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iPass, Inc. (NASDAQ:IPAS)

Q3 2007 Earnings Call

November 06, 2007 5:30 pm ET

Executives

Tim Shanahan - Director of Investor Relations

Ken Denman - Chairman and Chief Executive Officer

Frank Verdecanna - Chief Financial Officer

Analysts

Brian Essex - Morgan Stanley

Fredrick Ziegal - Soleil Security

Tariq Siddiqui - Manning Napier

Neil Weiner - Foxhill Capital Partners

Phil Winslow - Credit Suisse

Operator

Good day, ladies and gentlemen and welcome to the Q3, 2007 iPass Incorporated Earnings Conference Call. My name is Antwaan and I'll be your coordinator for today. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference (Operator Instructions).

I would now like to turn the presentation over to Mr. Tim Shanahan, Director, Investor Relations. Please proceed sir.

Tim Shanahan

Good afternoon. Thank you, for joining us to discuss our financial and operating results for the third quarter of 2007. I'm Tim Shanahan and I'll be managing the call and introducing the company's speakers, Ken Denman, Chairman and CEO of iPass; and Frank Verdecanna, Chief Financial Officer.

Before I turn the call over to Ken, I’d like to bring the following to your attention. The date of this call is November 6, 2007. Our presentation today contains forward-looking statements about events and circumstances that have not yet occurred.

Statements regarding our projected financial results for the fourth quarter of 2007, statements continuing words such as will, expect, believe and should, and other statements in the future tents are forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. These risks and uncertainties are set forth in our press release of today, as well as in our quarterly report on Form 10-Q under the caption, factors effecting operating results filed with the Securities and Exchange Commission on August 9th, 2007, and is available at www.sec.gov.

iPass undertakes no responsibility to update the information of this conference call under any circumstances. The press release announcing our financial results is available on our website at www.ipass.com in the pressroom section, under press release.

The current report on Form 8-K furnish with respect to our press release is available on our website in the investor relations section under SEC filings. In addition in this earnings call we will provide non-GAAP financial results. The press release on our website includes texts and tables that explain our reconciliation of these non-GAAP results to GAAP results.

This earnings call is also being recorded for replay and is being webcast, and will be available on our website for one quarter until next quarter's call.

I'll now turn the call over to iPass's Chairman and CEO, Ken Denman.

Ken Denman

Thanks, Tim. Good afternoon everyone. Over the past six quarters iPass has pursued opportunities to grow revenue, contain costs and improve operating margins. We’ve made study progress and as a result we are positioned to return to profitability beginning in the first quarter of 2008.

We grew our revenues and improved our operating margins despite a decline in our dollar revenues. Our progress reflects our success at transforming our business and our business model. Today, as the results indicate, customers are looking to us for high-value broadband software and mobility services. But there is more to this story. We have transformed the value proposition we offer to our customers.

Before we began this process customers mostly look to us as simply their provider of remote access. Now, they also look to us to help them unify the management of all of their remote and mobile connectivity and devices.

In our quarterly calls over the last year, we have described the incremental steps we’ve taken to achieve this transformation and these steps have included the successful launches of elevated services and pricing options, as well as our continuing efforts to expend our global broadband roaming network.

As a result of all of these efforts over the past six quarters, iPass has become a more balanced business and a much stronger company, a company that delivers superior customer value and continues to attract and retain the world's most sought-after enterprise accounts?

In short, the efforts we have discussed on our past calls have helped us continue to win in the marketplace for enterprise customers. On this call today I will focus most of my remarks on our continued efforts to translate our business success in to shareholder value.

As of today, we began our next phase of a corporate restructuring plan that will help us achieve and return to profitability. This corporate restructuring plan is detailed in the press release that was posted to our website earlier today.

Since acquiring overload in February of 2006, we have aggressively re-engineered the company to improve operational efficiencies and reduce costs. Since the acquisition, we have reduced non-stock compensation, network operations, research and development, sales and marketing, and general and administrative expenses by total of $3.7 million per quarter.

And we expect today's global restructuring plan to further reduce these expenses by an additional $3 million per quarter beginning in Q1 of 2008. We believe we are in position today to achieve these cost reductions without sacrificing our ability to continue to grow our revenues.

Making this restructuring plan work will require implementing some difficult measures the most difficult of all is the 12% headcount reduction which affects 70 iPass employees worldwide. In creating this plan, our management team took a close look at every part of our global corporate structure including our worldwide sales and market organization.

