys have stopped giving CPMs. In terms of ad impressions, was there sequential growth there or not?

Ali Jenab

As you know, summer months the traffic slows down for us, as we have always said. Actually year over year there was growth, but sequentially it was actually down a little bit.

Neal Doshi - ThinkEquity

Patty, it seems like sales and marketing increased about 400 basis points over the last quarter. Was that exclusively due to the net increase of three sales hires?

Patty Morris

There are two things impacting the number if you're looking sequentially. The name change was accounted for in Q4. That was a one-time expense that took the number up. And then the rest of the cost were headcount and personnel related.

Neal Doshi - ThinkEquity

How much was the name change cost?

Patty Morris

We haven't broken that out separately.

Ali Jenab

I believe in the last call I phrased it to be in the couple of hundred thousand dollar range, and it was within that range.

Operator

Your next question comes from Joe Maxa - Dougherty & Co.

Joe Maxa - Dougherty & Co.

You indicated you had 19 advertisers, new advertisers.

Ali Jenab

19 new names that we added.

Joe Maxa - Dougherty & Co.

What is your total new advertiser base?

Ali Jenab

The total base we're running around is high two’s, low three’s. It fluctuates depending upon the time, it depends on what you refer to, as in do you count the last 12 months, because advertisers as you know come and go. So we've got a few hundred advertisers and long term we would like to double that amount, because I think we should be more towards a 600 to 900 advertiser range in long term.

Joe Maxa - Dougherty & Co.

When you are at that level do you think you'll see more opportunity to have more consistent quarters if you're struggling with some, maybe close a few deals with existing? Do you need to be at a certain critical mass to maybe not have these surprises?

Ali Jenab

Yes, absolutely.

Joe Maxa - Dougherty & Co.

Is that the number you're looking at, the 600 to 900, to be in that range?

Ali Jenab

Correct.

Joe Maxa - Dougherty & Co.

So we could have some lumpiness over the coming year or two until you get to that level?

Ali Jenab

Correct.

Joe Maxa - Dougherty & Co.

Regarding the media again, you said across the board, but I am picturing you have some that are very large, $0.5 million potential in the quarter. Was it some of these guys?

Ali Jenab

We went and reviewed the pipeline and what happened, and large and small it was across the board where we were expecting to come in, everything was moving around. It wasn't a single thing. We had actually success with some bigger accounts that we weren't expecting to. But clearly across the board, both the large and small, campaigns we were expecting to close just didn't close at the rates we wanted, or if they closed it they wanted to run in September. We were even seeing some of the deals that were closed and done that came back to us to say, hey, can you move some of the stuff you're running for July and August and push it to September and October? Which is a deal you're running already, and all they were doing, they were just juggling their spend to be later in the year for whatever reason. It was a little bit unusual compared to previous year, we didn't see it to that dramatic effect.

Joe Maxa - Dougherty & Co.

You indicated the activity level has picked up drastically in the last couple of weeks. How does your pipeline look for the rest of the quarter at this point? Suggesting that you have higher levels would suggest maybe your media should be a little higher than what you guided to.

Ali Jenab

All I can tell you is last quarter we had a huge book of done business when we walked in the quarter, and then we didn't close well going into the end of the quarter. This quarter is exactly opposite of that. You have it weak going into the quarter and activity is picking up. I don't want to be over optimistic about how much activity is picking up for September and October after what happened last quarter. I want to make sure we're prudent in the way we are giving our guidance for this quarter.

But we have clearly seen the activity level already this month pick up because right now we're closing business for September and October, we have seen a pretty nice shift. We've also monitored our remnant inventories on a daily basis. We have seen a shift in our remnant side that is shifting quite a bit also.

Joe Maxa - Dougherty & Co.

Patty, where should we be looking for your OpEx to be at going forward?

Patty Morris

I think as we talked about earlier in the call, we are focusing on investing on the sales side, given what Ali told you in terms of expected headcount by the end of the calendar year and so forth. I think we provided the spend to the G&A range will generally be between 2.1 and 2.2 for FY08 on a quarterly basis. So I think those are the two primary components of OpEx that would have any impact on your question.

Joe Maxa - Dougherty & Co.

Your releases in development will be relatively flat?

Patty Morris

Yes, generally it should stay relatively flat.

Operator

Your next question comes from Douglas Whitman - Whitman Capital.

