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InnerWorkings, Inc. (NASDAQ:INWK)

Q3 2007 Earnings Call

November 7, 2007 5:30 pm ET

Executives

Nick Galassi - CFO

Steve Zuccarini - CEO

Eric Belcher - COO

Analysts

George Sutton - Craig-HallumCapital

Franco Turrinelli - William Blair& Company

Chris Gutek - Morgan Stanley

Randy Hugen - Piper Jaffray

Youssef Squali - Jefferies &Company

Lev Polinsky – J.P. Morgan

Operator

Good day and welcome everyone tothe InnerWorkings Incorporated Third Quarter Earnings Release Conference. As a remainder,today's conference is being recorded. At this time, I would like to turn theconference over to the Chief Financial Officer, Nick Galassi. Please go ahead,sir.

Nick Galassi

Thank you, Sarah. Good afternoon,everyone, and thanks for joining us on our third quarter 2007 earnings call. Iam Nick Galassi, the Chief Financial Officer of InnerWorkings. Joining me todayis our Chief Executive Officer, Steve Zuccarini and our Chief Operating Officer,Eric Belcher.

Before we begin, I'd like to notethat this call will include forward-looking statements relating to futureresults that are made pursuant to the Safe Harborprovisions of the Federal Securities Laws. These statements are subject to avariety of risks, uncertainties and assumptions that may cause actual resultsto differ materially from those stated or implied by the forward-lookingstatements. Any forward-looking statements represent our views only as of todayand should not be relied upon as representing our views as of any subsequentdate. Listeners of the call are advised to review the risk factors contained inour Form 10-K. Please note that this call is intended for investors andanalysts and may not be reproduced in the media in whole or in part without ourprior consent.

At this time, I'll turn the callover to our CEO, Steve Zuccarini, who will recap some of the highlights of thethird quarter. Following Steve's recap, our COO, Eric Belcher, will discusssome of our recent acquisitions. I will then spend a few minutes on thefinancials and Steve will wrap up before we finish with your questions. Steve?

Steve Zuccarini

Thanks, Nick, and thank youeveryone for joining us on our call today. Our third quarter results reflectour track record of success by executing on the strategic plan we laid out tothe investment community. We continue to post strong growth while we havesimultaneously generated strong cash flow. Third quarter results and revenuerose 73% to $72.1 million, up from $41.8 million in the same quarter last year.

Operating income also showedstrong growth, increasing 60% to $5.8 million from $3.6 million in the prioryear's third quarter. During the quarter, these outstanding financial resultswere made possible by the commitment of our team and our ability to execute onall levels of our growth strategy that we previously outlined. That includesexpanding our base of transactional and enterprise clients, further penetratingour existing customer base and growing through selective acquisitions.

I would like to take a minute tohighlight some of our most noteworthy achievements in the third quarter. Wecontinue to attract strong talent to our sales team. During the quarter, weadded 10 new sales executives. Of these individuals, six were gained thoughorganic hiring and four sales executives were brought on as a result of ouracquisition of Brown+Partners, which was a deal we completed in July of thisyear. In a few minutes, our Chief Operating Officer, Eric Belcher, will discussthis acquisition, as well as two others we completed following the close of thethird quarter.

We are particularly pleased thatthe sales people hired this quarter have expertise in geographic markets thatare currently under-penetrated by our existing sales force. We feel confidentthat these experienced individuals will achieve an even greater level ofsuccess, as a result of the InnerWorkings expanded product portfolio andsupplier network.

Transactional revenues increased138% year-over-year, and we serviced 2,376 customers in the third quarter of2007 versus 481 last year. Enterpriseclient growth remained strong. Five new enterprise accounts were signed duringthe third quarter. Enterpriserevenues increased 51% year-over-year to $47 million with a customer base of110 enterprise accounts, versus 86 at this time last year.

Two of our new enterprise clientswere converted from transactional clients, which once again illustrates thepower of our service offering, as we are able to take project or spot-typeaccounts and convert them into long-term engagements. We are pleased that oneof these conversions came from one of our acquired companies.