After a careful analysis of all regions worldwide, we are focusing our sales efforts on those regions with the best growth potential. Historically North American sales have been largely based on a direct selling model, which has been effective over the years.

Now we will rely more on our field sales model, selling through channels relationships that we have developed regional partners. These partners include carriers, system integrators, and value-adds resellers.

Many of our partners are gaining momentum and selling our services and use iPass to enhance their own offerings. In recent quarters, we successful established additional channel relationships in North America.

With the growing strength t of these relationships, with believe iPass will be able to generate its sales efficiently through any channel partners, and become less dependent on a direct sales model.

In the Asia-Pacific and EMEA regions sales occur predominantly through channel partners, Australia healthcare (ph) Corporation, orange business services, Deutsch telecom, and Taiwan Chunghwa Telecom are noteworthy examples of our FlexConnect partnerships.

We will continue to focus our efforts on building those relationships and generating new ones in those regions. As a mobile company it makes sense for iPass to use global talent for engineering and operations.

Part of our strategic long-term investment has involved moving select operations and developments to India. As you know when companies hastily move operations overseas they often experience mixed results.

Now as we continue to move more retention development work to India, I am confident we are prepared to execute a smooth transition that will maintain our high-quality standards and avoid customer disruptions.

This transition began in the second quarter of 2006 after our acquisition Go-remote.

At that time we moved many software development and quality issuance function to our newly acquired development facility in Bangalore.

Today, these teams are well establish add we now have an opportunity to further leverage our India operations. We recently completed a major product upgrade in the form of our iPass connect speed up 55 client, so we think it is the appropriate time to complete the transition and give our India team more end to end accountability for the iPass connect platform.

It is important to point out that the strategic development work in technology, technology strategy and innovation will continue in regular coarse. As I mentioned earlier, our global restructuring is part of our continued focus on creating better long-term shareholder value, by meeting our objectives and reducing non-stock operations for network operations, R&D and SG&A expenses by $3 million per quarter, beginning in Q1, 2008, we expect to be GAAP profitable in that quarter.

At this point, I would just like to reiterate that we are continuing to make very positive strides in many areas of the business. And a few minutes I'll share more information about some of the exciting developments over the past quarter.

Now I'll turn the call over to Frank to review our third quarter results.

Frank Verdecanna

Thanks, Ken. Revenues for the third quarter ended September 30th, 2007 were $47.7 million, versus $47.6 million last quarter, our third straight quarter of sequential revenue growth.

I'm very happy to report that for the first time this quarter, our total broadband revenues exceeded our dial revenues with broadband revenues coming in at $19.6 million versus $17.9 million in Q2, a 10% sequential increase.

We had $12.7 million in mobile broadband revenues in the quarter, compared with $11.7 million last quarter, an increase of 9%, and our fix broadband revenues were $7 million in the quarter compared with $6.2 million in Q2, a 12% sequential increase, and the largest single quarter-over-quarter increase, since our acquisition of go-remote in Q1 of 2006.

Software and service fee revenues in Q3 were $12.4 million, versus $11.4 million last quarter, a 9% increase, which is a significant rate of increase compared to last quarter's 2% growth rate. Dial revenues for Q3 were $15.7 million versus $18.4 million in Q2, a 14% rate of decline.

And while the erosion rate was at the high end of our expectations, it was not entirely unexpected given the continued user migration to broadband and the typical Q3 seasonality. Quarterly broadband software and service fees accounted for 67% of our total revenues, compared to 33% from dial.

When combined our broadband software and service fee revenues increased 10% sequentially in the third quarter. U.S. revenues in the quarter accounted for 63% of total revenues, and international revenues accounted for the remaining 37%.

Our network access costs were $17.4 million in the third quarter, or 36.4% of total revenues versus $17.3 million or 36.3% of total revenues in the second quarter. Gross margin was 63.6%, compared with 53.7% in Q2, virtually unchanged.

Now let's review our operating loss and operating expenses. We had a GAAP operating loss of $2.7 million in the third quarter, down from a loss of $3.7 million in Q2. We had a non-GAAP operating loss of $400,000 in the third quarter, again, down from a loss of $1.1 million last quarter. During Q3, our combined non-stock compensation expenses for network operations, R&D, and SG&A, was $30.7 million, compared with $31.4 million in Q2, a reduction of approximately $700,000.