Douglas Whitman - Whitman Capital

Patty, just housekeeping, could you talk a little bit about what the cost was of the Marketplace product in the quarter? Ali, can you talk a little bit about the building of the product and expectations as we look out to the next calendar year?

Patty Morris

In terms of our total expense to date on the capitalized piece on our balance sheet is $1.9 million, which puts us at just over $700,000 for the quarter.

Ali Jenab

But the $1.9 million will be amortized.

Patty Morris

Yes, let me clarify that. Thanks, Ali. When we actually launch the product, we will start to amortize the Marketplace investment, and that would be amortized over a three-year period.

Douglas Whitman - Whitman Capital

I know you touched on it, Ali, but maybe a little bit more feedback on the reaction you're getting from the product, and as we look out a year or two from now, what is reasonable to start feeling about potential revenue expectations?

Ali Jenab

As I mentioned, a few early successes for us is we are seeing a pretty good amount of listings. We are seeing listings across the board. We are seeing them twofold. One, people offering pure services that they're selling. The other one is we have about 154 projects that are offering services. One of the encouraging signs that we are seeing is six out of our top ten projects have service offerings around those projects. So the trend that we thought that these top downloadable projects will have the right level of services, that trend has proven to be basically showing us signs that is getting traction.

The other side of it that we are seeing is we are seeing the average listings is much higher than we initially anticipated. So if you go on our site out of 384 offerings that are there, the average listing is probably closer to $1,000 than to a few hundred dollars that we were expecting initially, so that is a positive trend.

The piece that we are really working with the suppliers right now and the reason we are keeping the project in beta is we want to make sure we control the quality of projects that are being listed. Because one thing you don't want to do is open it up and see a bunch of unrelated projects that are getting listed. Buyers get frustrated that you have stuff on there that just doesn't make sense. So my viewpoint is it is progressing well. We need to keep it going for another three to six months to start seeing some trends, because clearly the trends that we assume what we are seeing is moving, so it is hard for me to go and give you a two-year projection of where it is going to go, because we have different angles that we're looking at this point.

Douglas Whitman - Whitman Capital

You are very conservative guy. It sounds like things are going in the direction that you hope they would be.

Ali Jenab

Yes, right now it is going in the direction that we hoped it would be but to try to put something out there, this is where I'm going to be a year from now, I would rather not put a number out there because frankly we had a model, and we're looking at the model and we are getting some positive trends, and then some stuff is not quite to the level that we want it. Overall it is favorable. But we want to get a little bit more runway before we start going out there and putting commitments out there.

Douglas Whitman - Whitman Capital

I applaud the move to add more salesforce to monetize it. But one of the things you had talked about in the past and your salespeople have as well is that it takes closer to six months really for these people to get closer to a high level productivity. So could you talk a little about that? Also, you particularly had some turnover in your New York office. Where are you in one of your major advertising offices as well?

Ali Jenab

Overall, the minute we start to see what I saw in early July I personally got aggressive to go after recruiting salespeople. I can tell you the majority of the people that we've hired are seasoned people that were directly doing what we need them to do right now. Somebody who is selling online advertising for the CMP, which basically is pretty much the same advertisers that we're trying to go after, has a better chance of coming up to speed faster with us than somebody who is coming from the print side or another area. So overall I think we are able to attract people that know the space quite well. We're hoping the ramp will be shorter than that.

Also, part of the reason we want to be cautious during this quarter is we're not really counting on these people producing during this quarter as much as hopefully in the second quarter we're going to start seeing good results. As far as New York is concerned, two of the direct hires were in the New York market.

Douglas Whitman - Whitman Capital

Then it is reasonable to assume when we give the next quarter outlook these people should be at a reasonable level of productivity for the following quarter that we're in?

Ali Jenab

Yes. As I also said, we're looking to add three more between now and end of the calendar year. So between now and December we're going to be adding three more.

Douglas Whitman - Whitman Capital

Will they be in domestic markets?

Ali Jenab

These are all going to be domestic markets.

Operator

Your next question comes from James Gilman - Cross Research.

James Gilman - Cross Research

I wanted to follow-up on a couple of Doug's questions in reference to the new hires. Ali, you mentioned that there was a net increase, or Patty did, of three. When did the other two that you had, when did they leave the firm?

