iPass Q3 2007 Earnings Call Transcript

| About: iPass Inc. (IPAS)

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, 2007iPass Incorporated Earnings Conference Call. My name is Antwaan and I'll beyour coordinator for today. At this time all participants are in a listen onlymode. We will conduct a question and answer session towards the end of thisconference (Operator Instructions).

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

Tim Shanahan

Good afternoon. Thank you, for joining us to discuss ourfinancial and operating results for the third quarter of 2007. I'm Tim Shanahanand I'll be managing the call and introducing the company's speakers, KenDenman, Chairman and CEO of iPass; and Frank Verdecanna, Chief FinancialOfficer.

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

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

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

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

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

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

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

Ken Denman

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

We grew our revenues and improved our operating margins despitea decline in our dollar revenues. Our progress reflects our success attransforming our business and our business model. Today, as the resultsindicate, customers are looking to us for high-value broadband software andmobility services. But there is more to this story. We have transformed thevalue proposition we offer to our customers.

Before we began this process customers mostly look to us assimply their provider of remote access. Now, they also look to us to help themunify the management of all of their remote and mobile connectivity anddevices.

In our quarterly calls over the last year, we have describedthe incremental steps we’ve taken to achieve this transformation and thesesteps have included the successful launches of elevated services and pricingoptions, as well as our continuing efforts to expend our global broadbandroaming network.

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

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

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

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

And we expect today's global restructuring plan to furtherreduce these expenses by an additional $3 million per quarter beginning in Q1of 2008. We believe we are in position today to achieve these cost reductionswithout sacrificing our ability to continue to grow our revenues.

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

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

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

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

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

In the Asia-Pacific and EMEA regions sales occur predominantlythrough channel partners, Australia healthcare (ph) Corporation, orangebusiness services, Deutsch telecom, and Taiwan Chunghwa Telecom are noteworthyexamples of our FlexConnect partnerships.

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

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

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

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

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

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

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

At this point, I would just like to reiterate that we arecontinuing to make very positive strides in many areas of the business. And afew minutes I'll share more information about some of the exciting developmentsover the past quarter.

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

Frank Verdecanna

Thanks, Ken. Revenues for the third quarter ended September30th, 2007 were $47.7 million, versus $47.6 million last quarter, our thirdstraight quarter of sequential revenue growth.

I'm very happy to report that for the first time thisquarter, our total broadband revenues exceeded our dial revenues with broadbandrevenues 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 thequarter, compared with $11.7 million last quarter, an increase of 9%, and ourfix broadband revenues were $7 million in the quarter compared with $6.2million in Q2, a 12% sequential increase, and the largest singlequarter-over-quarter increase, since our acquisition of go-remote in Q1 of2006.

Software and service fee revenues in Q3 were $12.4 million,versus $11.4 million last quarter, a 9% increase, which is a significant rateof increase compared to last quarter's 2% growth rate. Dial revenues for Q3were $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 ourexpectations, it was not entirely unexpected given the continued user migrationto broadband and the typical Q3 seasonality. Quarterly broadband software andservice fees accounted for 67% of our total revenues, compared to 33% fromdial.

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

Our network access costs were $17.4 million in the thirdquarter, or 36.4% of total revenues versus $17.3 million or 36.3% of totalrevenues in the second quarter. Gross margin was 63.6%, compared with 53.7% inQ2, 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 aloss of $3.7 million in Q2. We had a non-GAAP operating loss of $400,000 in thethird 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 reductionof approximately $700,000.

Now I would like to review our net income and earnings pershare 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 dilutedshare in the previous quarter. We had non-GAAP net income of $415,000 in the thirdquarter, compared to non-GAAP net loss of $56,000 in the second quarter.

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

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

As Ken mentioned earlier, and as announced in our pressrelease today, we plan to reduce our non-stock compensation, networkoperations, 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 arestructuring charge of approximately $3.5 million in the fourth quarter.

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

These statements are forward-looking and actual results maydiffer materially. For the quarter ending December 31st, 2007, we anticipaterevenues of approximately $48 to $50 million. We anticipate a fully dilutedGAAP loss per share of between $0.03 and $0.06. We expect fully dilutednon-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 thedevelopments at iPass in recent quarters. Today our momentum continues. I'mpleased to report another company milestone. iPass recently achieved ourhighest rating to date with Gartner's magic quadrant for U.S. managed remoteaccess and mobility services. iPass has been included in lead requirement everyyear 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 ofthe leader quadrant. Not only does this validate our world-class enterprisemobility services, it also recognizes the value we offer in unifying themanagement of remote and mobile connectivity devices.