Now I would like to review our net income and earnings per share both on a GAAP and non-GAAP basis. We had a net loss of $1.1 million, or $0.02 per diluted share on a GAAP basis in the third quarter.

Down from a net loss of $2.3 million or $0.04 per diluted share in the previous quarter. We had non-GAAP net income of $415,000 in the third quarter, compared to non-GAAP net loss of $56,000 in the second quarter.

We ended the quarter with a total cash and investment balance of approximately $74 million, and no debt. The reduction in cash from last quarter was related to $1.6 million of stock repurchases in July, $5.8 million increase in accounts receivable. The increase in accounts receivable in the quarter was primarily the result of the following factors.

We have strong revenues booked in the last month of the quarter but not collected, and during the quarter we automated the fixed-broadband billing operations, resulting in payment delays as customers adjusted to the new billing formats and reports. We expect normal collections to resume in Q4, as we believe the Q3 collections performance was a timing issue, and not related to the quality or credit worthiness of our customers.

As Ken mentioned earlier, and as announced in our press release today, we plan to reduce our non-stock compensation, network operations, R&D, and SG&A expenses by $3 million in Q1 of 2008, primarily through a reduction in headcount. As a result, we expect to record a restructuring charge of approximately $3.5 million in the fourth quarter.

Now I would like to cover our projections for the fourth quarter of 2007. The following statements are based on information available to iPass today, and the company does not assume any duty to update these numbers at anytime during the quarter or thereafter.

These statements are forward-looking and actual results may differ materially. For the quarter ending December 31st, 2007, we anticipate revenues of approximately $48 to $50 million. We anticipate a fully diluted GAAP loss per share of between $0.03 and $0.06. We expect fully diluted non-GAAP earnings per share to be between zero and $0.03 earnings per share.

Now I would like to turn the call back over to Ken.

Ken Denman

Thanks, Frank. I began the call by recapping some of the developments at iPass in recent quarters. Today our momentum continues. I'm pleased to report another company milestone. iPass recently achieved our highest rating to date with Gartner's magic quadrant for U.S. managed remote access and mobility services. iPass has been included in lead requirement every year from the inception of this highly regarded report in 2002.

In its 2007 report, Gartner’s positioned iPass as theclear leader pricing us in the uppermost right hand corner of the leader quadrant. Not only does this validate our world-class enterprise mobility services, it also recognizes the value we offer in unifying the management of remote and mobile connectivity devices.

We continue to attract new customers, and maintain exception levels of customer satisfaction and retention. Also we continued to invest in building our global WiMAX footprints by adding 10,000 new hot spots from French Telecom’s WiFi network in Europe in October.

We’ve also added seven new Forbes Global 2000 customers during the quarter bringing our total to 408. And as I mentioned earlier, we launched version 3.55 over iPass connect universal client and have made a preview version of our 3.6 plan available, which is just as compatible and includes enhances features for wireless roaming on campus of indication into our planning.

These important product releases have been a major focus of our R&D efforts in 2007. Many of our blue-chip Forbes Global 2000 corporate customers have plans to move to Vista over the next year or two. We have been focused on nailing this important release, and I believe we have done exactly that.

The 3.6 version coming out in late Q4 or early Q1, has significant 3G integration features that our customers are also excited about. Getting these releases done and in the hand of our team in India should allow us to it rate even faster on future enhancements given the scale of our team in Bangalore.

Bottom-line profitability as been within our sites we have chosen to continue to build that capability, relationships and market positions to drive the business to a growth profile and a market leadership position. We seen these efforts and investments bare fruit. With the nose of the plane pointing above the horizon we are working to balance our financial model by driving 2008 profitability to be a solid improvement over 2007.

The steps we announced today are the right thing to do for the business and shareholders. With that, I turn the call back to the operator for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Brian Essex with Morgan Stanley. Please proceed with your question.

Brian Essex - Morgan Stanley

Hi, good afternoon, guys. How are you?

Ken Denman

Hi, Brian.

Frank Verdecanna

Hi, Brian. Good thing.

Brian Essex - Morgan Stanley

I was wondering to get a little bit to the dial-up revenue and get a little bit more color if you have in terms of what happened during the quarter that maybe lead to a little bit more attrition than you thought. I mean I know this revenue stream kind of be choppy by million or two from quarter-to-quarter or was there anything that you can put a finger on that maybe lead it to be a little lighter.