As we fully integrateacquisitions and continue to grow, we have accelerated our joint sellingprocess of utilizing our season business development team to assist our salesexecutives in landing new enterprise accounts. The results of these efforts arebeginning to gain traction.

In addition, during the quarterwe were able to add three well-known brands to our enterprise accounts list.These brands include a prominent national retailer, a major national cableprovider and a global advertising agency. In the case of the global advertisingagency, we provide on-site personnel, end-to-end direct marketing andpurchasing expertise, and significant savings in the areas of print,distribution and payroll.

Client retention and growthcontinues to be a major focus for our company and several factors point to oursuccess. Revenue from the top 25 accounts for the first nine months of 2006increased by 47% during the same period in 2007, signifying that our keycustomer relationships remained strong and growing. Another highlight duringthe quarter is our continued success in driving organic growth.

During the third quarter morethan 50% of our growth was organic. And through the first nine months of 2007,sales force productivity alone rose more than 16% compared to the same periodin 2006. And while it is easy to get caught up in these outstanding growthnumbers generated by the company, we want to remind investors that managementcontinues to invest in the future. We have dedicated teams concentrating oneach area of our growth strategy.

Our integration team focuses onintegrating the acquired companies as quickly as possible, typically between 90and 120 days. Our customer implementation teams work with our new enterpriseaccounts to assure successful startup and on-boarding through a disciplinedmethodology that addresses appropriate staffing levels and organizationalissues critical to the success of their programs. And we continue to makeadditions to our management team that will allow us to strengthen our saleseffort and reinforce our competitive position.

Recently, we hired [Jonathan Sheen],as our Senior Vice President of Sales Operations. Prior to joining InnerWorkings,Jonathan held a high level management position at Domtar Corporation, a leadingglobal paper manufacturer. He served in various management roles withincreasing responsibility at Domtar for over 12 years. Through managementadditions and strategic initiatives, we continue to build the infrastructure ofthe company and we continue to make investments in our proprietary technologyand business model.

With that said, I'd like to nowturn the call over to Eric Belcher, our Chief Operating Officer. I've askedEric to give more details regarding our recent acquisition of Brown+Partners and the two other strategic tuck-in acquisitions wecompleted following the close of the third quarter.

Eric Belcher

Thanks Steve. On the call today,I'll focus on our recent acquisitions, which have allowed us to enter some veryattractive new markets. As previously announced, we acquired a Philadelphia-basedprint management company called Brown+Partners duringthe third quarter.

This acquisition gives us astrong platform for growth in both the Philadelphiamarket and across the Mid-Atlantic region in general. Its current roster ofclients include large public companies headquartered in the Philadelphia areaand it's important to note that while Brown+Partners was acquired just fourmonths ago, they are already integrated onto our PPM4 technology platform.

Following the close of the thirdquarter, the company acquired two additional print management firms. Combinedthese two companies have 10 sales representatives and generated revenue ofapproximately $14 million in 2006. First, we acquired Dataflow ManagementSystems, known as DFMS, in October of this year and, as a result, we now have asales and operational presence in the Dallasmarket.

This 22-year-old company has anexcellent reputation and a strong customer list. DFMS currently provides printmanagement services to more than 400 clients and these customers are supportedby a supplier community of more than a 1000. Second, also in the month ofOctober, we acquired Graphics Resource Group, which primarily serves the Minneapolis market.Through its talented sales force, last year the company had 150 customersserviced by more than 200 suppliers.

These acquisitions were completedto strengthen our geographic focus in the new markets of Philadelphia,Minneapolis and Dallas cities with significant Fortune 1000representation. As a result of all of our recently completed transactions, wehave amassed a strong footprint in the major print markets throughout the United States,and we believe this will allow us to more effectively penetrate both ourcurrent and our targeted customer base.

These acquired companies werechosen because they are among the best run print procurement and printmanagement firms in their respective markets, and we feel strongly that theseacquisitions will be successfully integrated into the InnerWorkings model and thatour combined resources will accelerate both the growth and the profitability ofthese firms. The valuation multiples and the structure of the payments,including the performance-based earn-outs for these three acquisitions areconsistent with our historical practices.