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

We’ve also added seven new Forbes Global 2000 customersduring the quarter bringing our total to 408. And as I mentioned earlier, welaunched version 3.55 over iPass connect universal client and have made apreview version of our 3.6 plan available, which is just as compatible andincludes enhances features for wireless roaming on campus of indication intoour planning.

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

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

Bottom-line profitability as been within our sites we havechosen to continue to build that capability, relationships and market positionsto drive the business to a growth profile and a market leadership position. Weseen these efforts and investments bare fruit. With the nose of the planepointing above the horizon we are working to balance our financial model bydriving 2008 profitability to be a solid improvement over 2007.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the lineof 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 revenueand get a little bit more color if you have in terms of what happened duringthe quarter that maybe lead to a little bit more attrition than you thought. Imean I know this revenue stream kind of be choppy by million or two fromquarter-to-quarter or was there anything that you can put a finger on thatmaybe lead it to be a little lighter.

Ken Denman

Brain, I was just add that if you look at our dollar erosionover the past two quarters, yes, there has been a kind of consistent erosionrate of kind of 8% to 10%, and then if you look at Q3, I would say we had atleast additional 3% or 4% of seasonality built in to that number, so that's howwe 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 onthat, is that a new initiative? Is at it continuation of the restructuring youhad around go-remote? What were the primary drivers of that?

Ken Denman

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

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

We kept the product integration team and QA team on shorethis year to deliver, because we couldn't screw that up. I mean, this was justa must. All of our major customers were waiting for this release. Trying topush 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 notour new initiative that we sort of thought up, two weeks ago. This is beensomething that's being on our mind and in our plan for some time but we have todo in a methodical fashion. We've spoken before about our efforts to pivotincreasingly toward the channel, particularly in North America.

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

Brian Essex - Morgan Stanley

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

Ken Denman

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

Brian Essex - Morgan Stanley

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

How do you typically look at share repurchases, in light ofthe operating cash that you paid for the quarter, and I guess that's kind of animplied question looking in to Q4, assuming that's going to be kind of negativecash 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 infrom 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 littlelonger, we announced a $30 million share repurchase plan.

Again, with all the knowledge we had at the time and withvery 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 acombination of that $30 million program.

So the $1.6 million, I think it was, Frank, was actuallyjust part of that final program that we had in place, and the Board hasannounced no further extensions of that program or no new programs, so we'renot in the market at this moment. And again, there's no formal authorizationfrom 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 Ziegalwith 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 wherethe 70 people are being taken out of by line of expense?

Ken Denman

Sure, Fred. 25 are coming from sales and marketing. And 45are coming from ops and R&D with the majority of those 45 coming fromR&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 knowFlexConnect partners are important. Who are you try to lean on mostly here inthe U.S. for your channels?

Ken Denman

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

So, those are just some of the examples on the systemsintegrator side. On the carrier side, we’ve had a relationship and haverelationship with people like global crossing, for instance and maybesignificantly, the work we have done to bring orange business services in tothe fold, orange, and equivalent was a subsidiary of orange, it has all beenrolled together now in under the orange services brand and we have seeingorange 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, butI don't want to be too long winded here. But we do have across the spectrum arange of older, but more importantly newer partners who are doing more businesswith us.

Fredrick Ziegal - Soleil Security

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

Ken Denman

The new partners?

Fredrick Ziegal - Soleil Security

Yes.

Ken Denman

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

Fredrick Ziegal - Soleil Security

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

Ken Denman

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

So, that's really, we had several large deployments throughlate 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 youtouching 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 anysuccess we're seeing in the fixed broadband business and the pipeline isterrific.

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 financialservices vertical. A couple of new potential customers, actually one that weclosed. One that is a significant resign and then a couple that are of highquality and good size in the pipeline.

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

So that's been one of the attributes and features of ourproduct 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. Itwas little less than we did last quarter. Last quarter was a record quarter forus, but we did see continued traction in the U.S. market and then we're alsostarting 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 Siddiquiwith Manning Napier. Please proceed with your question.

Tariq Siddiqui - Manning Napier

Hi, thank you for taking my call. If you could talk a littlebit about your network access costs, they seem to be as a percent of your totalsales or the percentage of your just the access revenues if you will have beengoing up every quarter, just any thoughts on when we might see leverage herebased 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 toFrank, that I think the ability to keep the gross margin relatively flat as wesaid we would last quarter, if you will recall. Our ability to keep thatrelatively flat in the face of, 14%, sort of dial erosion, and therefore sortof swapping out dial revenue for a broadband software and service fees. I thinkthat's quite an accomplishment. We feel really good about sort of holding theline given the differing gross margins relative to the product mix. So I'lljust stop there and turn it over to Frank.