Ken Denman

Brain, I was just add that if you look at our dollar erosion over the past two quarters, yes, there has been a kind of consistent erosion rate of kind of 8% to 10%, and then if you look at Q3, I would say we had at least additional 3% or 4% of seasonality built in to that number, so that's how we got to the high end of our expectations of around 14%.

Brian Essex - Morgan Stanley

Okay. And then the reduction in Forbes, if I could touch on that, is that a new initiative? Is at it continuation of the restructuring you had around go-remote? What were the primary drivers of that?

Ken Denman

Brian, the primary driver is a continuation of our strategy to get more leverage out of the business, but we have gaited that strategy to take care of specific things that we needed to do in the business, and from our perspective growth and product quality, product capability, the breadth of the product platform are related. We have to deliver against the market requirements, the market needs, in fact. So that sort of is very tightly tied to our list of deliverables, and the R&D team.

We have been moving in an aggressive fashion to make sure that we have a strong R&D facility team and operation in Bangalore as part of the previous acquisition, and we've been solidifying that group, while at the same time delivering against current product requirements mainly Vista and some of the 3G things that the market was wanting this year.

We kept the product integration team and QA team on shore this year to deliver, because we couldn't screw that up. I mean, this was just a must. All of our major customers were waiting for this release. Trying to push two more to India all at one time we felt it just was too risky.

In short, we did taken in step, taken it in phases. It's not our new initiative that we sort of thought up, two weeks ago. This is been something that's being on our mind and in our plan for some time but we have to do in a methodical fashion. We've spoken before about our efforts to pivot increasingly toward the channel, particularly in North America.

So when you look at both of those initiatives those are things that we've talked to you about before, but we've been facing them in a way and in the manner, which allows the top line of the business to continue to move forward. So it really has been part of a broader strategic plan that we have had in place.

Brian Essex - Morgan Stanley

Okay. And then with those expense reductions. Did you have an offer, cash from operations number for the quarter?

Ken Denman

Brian, it wasn't in our press release, but our operating cash flows for the quarter was an outflow of $4.1 million, and that has to do with increasing the accounts receivables I discussed earlier.

Brian Essex - Morgan Stanley

Okay. And then, you know, I guess in line with that, looking at the shares you repurchased, how do you typically, from a go-forward basis and how we can kind of frame that out in our model.

How do you typically look at share repurchases, in light of the operating cash that you paid for the quarter, and I guess that's kind of an implied question looking in to Q4, assuming that's going to be kind of negative cash flow quarter, given the restructuring charge, how, or will it?

And, how would you look at repurchasing shares next quarter?

Ken Denman

We look at repurchases shares and allocation of capital in from a strategic sense and with a strategic bent in mind. And you might recall, almost a year and a half ago, it was a year and a half ago, possibly a little longer, we announced a $30 million share repurchase plan.

Again, with all the knowledge we had at the time and with very much a strategic focus on what was the best use of cash for shareholders. The final share repurchase that we did this last quarter Q3, that was a combination of that $30 million program.

So the $1.6 million, I think it was, Frank, was actually just part of that final program that we had in place, and the Board has announced no further extensions of that program or no new programs, so we're not in the market at this moment. And again, there's no formal authorization from the Board to repurchase any more shares.

Brian Essex - Morgan Stanley

Got it. Thank you.

Operator

Your next question comes from the line of Fredrick Ziegal with Soleil Security. Please proceed with your question.

Fredrick Ziegal - Soleil Security

Hi, guys.

Ken Denman

Hi.

Frank Verdecanna

Hi, Fred.

Fredrick Ziegal - Soleil Security

Let's see, can you give me or give us a breakdown of where the 70 people are being taken out of by line of expense?

Ken Denman

Sure, Fred. 25 are coming from sales and marketing. And 45 are coming from ops and R&D with the majority of those 45 coming from R&D.

Fredrick Ziegal - Soleil Security

Okay. What's the direct, indirect mix as of Q3?

Ken Denman

The current quarter was 58% direct and 42% indirect.

Fredrick Ziegal - Soleil Security

Okay. And in the U.S., Well, outside the U.S., I know FlexConnect partners are important. Who are you try to lean on mostly here in the U.S. for your channels?

Ken Denman

Well, we have several value added resellers that we have historically used in the U.S. here and those will continue. We have also extended our reach with a couple of systems integrator deals that we have done and again, there we're at the beginning or early stages of those deals, but it's we do have relationships in place with people like excensure and CSC and we had an ongoing relationship with EDS that we really do need to get more out of.