I will now turn the call over to Nickfor a discussion of the financials.

Nick Galassi

Thanks, Eric. I'd like to now spenda few minutes and walk through our financial results for the quarter in a bitmore detail.

As Steve mentioned, our revenuefor the fiscal third quarter was $72.1 million. This represents a 73% increaseover revenue of $41.8 million in the same quarter of the prior year and wasdriven by strong gains across both transactional and enterprise accounts.

We are particularly pleased withour growth for this quarter. We want to point out that given our outstandingtrack record of growth over our short history, future growth comparisons willbecome more difficult to achieve, as we are building on a much bigger base.However, we expect continued growth on an absolute basis, as we strengthen ourcompetitive position in the industry.

We increased our third quarterenterprise account business by 51% to $47 million from $31.2 million in thethird quarter of 2006. As Steve mentioned, we added five new enterpriseaccounts this quarter and continue to increase penetration of our existingenterprise accounts, which help drive results.

For the transactional segment ofour business, revenue increased 138% to $25.1 million as compared to the sameperiod in the prior year. This was largely driven by better account penetrationand a stronger sales force. For the quarter, enterprise sales represented 65%of total revenue and transactional sales represented 35%.

While we continue to see strongtransactional revenues as a result of recent acquisitions, we are pleased withthe current mix of enterprise and transactional revenues. The currentcomposition of 65/35 shows an improvement from beginning of the year when themix was 60/40 and shows progress towards our long-term goal of 70/30.

Gross profit for the quarter was$18.3 million versus $9.5 million in the year ago quarter. Gross marginincreased by 260 basis points to 25.4% from 22.8%. The gross margin increasedas a result of a higher base of transactional revenues and early paymentdiscounts with key suppliers.

General and administrativeexpenses increased to 10.9% of revenue in the current quarter compared to 8.1%during the same quarter of the prior year. This increase was due to theaddition of personnel through organic hiring, the addition of personnel throughacquisitions and an increase in professional fees associated specifically with Sarbanes-Oxleycompliance.

Operating income in the quartershowed strong growth rising 60% to $5.8 million from $3.6 million in the prioryear quarter. Operating margin was 8.1% during the quarter as compared to 8.7%in the same quarter last year. Our operating expenses demonstrate that wecontinue to invest in the business, which we feel is necessary to sustain ourcurrent growth trajectory and competitive advantages in the marketplace.

Income before taxes saw similarstrength during the quarter. Third quarter income before taxes was $6.6million, which was a 70% increase from the third quarter of 2006.

Moving to the bottom line, netincome increased 70% year-over-year to $4 million during the third quarter. Asa percentage of revenue, net income was roughly in line with last quarter at5.6% compared to 5.7% in the year ago period. Our fully diluted GAAP EPS duringthe third quarter was $0.08 as compared to $0.05 during the third quarter of2006.

Now turning to the balance sheet,our balance sheet remains very strong. During the quarter, we generated $2.5million in cash flow from operations, which allowed us to increase our cashbalance by over $1.5 million despite our investment activity during thequarter.

We ended the quarter with $70.3million of cash and marketable securities. Our strong cash position combinedwith no debt and lower requirements for capital position us to continue tofollow our upward growth trajectory. As we draw to a close in 2007, we areupdating the revenue guidance, which originally provided to account for ourstrong top line growth.

We believe revenue for fiscalyear 2007 will be at the high end or slightly above our forecasted range of$260 million to $280 million. Based upon our continued investment in thebusiness, we are reiterating guidance related to net income and dilutedearnings per share in the ranges of $16 million to $17 million and $0.30 to$0.33 respectively.

The company has a $12 milliondeferred tax asset, which was created as part of the January 2006 sharebuyback. The assets represent $30 million of future tax deductions, which maybe taken over a 15-year period. At that time, the company recorded a $6.6million valuation allowance on the deferred tax asset based on our analysis at thetime. Periodically, the company reviews the continuing need for the valuationallowance, based on the factors existing during the review.

