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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-Hallum Capital

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 to the InnerWorkings Incorporated Third Quarter Earnings Release Conference. As a remainder, today's conference is being recorded. At this time, I would like to turn the conference 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. I am Nick Galassi, the Chief Financial Officer of InnerWorkings. Joining me today is our Chief Executive Officer, Steve Zuccarini and our Chief Operating Officer, Eric Belcher.

Before we begin, I'd like to note that this call will include forward-looking statements relating to future results that are made pursuant to the Safe Harbor provisions of the Federal Securities Laws. These statements are subject to a variety of risks, uncertainties and assumptions that may cause actual results to differ materially from those stated or implied by the forward-looking statements. Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Listeners of the call are advised to review the risk factors contained in our Form 10-K. Please note that this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without our prior consent.

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

Steve Zuccarini

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

Operating income also showed strong growth, increasing 60% to $5.8 million from $3.6 million in the prior year's third quarter. During the quarter, these outstanding financial results were made possible by the commitment of our team and our ability to execute on all levels of our growth strategy that we previously outlined. That includes expanding our base of transactional and enterprise clients, further penetrating our existing customer base and growing through selective acquisitions.

I would like to take a minute to highlight some of our most noteworthy achievements in the third quarter. We continue to attract strong talent to our sales team. During the quarter, we added 10 new sales executives. Of these individuals, six were gained though organic hiring and four sales executives were brought on as a result of our acquisition of Brown+Partners, which was a deal we completed in July of this year. In a few minutes, our Chief Operating Officer, Eric Belcher, will discuss this acquisition, as well as two others we completed following the close of the third quarter.

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

Transactional revenues increased 138% year-over-year, and we serviced 2,376 customers in the third quarter of 2007 versus 481 last year. Enterprise client growth remained strong. Five new enterprise accounts were signed during the third quarter. Enterprise revenues increased 51% year-over-year to $47 million with a customer base of 110 enterprise accounts, versus 86 at this time last year.

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

As we fully integrate acquisitions and continue to grow, we have accelerated our joint selling process of utilizing our season business development team to assist our sales executives in landing new enterprise accounts. The results of these efforts are beginning to gain traction.

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

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

During the third quarter more than 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 period in 2006. And while it is easy to get caught up in these outstanding growth numbers generated by the company, we want to remind investors that management continues to invest in the future. We have dedicated teams concentrating on each area of our growth strategy.

Our integration team focuses on integrating the acquired companies as quickly as possible, typically between 90 and 120 days. Our customer implementation teams work with our new enterprise accounts to assure successful startup and on-boarding through a disciplined methodology that addresses appropriate staffing levels and organizational issues critical to the success of their programs. And we continue to make additions to our management team that will allow us to strengthen our sales effort 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 leading global paper manufacturer. He served in various management roles with increasing responsibility at Domtar for over 12 years. Through management additions and strategic initiatives, we continue to build the infrastructure of the company and we continue to make investments in our proprietary technology and business model.

With that said, I'd like to now turn the call over to Eric Belcher, our Chief Operating Officer. I've asked Eric to give more details regarding our recent acquisition of Brown+Partners and the two other strategic tuck-in acquisitions we completed 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 very attractive new markets. As previously announced, we acquired a Philadelphia-based print management company called Brown+Partners during the third quarter.

This acquisition gives us a strong platform for growth in both the Philadelphia market and across the Mid-Atlantic region in general. Its current roster of clients include large public companies headquartered in the Philadelphia area and it's important to note that while Brown+Partners was acquired just four months ago, they are already integrated onto our PPM4 technology platform.

Following the close of the third quarter, the company acquired two additional print management firms. Combined these two companies have 10 sales representatives and generated revenue of approximately $14 million in 2006. First, we acquired Dataflow Management Systems, known as DFMS, in October of this year and, as a result, we now have a sales and operational presence in the Dallas market.

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

These acquisitions were completed to strengthen our geographic focus in the new markets of Philadelphia, Minneapolis and Dallas cities with significant Fortune 1000 representation. As a result of all of our recently completed transactions, we have 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 our current and our targeted customer base.

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

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

Nick Galassi

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

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

We are particularly pleased with our growth for this quarter. We want to point out that given our outstanding track record of growth over our short history, future growth comparisons will become 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 our competitive position in the industry.

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

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

While we continue to see strong transactional revenues as a result of recent acquisitions, we are pleased with the current mix of enterprise and transactional revenues. The current composition of 65/35 shows an improvement from beginning of the year when the mix 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 margin increased by 260 basis points to 25.4% from 22.8%. The gross margin increased as a result of a higher base of transactional revenues and early payment discounts with key suppliers.