So, those are just some of the examples on the systems integrator side. On the carrier side, we’ve had a relationship and have relationship with people like global crossing, for instance and maybe significantly, the work we have done to bring orange business services in to the fold, orange, and equivalent was a subsidiary of orange, it has all been rolled together now in under the orange services brand and we have seeing orange as a very solid partner, not only in EBA, but also in the U.S.

So, that’s, I could give you a couple of other examples, but I don't want to be too long winded here. But we do have across the spectrum a range of older, but more importantly newer partners who are doing more business with us.

Fredrick Ziegal - Soleil Security

And where would you kind of put them on the success profile or spectrum today?

Ken Denman

The new partners?

Fredrick Ziegal - Soleil Security

Yes.

Ken Denman

I would say that we're solidly successful, but we are earlier, I am seeing enough signs and we're seeing enough breadth in terms of them being able to move across product, for instance, being able to support us or work with us and the fixed broadband area or mobile data area that we know we're on the right track.

Fredrick Ziegal - Soleil Security

Okay. Any particular reason for the pickup sequentially in the fixed broadband business?

Ken Denman

Well, we’ve had some very nice closes over the course of the last year and with some big brand retail chains, who are frankly we were just in the sort of right point of the deployment process to get them up and running.

So, that's really, we had several large deployments through late spring and summer and early fall, it typically things slow down a bit, just a bit as you get in to the holiday season, retailers don't like you touching anything in, of course, the most important weeks of the year for them, but that's the real answer.

I would ask, Fred, though, that we're very happy with any success we're seeing in the fixed broadband business and the pipeline is terrific.

Fredrick Ziegal - Soleil Security

What are you seeing in the financial services vertical?

Ken Denman

Actually, we do have a couple of customers in the financial services vertical. A couple of new potential customers, actually one that we closed. One that is a significant resign and then a couple that are of high quality and good size in the pipeline.

So, we're seeing the financial services be a very interesting vertical. We've spent the time and the energy to make sure that we are Visa, kiss comply and that in itself a has been a nice marketing vehicle for us, not only for the financial services, but for all of the retail space because the market is very sensitive now to anything having to do with credit card validation and protection of personal information.

So that's been one of the attributes and features of our product set that has resinated very well with the market.

Fredrick Ziegal - Soleil Security

Last question, how many 3G cards did you ship?

Ken Denman

Fred, we don't typically give out that quarterly number. It was little less than we did last quarter. Last quarter was a record quarter for us, but we did see continued traction in the U.S. market and then we're also starting to see some traction in the Europe market.

Fredrick Ziegal - Soleil Security

Okay. But it was a little less than Q2?

Ken Denman

Correct.

Fredrick Ziegal - Soleil Security

Okay. Thanks. Thanks, guys.

Ken Denman

Thank you.

Operator

Your next question comes from the line of Tariq Siddiqui with Manning Napier. Please proceed with your question.

Tariq Siddiqui - Manning Napier

Hi, thank you for taking my call. If you could talk a little bit about your network access costs, they seem to be as a percent of your total sales or the percentage of your just the access revenues if you will have been going up every quarter, just any thoughts on when we might see leverage here based on the bigger contracts, bigger minutes of use and so forth.

Ken Denman

I would just start off and I'll hand it very quickly to Frank, that I think the ability to keep the gross margin relatively flat as we said we would last quarter, if you will recall. Our ability to keep that relatively flat in the face of, 14%, sort of dial erosion, and therefore sort of swapping out dial revenue for a broadband software and service fees. I think that's quite an accomplishment. We feel really good about sort of holding the line given the differing gross margins relative to the product mix. So I'll just stop there and turn it over to Frank.

Frank Verdecanna

Yeah, Tariq I’ll just add that I think in Q3 and then I think you'll also see in Q4, the importance of some of the larger global broadband roaming agreement and mobile data agreements that we have resigned with our networking access providers. They are start both the GBR agreements and the mobile data agreements, we saw an impact in Q3, which enabled us to keep the margin flat and in light of, significant dial erosion.

Tariq Siddiqui - Manning Napier

All right. I guess, if I could just jump in for a little bit more here. Could you give have you ever given sort of a break and between what in the software services like how much is software and how much is service just other roughly 50-50 or lopsided one way or another?