We evaluated this valuationallowance as of December 31, 2006 and determined based on limited operating andearnings history, no adjustments were necessary. We will evaluate it again asof December 31, 2007 and may determine that an adjustment is necessary. In theevent that the company determines that full valuation allowance is no longerneeded, our tax expense may be reduced, which would have a positive effect onthe company's net income and earnings per share in the fourth quarter.

Now, I'll turn the presentationback over to Steve for closing comments before we open it up for Q&A.

Steve Zuccarini

Thank you, Nick. The company isfiring on all cylinders. We have made and will continue to make smartinvestment decisions in our business to drive future growth, as our opportunityis boundless. While we are not in a position to discuss our specific 2008guidance today and don't expect to do so until our fourth quarter call, I cansay that we believe 2008 will be a very strong year. I want to remind all ofyou that despite our outstanding track record of success, we still capture lessthan 20% of the available print universe within our existing client base. And furthermore,our target market opportunity in this $170 billion U.S. printing industry is roughly a$130 billion to $140 billion, with the company's penetration of this marketwell under 1% market share.

Based upon our newly expandednational footprint in key markets such as Los Angeles,Philadelphia, Minneapolisand Dallas, aswell as our under-penetrated base of existing business, we are confident in ourcontinued ability to grow both organically as well through strategicacquisition. We are pleased that the investments we have made in the businessare beginning to reap outstanding rewards and we are truly encouraged by theopportunities that lie ahead.

Sarah, I'd like to now open it upfor questions.

Question-and-Answer Session

Operator

(Operator Instructions) And wewill take our first question today from George Sutton, Craig-Hallum.

George Sutton - Craig-Hallum Capital

Hi, guys. Nice quarter. My firstquestion is for Eric. Eric, obviously when you bought Brown+Partners there weresome very good national brands that you were able to bring in, where you woulddo the work for their headquarters business. I'm curious if that would also bethe case for the Dallas and Minneapolis acquisitions, and if you can giveus any sense there?

Eric Belcher

The short answer is yes, it isthe case in both Dallas and Minneapolis. Those are markets that have asubstantial number of Fortune 1000 clients in the environs and the twocompanies that we've now partnered with in those two markets due to work onbehalf of large Fortune 1000 clients. So, as with Philadelphia,yes, the plan is to help those companies in Dallasand Minneapolisgrowth with our combined resources.

George Sutton - Craig-Hallum Capital

Now you mentioned that won fivenew enterprise accounts, could you discuss quality, size, depth and breadth ofthose wins? Obviously, all enterprises are equal.

Steve Zuccarini

No. This is Steve, George. Youare absolutely right. The five, as I mentioned two of them were conversionsfrom transactional. So we quadrupled the base business on both of those, as wetalked about the size of these deals in the early years were in the $1 million to$3 million range. Now they're venturing anywhere from $4 million to $10 millionrange. So, again we don't get into specific numbers, but we are starting to seemuch larger opportunities on the horizon with these new enterprise engagements.

George Sutton - Craig-Hallum Capital

Lastly, using your own numbers,you talk about the $130 billion to $140 billion size market. Are you seeingmuch of an increase in anyone coming up with a competitive plan that you would viewas someone you compete with regularly?

Steve Zuccarini

As we mentioned, we stillprimarily compete with printers who have direct sales forces. I have mentionedto most of you that there is another company that's come in Europecalled Williams Lea. But really, there is no one out there that has the fullsuite of services in the procurement technology that we bring in the markettoday.

George Sutton - Craig-Hallum Capital

Thanks guys. Nice quarter.

Steve Zuccarini

Thank you.

Eric Belcher

Thank you, George.

Operator

We will take our next questionfrom Franco Turrinelli, William Blair.

Franco Turrinelli - William Blair & Company

Gentlemen, good afternoon.

Steve Zuccarini

Hi, Franco.