Ali Jenab

One left early in Q4. One left in the middle of Q4. And the two adds, two were added in July and three were added in August.

James Gilman - Cross Research

How much of an impact do you think the departures had on the business?

Ali Jenab

I think it had some impact on us. I don't know how to quantify it other than it had an impact on us. Part of the reason I mentioned that we had a bandwidth issue within our sales organization was a couple moved, and also a couple of other people weren't fully accessible during the quarter because of a leave of absence and stuff. So all that impacted us, our ability to respond, so initially we were fully focused on what we can do to fix the short-term sales issue there.

James Gilman - Cross Research

Last quarter you made the decision not to disclose CPMs. Have you seen any impact on that in your business, or do you think that would be more coming in this quarter?

Ali Jenab

It has not moved dramatically at all, so it has not. It has been pretty flat.

James Gilman - Cross Research

Turning to the ecommerce business, you had an improvement on the gross margin. Quarter to quarter it is not necessarily a trend there. Should we look at a trend or expect it to fluctuate going forward as it has been in the past?

Patty Morris

I wouldn't look at Q4 as a trend. As we have talked about on previous calls, a lot of the margin is affected actually by the team in terms of selling certain products at higher margins and lower margins. They have a really good blend of products where they manage the margins quite effectively. So I wouldn't view Q4 as an indicator on a go-forward basis.

James Gilman - Cross Research

Also in reference to the ecommerce business, it seems like for the year that the inventory turns went down, meaning more days there in inventory. Any comments that you can make on that and how to improve that?

Ali Jenab

One thing we're doing as that business is growing and as we plan for the holiday timeframe, what we end up doing we have been sourcing some of the product out of international markets, such as China and stuff. It has longer lead times. Then when you buy, it is more efficient to buy in larger quantities because you're shipping it across the water. So we do an analysis on the margin and stuff. We feel like it might be worthwhile for us to carry the inventory a little bit longer and get the better margin, and that is the little impact that you are seeing on the turns.

James Gilman - Cross Research

Besides moving the headquarters, how are the other initiatives to lower the overall OpEx going, since you have now disposed of the software business?

Ali Jenab

I think we have done a pretty good job. I think in the fourth quarter, if you look at the detailed numbers we did a pretty good job of trying to lowering that piece, and we're going to keep going at it. I think we're going to continue making progress. It is not one big item that we say we're going to eliminate, it is all the little stuff that we're doing to drive efficiency and I think we made good progress in fourth quarter, and we're going to keep moving it forward.

But again, on the other side of it is we're spending more on the sales side to grow that piece.

James Gilman - Cross Research

Patty, I don't know if you mentioned cash flow from operations. If you did or did not can you give that?

Patty Morris

I did not mention it, but we had an operating cash flow of $800,000 for the quarter.

James Gilman - Cross Research

In the Qs you typically break out the operating segment results, which give the operating income for the segments. Do you have those numbers available that you can disclose that?

Patty Morris

I don't have that right with me. That will definitely be in our 10-K.

Operator

Your next question comes from Jeff Osher - Harvest Small Cap.

Jeff Osher - Harvest Small Cap

I'm having problems backing into your $1.3 million of income from continuing ops. Can you just walk me through the reconciliation of that? If we start with the $6,000 of operating income you had on a GAAP basis.

Patty Morris

Actually, using income from continuing operations it is $706,000.

Jeff Osher - Harvest Small Cap

How do you get to $706,000? When I look at your income statement you have $6,000 from operating income. How do you get to $706,000 from operations?

Patty Morris

Yes. I think you're looking at the other income.

Jeff Osher - Harvest Small Cap

It is just how you guys define it. It says right here non-GAAP income from continuing operations of $1.3 million.

Patty Morris

You're looking at operating income from continuing ops and then you need to add in interest and other income of $700,000.

Jeff Osher - Harvest Small Cap

Why would I add interest income to your continuing operations? Isn't that a metric for the enterprise, the business itself?

Patty Morris

Our total income from continuing operations is inclusive of interest income in other.

Jeff Osher - Harvest Small Cap

You guys are including interest income in your continuing ops?

Patty Morris

Yes, we are.

Jeff Osher - Harvest Small Cap

Really? Okay. I presume the auditors are okay with that.