Ken Denman

The one piece of data that we have given out is the percentage of perpetual licenses in that number. And it continues to be less than 10% of that bucket.

Tariq Siddiqui - Manning Napier

Okay. And the last question…?

Ken Denman

By the way is something that I don't feel bad about. We really do like the reoccurring revenue model. And I think, we're driving hard to focus on enterprise flat rate in terms of our service model.

Again, we certainly take the license revenue or perceptual license fees, excuse me, perpetual license revenue wherever we can and wherever it is appropriate to take it, but the business model is a solidly reoccurring revenue model.

Tariq Siddiqui - Manning Napier

Sure.

Ken Denman

And Tariq I’ll add, to that, in this quarter, 45% of our total revenues came from flat rate or subscription revenue stream.

Tariq Siddiqui - Manning Napier

Okay. That was my last question.

Ken Denman

So that was up from 49%, so we are seeing a nice increase there based on the enterprise flat rate deals that we have been signing and retiming.

Tariq Siddiqui - Manning Napier

Great. Thanks a lot, guys.

Ken Denman

Thank you.

Tariq Siddiqui - Manning Napier

Okay.

Operator

(Operator Instructions) Your next question comes from the line of Neil Weiner with Foxhill Capital Partners. Please proceed with your question.

Neil Weiner - Foxhill Capital Partners

Hi, gentlemen. Just a follow-up on a couple of questions here on the flat rate, how long do you think we'll see that number going from 45 to say, 60 or 70% there is another year kind of time frame? Six month, nine months, where we're see the kind of cycling of that kind of flat rate, pricing and leverage of that?

Frank Verdecanna

Neil, I would expect that we'll see that happen in 2008. If you look at, the current quarter deals signed, 100% of the deals in North America were signed under enterprise flat rate, and 75% of the deals in Europe.

So, we continue to have the predominance of all new deals signed under this structure, and a lot of the resigns that we're doing we're still pushing very hard to move them to enterprise flat rate pricing. So I think you'll continually see that number walk up.

Ken Denman

It is a cumulative effect, and given that we started a mandatory or sort of a predominantly enterprise flat rate model. A year ago, last July, we had forecasted that it would take it, approximately 30 months, potentially a little longer between new signs deals and resigned deals to get the great majority read that as kind of 75% plus of our customers on that model.

So I think look from much, July 1st of '06 through to kind of, July 1st of '09 that's sort of in my head that's kind of the worst case to get to that kind of penetration. It could be faster as we are focusing on marketing programs to convince customers that it's a in their benefit to move quicker to enterprise flat rate and I think that's something you'll see from us in a pretty aggressive fashion over the next two or three quarters.

Neil Weiner - Foxhill Capital Partners

Okay. Just a backup question on the network access cross, if dial erodes at kind of at the same 8% to 10% historical rate, now that you are getting, broadband penetration.

What kind of leverage can we see in bringing that those network access costs down next year?

Ken Denman

I think, we're going to see continued improvement on the broadband margins, as we’ve been able to do every year since we got in to that game. The two things that do help us is, one, is the increased volume that we see quarter-over-quarter in broadband.

And then the additional thing is the competitive network that we keep introducing to our platform. You know, each one of these networks, when we introduced 3G that helped our global broadband roaming prices because now there's other players in town that could capture that traffic.

So, we think we continue to improve broadband margins every single quarter and we don't think that changes next year.

Neil Weiner - Foxhill Capital Partners

I mean is this something that you think you can bring down from 36% which is just current quarter, I mean what is the goal here 30? I mean just if you could just us kind of an idea what the goal would be as we move more and more towards broadband?

Ken Denman

Yeah, I think our goal would be to get to our historic gross margins of kind of 75% with broadband and software and service fees. I mean, the key is that we may never see broadband margins alone get as high as dial margins did.

But we don't need to, because we're introducing a lot of per user per month sees that are at 100% margin, so we look at trying to get the combination of the two closer to that 75% range.

Neil Weiner - Foxhill Capital Partners

Okay.

Ken Denman

I would just add that the help that we see on the horizon to keep this cycle and this process going for us over time is additional access methodology. So, we are seeing 3G become a viable alternative, and we're supporting that.

We don't see that per see as a threat. We see that as an opportunity properly executed against. But the other one we haven't talked about in the last couple of calls and I do think is becoming more and more of a reality as least as it regards the network technology players that we are close to, is we do believe there will over the next 24 month period an impact from WiMAX.