Franco Turrinelli - William Blair & Company

Couple of questions for you, if Imay. The first is, you picked up Dallas and Minneapolis, could youmaybe just give us or refresh our memories a little bit in terms of the majormarkets that you feel that you want or mean to be in kind of what's currentcoverage relative to that?

Steve Zuccarini

Again, I feel very consistentlyabout building out the national footprint of this business model. And I'mextremely pleased with the acquisitions in Philadelphia,Dallas and Minneapolis.Those three markets alone are in excess of $14 billion of available printuniverse. Couple other areas that we will continue to focus on and we are notgoing to give specific, but it will be the Northeast and the Southeast. But weare, again, continuing to build out this national footprint.

Franco Turrinelli - William Blair & Company

Yeah, Steve, I mean, I'm sure,you have a kind of a top 50 markets or whatever the number is, I mean, do youfeel that you are halfway through those or 90% of way through, just kind ofgive us a sense of how far we are in establishing that national footprint?

Steve Zuccarini

Well, the beauty of it is, we dohave sales representatives in almost every state. What we really talk aboutdoing is that getting a concentrated selling effort in many of these majormarkets. If I had to give you a rough benchmark, I'd say maybe we are 50%through the types of markets that we want to continue to expand into.

Franco Turrinelli - William Blair & Company

Great. One other question relatedto these acquisitions. Obviously, each one of them came with a very strongsupply network. I'm assuming that in general there is not a great deal ofoverlap with your existing supply network. Can you give us two thoughts, Imean, the first is, whether or not those supplies are bringing some newcapabilities or facilities to the table that you will be to cross sell?

And secondly, what you arethinking, generally, on the supply network? Is there a point, where it getsunveiled, you want to have fewer suppliers or just kind of help us to understandthe plans for the network?

Nick Galassi

Franco, this is Nick. Yeah,regarding the two acquisitions that we made in October, they did come with a goodnumber of suppliers and it is largely additive to our supplier network. Itgives us a little more breadth and reach with certain domains and products thatthese companies have specialized in. So, I think in those few product categoriesis going to give us a little more leverage, a little more buying opportunity.

But as a larger look at ourvendor community today with number in excess of well over $6000 total vendorsin our network, really what we are focused on is not necessarily adding to the6000 number, although through acquisitions and new enterprise customers we doadd to it. What we are really focused on is enhancing our existingrelationships with the current supplier base.

So, as we've talked about before,we have things like a certified supplier network. We have another componentthat we are working on called a vendor portal that allows for transparencybetween us and our vendors. And those are the things today probably each ofthose programs have somewhere in the 800 to 1000 vendors in each of thoseprograms.

Those are the things that we'relooking to really enhance and build upon, as we enter into '08. And that's oneof the reasons, and we talked about this in our last quarterly call, why wehired Brian Carlson from A.T. Kearney to really focus on the supplier base, thesupplier network and start to really drill down and expand those existingrelationships.

Franco Turrinelli - William Blair & Company

Nick, I mean, do you think thesupplier network will actually shrink over time, if you focus more on deepeningof your relationships with small number of suppliers, or should we expect thatto continue to increase?

Nick Galassi

No, it will increase. As we getlarger, again as we add enterprise accounts, as we bring on more acquisitions,the print community will grow as the business grows at the rapid pace that it'sgrowing at. But it's the function of really enhancing the relationships withsome of these vendors.

Franco Turrinelli - William Blair & Company

Sure. One more question, if I may.Obviously, as you pointed out, SG&A grew faster than revenue. Can you giveus the commission expense component of that?

Nick Galassi

Yes. The commission expense fromQ3 '06 to Q3 '07 was actually flat at 5.5% of top line revenue. So, 5.5% in Q3and 5.5% in Q3 of '07 as well.

Franco Turrinelli - William Blair & Company

So, I sense that the SG&Agrew, as you pointed out, [step out like kind of a administrative thing], shouldwe expect a little bit more leverage of that line item going forward?