Then I guess just as far as OpEx, what was the big jump? Refresh my memory. I know they were some questions about what you guys stuck in unallocated corporate overhead last quarter, but sequentially it looks like OpEx was up about $1 million, call it $1.15 million. What was the composition of that?

Patty Morris

There are primarily two components associated with that. The first is the corporate and facilities allocation I mentioned on the call, which had been previously allocated to our software division. That is the first component of it. The second component of it is increased sales and marketing, headcount and related personnel costs.

Jeff Osher - Harvest Small Cap

How did you guys make the decision to allocate the $800,000 or $900,000 to your software division, and was that in disc ops last quarter?

Patty Morris

Yes, it was in disc ops last quarter.

Jeff Osher - Harvest Small Cap

Yet it is a continuing?

Patty Morris

Jeff, it is headcount-related allocation. So the software division was with the company through almost the end of our third quarter, therefore they absorbed most of that allocation for Q3. So those costs don't go away in Q4, they have to be redistributed among the existing or the remaining headcount.

Jeff Osher - Harvest Small Cap

Right, I understand that. But you guys chose not to. I guess in your Q3 allocation to corporate overhead, or to software, all along that was expected to be a continuing operating cost?

Ali Jenab

Because it was part of the quarter. Software was here during the Q3. Software didn't leave the company until end of --.

Jeff Osher - Harvest Small Cap

No, I understand that Ali. But it was backed out of your OpEx in Q3.

Patty Morris

It wasn't backed out.

Jeff Osher - Harvest Small Cap

It was in disc ops.

Patty Morris

Yes, it was allocated to the software division, which was then discontinued, and so that gets moved to the line discontinued operations. We can't make a decision for accounting purposes to keep it in continuing operations because it was truly a cost that was absorbed by that business.

Jeff Osher - Harvest Small Cap

And now it is being absorbed by the media business and ecommerce business?

Patty Morris

That's correct.

Ali Jenab

Those are the pieces of costs that, as James was asking earlier, we're trying to work those costs out of the system.

Jeff Osher - Harvest Small Cap

That is very helpful. Finally, as far as media gross margins, the lower gross margins, that is just a function of lower revenue? I know you guys aren't breaking out your CPMs, but at just a high level can you maybe talk about the sequential 200 point change of gross margin?

Ali Jenab

The allocation cost that gets spread across the company, it hits the line that is cost of goods sold on the media line also. So that allocation is just on the operating expenses. Also it hits because those are personnel that are operating from the site that are part of cost of goods sold, that gets increased because a certain amount of allocation gets allocated to that piece.

Operator

Your final question comes from Karim Bengalone - Trivium Capital.

Karim Bengalone - Trivium Capital

That was a tough question. I was thought companies got credit for operating income and their interest income.

Ali Jenab

No comment. I wasn't going to talk about it. Go and look at other companies P&Ls, but that is how it is. Everybody does it.

Karim Bengalone - Trivium Capital

If you look at recent announcements from some of the industry bellwethers, the HPs, Ciscos et cetera, they are all feeling much better and have commented, even TechData, about enterprise spending. It seems like now you have set a conservative target, or a reasonable target for the media business, do you think you have set yourself up to hopefully under promise and over deliver? In other words, your customers should feel good about the lead generation and then spend with you?

Ali Jenab

You know, we have been pretty optimistic all year that we feel good about the activity level that we have been getting from the clients. Frankly, we are coming off a little bit of surprise during that six to seven weeks that we experienced what we experienced. So I want to make sure we're prudent moving forward, that we're cautious with it.

But again, I tell you I'm happy to be doing the call today rather than two weeks ago, because two weeks ago we clearly had seen a it going back to the activity level that we saw and the response rates that we saw and close rates that we have seen, both as I mentioned on our direct sales and our remnants. I feel somewhat better, but I'm hoping in a few months I will even be more optimistic. But overall I think our customers are pretty healthy. But it clearly also shows one trend that tech guys don't spend much in the summertime because everybody takes off. No product introduction and the marketing teams within tech companies try to avoid doing major campaigns during the summer. Summer applies in the month of July and August and pretty much we saw that more dramatic this year.

Operator

There are no further questions in the queue. Do you have any closing comments?

Ali Jenab

No, I don't. Thank you very much for joining us. I'm looking forward to talking with you next quarter.

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Source: SourceForge F4Q07 (Qtr End 7/31/07) Earnings Call Transcript
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