Frank Verdecanna

Yeah, Tariq I’ll just add that I think in Q3 and then Ithink you'll also see in Q4, the importance of some of the larger globalbroadband roaming agreement and mobile data agreements that we have resignedwith our networking access providers. They are start both the GBR agreementsand the mobile data agreements, we saw an impact in Q3, which enabled us tokeep 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 bitmore here. Could you give have you ever given sort of a break and between whatin the software services like how much is software and how much is service justother roughly 50-50 or lopsided one way or another?

Ken Denman

The one piece of data that we have given out is thepercentage of perpetual licenses in that number. And it continues to be lessthan 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. Wereally do like the reoccurring revenue model. And I think, we're driving hardto focus on enterprise flat rate in terms of our service model.

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

Tariq Siddiqui - Manning Napier

Sure.

Ken Denman

And Tariq I’ll add, to that, in this quarter, 45% of ourtotal 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 increasethere based on the enterprise flat rate deals that we have been signing andretiming.

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 theline of Neil Weiner with Foxhill Capital Partners. Please proceed with yourquestion.

Neil Weiner - Foxhill Capital Partners

Hi, gentlemen. Just a follow-up on a couple of questionshere on the flat rate, how long do you think we'll see that number going from45 to say, 60 or 70% there is another year kind of time frame? Six month, ninemonths, where we're see the kind of cycling of that kind of flat rate, pricingand leverage of that?

Frank Verdecanna

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

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

Ken Denman

It is a cumulative effect, and given that we started amandatory 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 getthe great majority read that as kind of 75% plus of our customers on thatmodel.

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 getto that kind of penetration. It could be faster as we are focusing on marketingprograms to convince customers that it's a in their benefit to move quicker toenterprise flat rate and I think that's something you'll see from us in apretty aggressive fashion over the next two or three quarters.

Neil Weiner - Foxhill Capital Partners

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

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

Ken Denman

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

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

So, we think we continue to improve broadband margins everysingle 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 downfrom 36% which is just current quarter, I mean what is the goal here 30? I meanjust if you could just us kind of an idea what the goal would be as we movemore and more towards broadband?

Ken Denman

Yeah, I think our goal would be to get to our historic grossmargins 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 dialmargins did.

But we don't need to, because we're introducing a lot of peruser per month sees that are at 100% margin, so we look at trying to get thecombination 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 tokeep this cycle and this process going for us over time is additional accessmethodology. So, we are seeing 3G become a viable alternative, and we'resupporting that.

We don't see that per see as a threat. We see that as anopportunity properly executed against. But the other one we haven't talkedabout in the last couple of calls and I do think is becoming more and more of areality as least as it regards the network technology players that we are closeto, is we do believe there will over the next 24 month period an impact fromWiMAX.

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

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

And so I'm actually, quite hopeful over time that we'regoing to be continue to continue to do exactly what we have done over the lastmany years, which is continue to drive our network access costs incrementallydown by working with our partners and delivering them blue chip and a pricegrade quality traffic.

Neil Weiner - Foxhill Capital Partners

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

Can you detail how much of that will be cash versus non-cashand do you expect to collect all the $5.8 million accounts receivable that kindof 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 cashwithin 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, soI'm looking for a significant improvement there.

Neil Weiner - Foxhill Capital Partners

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

Ken Denman

Yeah, outside of the restructuring charge, our expectationis 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 withCredit Suisse. Please proceed with your question.

Phil Winslow - Credit Suisse

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

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

Ken Denman

Sure, Phil, the $3 million measurement from the current runrate 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, alot of that was leading up to anticipation of doing this. Doing thereorganization plan, so we managed headcount within the quarter, we alsomanaged some of the marketing spends.

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

Phil Winslow - Credit Suisse

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

Ken Denman

Well I think that, thanks for the question. I think that weare certainly hoping for efficiency in the selling channel. I mean that'sabsolutely part of the game here move we get greater leverage because we're nothaving to put feet on the street to drive revenues.

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

If you look at some of the partners that we are workingwith, with if we gain access to their embedded base of customers that's exactlyI 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 onthat thought.

Phil Winslow - Credit Suisse

Great. Thanks, guys.

Ken Denman

Thanks, Phil.

Operator

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

Ken Denman

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

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

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

We remain on track with the strategies, plans, and focusthat we presented to you last year in our analysts' day, and now we're turningmore of our attention towards steps to transit will our growing operational andmarketplace 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 coloron the opportunities, the very, very good opportunities we see as we look outtowards 2008. Thanks very much. Have a good evening.

Operator

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

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