Nick Galassi

You should. Although wedemonstrated some very strong operating leverage in the quarter. It was downslightly compared to last year for some other reasons we talked about, againcontinuing to invest in the business, continuing to build out things likeimplementation teams, integration teams, sales management.

We are looking at the long-term viability.We are looking at becoming the first billion dollar outsourcer of print. And sowhen we look to make strategic hires, we are not sacrificing for short-termresults. So, we do continue to expect to see strong operating leverage in thebusiness as we continue to grow profitably.

Franco Turrinelli - William Blair & Company

Great, thank you. Good quarter,guys.

Nick Galassi

Thank you.

Operator

Next from Morgan Stanley, ChrisGutek.

Chris Gutek - Morgan Stanley

Thanks. Hi, guys. First just tofollow-up on that last line of questioning. I guess, Nick, if you look at therevenue guidance for the full year, it looks like it will be towards the topend of the range or slightly above. And just hypothetically assuming that theseearnings are short of the middle of the range, it does assume that theoperating margin in the fourth quarter will be up somewhat nicelyyear-over-year.

So to the previous line ofquestioning, is that purely some timing issues with some of the G&A itemsthat will sort of reverse and be beneficial in Q4, or do you have visibilitythat is a function of mix or other factors, the gross margin will be favorableor the selling commission will be favorable?

Steve Zuccarini

Chris, it's really more of afunction of just with the fixed component of our overhead in our business, aswe continue to grow that top line revenue number, you are going to seecontinued leverage in it. So, on our fourth quarter, that's higher than thethird quarter. You will see improved operating margins compared to Q3 of '07,as well as compared to Q4 of '06. So, yeah, we do expect improved margins over time.

Chris Gutek - Morgan Stanley

And looking well beyond thefourth quarter to that point about expecting leverage over time, it seems like the[stores], there has continued to be and obviously given the company'srelatively young age, therefore going forward will continue to be additions tothe senior to mid management level staff. I'm curious, if there are meaningfulmembers of open positions or is it just a very few selectively one or twopeople here and there over the next year to two, in addition to aggressivehiring on the sales force?

Steve Zuccarini

Yeah. There are not meaningfulholes in really the senior management team or the second tier management team.It's more of what you'd said later which is, we do look for strategic hirespeople that we think help grow the business, help add and augment some of theteams that we have. But as we've said today, there are no material orsignificant holes in any of the senior management positions.

Chris Gutek - Morgan Stanley

Okay. And then regarding the twoacquisitions done subsequent to the Brown+Partners, maybe I missed on yourprepared comments. But did you guys disclose the revenue or earnings impact ofthose deals?

Nick Galassi

Yeah. We discussed, as we always do,the last fiscal year for both those entities, combined those two acquisitionsin 2006 did approximately $14 million of top line revenue, and as is typicalwith a number of the acquisitions that we do fairly low operating profitmargins.

Chris Gutek - Morgan Stanley

Okay. And then finally, anychange in either your client retention rate or your sales force retention rate?

Steve Zuccarini

Chris, this is Steve. Our clientretention rate still stays north of 96% on our enterprise clients and ourattrition in the sales force is continuing to run in the 5% range, which is we'vetalked out before is far below industry average.

Chris Gutek - Morgan Stanley

Okay, thanks.

Steve Zuccarini

Thank you.

Operator

Next, we'll hear from RandyHugen, Piper Jaffray.

Randy Hugen - Piper Jaffray

Thanks. Did you guys have anylarger projects or unusually larger projects I guess in Q3, do you expect anyin Q4 and what seasonality this year will be similar to prior years?

Nick Galassi

Randy, this is Nick. Yeah, we didnot have any specific projects or items in the third quarter, but we do expectseasonality to be consistent as we've seen in years past.

Randy Hugen - Piper Jaffray

All right. And then our grossmargins on just the transactional clients still in line with, where they havebeen in pervious quarters?

Nick Galassi

Yes.

Randy Hugen - Piper Jaffray

And then can you just give us abrief update I guess on the acquisition pipeline?