We think we'll see WiMAX begin to enter the market and to us that looks like another access methodology, more networks, more fragmentation and it’s going to make all networks a little more competitive.

So for instance, if I have the opportunity to provision a DSL link, excuse me a fixed-broadband location if bet if I can provision a DSL or cable modem or WiMAX link to that location, it’s going to be put pressure on those other two access methodology also the two network providers to bring their pricing down.

And so I'm actually, quite hopeful over time that we're going to be continue to continue to do exactly what we have done over the last many years, which is continue to drive our network access costs incrementally down by working with our partners and delivering them blue chip and a price grade quality traffic.

Neil Weiner - Foxhill Capital Partners

One last question for Frank, two things, the restructuring costs in the next quarter.

Can you detail how much of that will be cash versus non-cash and do you expect to collect all the $5.8 million accounts receivable that kind of slips from this quarter in to next quarter?

Ken Denman

Sure. So on the restructuring charge, out of that roughly $3.5 million expectation, we expect around $2.5 million to be paid out in cash within the quarter. And then as far as the accounts receivable, yes, I believe, you know, it was a timing issue in that we will correct that increase in Q4, so I'm looking for a significant improvement there.

Neil Weiner - Foxhill Capital Partners

And so outside re structuring charge, you should be cash-flow positive?

Ken Denman

Yeah, outside of the restructuring charge, our expectation is that we will have operating cash flows.

Neil Weiner - Foxhill Capital Partners

Thank you.

Ken Denman

Thanks, Neil.

Operator

Your next question comes from the line of Phil Winslow with Credit Suisse. Please proceed with your question.

Phil Winslow - Credit Suisse

Hi, guys. I just wanted to walk through some of the expense savings and also this quarter, obviously, you saw you guys exhibited pretty strong expense controls.

Any of that $3 million, did any of that show up this quarter or is that all incremental from the end of Q3?

Ken Denman

Sure, Phil, the $3 million measurement from the current run rate of the $30.7 million we had this quarter.

Phil Winslow - Credit Suisse

Okay.

Ken Denman

And so we did have significant savings within the quarter, a lot of that was leading up to anticipation of doing this. Doing the reorganization plan, so we managed headcount within the quarter, we also managed some of the marketing spends.

So, we have over the past year and a half, really focused on manage expenses down, and this quarter was note different, but again, we are looking forward to a significant decrease in Q1 2008.

Phil Winslow - Credit Suisse

And then I guess when you do look at just the revenue impact of this, especially when you start talking about going a little more indirect versus direct, do you see any more efficiency of sales betweens these two different channels, or how do you think this affecting just the revenue side of the equation?

Ken Denman

Well I think that, thanks for the question. I think that we are certainly hoping for efficiency in the selling channel. I mean that's absolutely part of the game here move we get greater leverage because we're not having to put feet on the street to drive revenues.

But we're investing dollars, but we're investing dollars in resource and assets that are even more highly leverages. That's certainly our hope and our belief in moving in to this model.

If you look at some of the partners that we are working with, with if we gain access to their embedded base of customers that's exactly I think the point did you are speaking to. So, that's certainly in our mind, and at certainly our goal and at certainly our belief that we can execute on that thought.

Phil Winslow - Credit Suisse

Great. Thanks, guys.

Ken Denman

Thanks, Phil.

Operator

There are no further questions at that time. I would now like to turn the call back over to Mr. Ken Denman.

Ken Denman

Thank you very much, operator. Ladies and gentlemen, thanks for joining us this evening. We come off of what we think of as being a solid quarter, and a quarter that continues to provide evidence of a strategic plan that is in place, that is solid and that we're executing against.

It's always fortunate to have talented and capable people leave our business, and I want to acknowledge we have exactly that phenomenon going on as a result of the actions that we announced today.

But it is exactly the right step to take, and we're doing it for all of the right reasons, and all of those people are shareholders, by the way, and it's our goal to make sure that, that their shares are worth a lot more than they are today over time.

We remain on track with the strategies, plans, and focus that we presented to you last year in our analysts' day, and now we're turning more of our attention towards steps to transit will our growing operational and marketplace success in to shareholder value.

And I look forward to talking with you in the late January, early February time frame about our Q4 results, and provide a little more color on the opportunities, the very, very good opportunities we see as we look out towards 2008. Thanks very much. Have a good evening.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.

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