Eric Belcher

Well, this is Eric. Theacquisition pipeline remains strong, as it has been here over the past year andhalf are so. At any one point in time, we are in dialogues with a number ofcompanies, and all we can say at this point in time is we are in thosediscussions at the moment.

Randy Hugen - Piper Jaffray

Perfect, thanks.

Eric Belcher

Thank you.

Operator

Moving on to Youssef Squali,Jefferies & Company.

Youssef Squali - Jefferies & Company

Those are two acquisitions thatyou made. Could you just help us engage the percentage of transactionalrevenues versus enterprise, are there more one or the other?

Nick Galassi

Youssef, this is Nick. Againthese acquisitions similar to ones we've done in the past are predominatelytransactional in nature. They both have a couple of smaller enterprise typerelationships, but for the most part they are transactional.

Youssef Squali - Jefferies & Company

Okay, helpful. And then, if Ilook at your margins on an EBITDA basis, they were roughly in line with lastquarter and they were slightly down from year ago period, so we came in at roughly9%. Historically, though, you've talked about kind of your goal is to kind ofkeep pushing them up 60 to 100 basis points every year. Has anything changed inyour thinking on that considering the acquisitions that you continue doing?

Nick Galassi

This is Nick. No, we are not. No,our thinking has not changed on the ability for us to improve our overalloperating leverage. Again, we did have a very strong quarter from an operatingleverage perspective and we expect that to continue. But it is important tonote that we do look to make strategic hires and to bring on people and notsacrificing the short-term for the long-term and focus on the long-termbenefit. But there is continued operating leverage in the model.

Youssef Squali - Jefferies & Company

Okay. And I guess lastly for mehere. Have you noticed any weakness in the economic sensitive segments that arewell published right out there?

Steve Zuccarini

Youssef, this is Steve. As youknow InnerWorkings, we are really primarily focused on gaining market share.So, all of the macroeconomic weakness that we are seeing really has not had anysignificant impact on our business. I've argued and you've asked the question,could an economic downturn potentially help us?

We think it could because of thecost cutting measures, the openness of chief procurement officers and CFOs toour model, which is all about low cost, reducing headcount, not having to payfor technology and providing best-in-breed customer service.

Youssef Squali - Jefferies & Company

Okay. Great, thanks.

Steve Zuccarini

Thank you.

Operator

Next, we will hear from ImranKhan, J.P. Morgan

Lev Polinsky – J.P. Morgan

Hi, guys, this is actually LevPolinsky calling in for Imran. Couple of quick questions. First of all, I waswondering if you could talk a little bit about your account payables. I thinkit went up on a sequential basis, if you could talk about that?

And then in terms of thecommission expense going forward, should we think about a more in the sort of6% and above range, where it had been for last few quarters or do you see it trendingmore towards 5% or 4.5% something going forward? Thank you very much.

Nick Galassi

Sure, this is Nick. I will takethe commission one first and then we will talk AP. Regarding commissions, Ithink the 5.5 range is pretty strong and pretty indicative of the businesstoday. You will see that numbers fluctuate again like so many of the componentsof our income statement based on the revenue mix.

And so as you've talked about inthe past the higher ratio of enterprise business, you'll see slightly lowercommission rates versus the quarter, where we have higher ratio of transactionalbusiness, you'll see those commission rates come up a bit. So I think somewherein that 5% to 6% range is a pretty fair number based on that ratio of somewherein the 60%, 70% enterprise.

Regarding account payables, wecontinue to run accounts payables the way we have. We have an early paymentprogram with the number of our vendors that we take advantage of. Last quarterQ3, our days to pay is actually right in line or slightly less than our days topay from Q2. So, there are no real changes or anything standing out in accountspayable.

Lev Polinsky – J.P. Morgan

Thank you.

Operator

That is all the time we have forquestions. Gentlemen, I will turn the conference back over to you for anyadditional or closing comments.

Steve Zuccarini

Thank you everyone. We lookforward to talking to you in our fourth quarter call.

Operator

Once again, that does concludetoday's conference. Thank you all for joining us.

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