General and administrative expenses 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 the addition of personnel through organic hiring, the addition of personnel through acquisitions and an increase in professional fees associated specifically with Sarbanes-Oxley compliance.

Operating income in the quarter showed strong growth rising 60% to $5.8 million from $3.6 million in the prior year 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 we continue to invest in the business, which we feel is necessary to sustain our current growth trajectory and competitive advantages in the marketplace.

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

Moving to the bottom line, net income increased 70% year-over-year to $4 million during the third quarter. As a percentage of revenue, net income was roughly in line with last quarter at 5.6% compared to 5.7% in the year ago period. Our fully diluted GAAP EPS during the third quarter was $0.08 as compared to $0.05 during the third quarter of 2006.

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

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

We believe revenue for fiscal year 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 the business, we are reiterating guidance related to net income and diluted earnings per share in the ranges of $16 million to $17 million and $0.30 to $0.33 respectively.

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

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

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

Steve Zuccarini

Thank you, Nick. The company is firing on all cylinders. We have made and will continue to make smart investment decisions in our business to drive future growth, as our opportunity is boundless. While we are not in a position to discuss our specific 2008 guidance today and don't expect to do so until our fourth quarter call, I can say that we believe 2008 will be a very strong year. I want to remind all of you that despite our outstanding track record of success, we still capture less than 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 market well under 1% market share.

Based upon our newly expanded national footprint in key markets such as Los Angeles, Philadelphia, Minneapolis and Dallas, as well as our under-penetrated base of existing business, we are confident in our continued ability to grow both organically as well through strategic acquisition. We are pleased that the investments we have made in the business are beginning to reap outstanding rewards and we are truly encouraged by the opportunities that lie ahead.

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

Question-and-Answer Session

Operator

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

George Sutton - Craig-Hallum Capital

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

Eric Belcher

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

George Sutton - Craig-Hallum Capital

Now you mentioned that won five new enterprise accounts, could you discuss quality, size, depth and breadth of those wins? Obviously, all enterprises are equal.

Steve Zuccarini

No. This is Steve, George. You are absolutely right. The five, as I mentioned two of them were conversions from transactional. So we quadrupled the base business on both of those, as we talked 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 million range. So, again we don't get into specific numbers, but we are starting to see much 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 seeing much of an increase in anyone coming up with a competitive plan that you would view as someone you compete with regularly?

Steve Zuccarini

As we mentioned, we still primarily compete with printers who have direct sales forces. I have mentioned to most of you that there is another company that's come in Europe called Williams Lea. But really, there is no one out there that has the full suite of services in the procurement technology that we bring in the market today.

George Sutton - Craig-Hallum Capital

Thanks guys. Nice quarter.

Steve Zuccarini

Thank you.

Eric Belcher

Thank you, George.

Operator

We will take our next question from 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 I may. The first is, you picked up Dallas and Minneapolis, could you maybe just give us or refresh our memories a little bit in terms of the major markets that you feel that you want or mean to be in kind of what's current coverage relative to that?

Steve Zuccarini

Again, I feel very consistently about building out the national footprint of this business model. And I'm extremely pleased with the acquisitions in Philadelphia, Dallas and Minneapolis. Those three markets alone are in excess of $14 billion of available print universe. Couple other areas that we will continue to focus on and we are not going to give specific, but it will be the Northeast and the Southeast. But we are, 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 you feel that you are halfway through those or 90% of way through, just kind of give us a sense of how far we are in establishing that national footprint?

Steve Zuccarini

Well, the beauty of it is, we do have sales representatives in almost every state. What we really talk about doing is that getting a concentrated selling effort in many of these major markets. 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 related to these acquisitions. Obviously, each one of them came with a very strong supply network. I'm assuming that in general there is not a great deal of overlap with your existing supply network. Can you give us two thoughts, I mean, the first is, whether or not those supplies are bringing some new capabilities or facilities to the table that you will be to cross sell?

And secondly, what you are thinking, generally, on the supply network? Is there a point, where it gets unveiled, you want to have fewer suppliers or just kind of help us to understand the 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 good number of suppliers and it is largely additive to our supplier network. It gives us a little more breadth and reach with certain domains and products that these companies have specialized in. So, I think in those few product categories is going to give us a little more leverage, a little more buying opportunity.

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

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

Those are the things that we're looking to really enhance and build upon, as we enter into '08. And that's one of the reasons, and we talked about this in our last quarterly call, why we hired Brian Carlson from A.T. Kearney to really focus on the supplier base, the supplier network and start to really drill down and expand those existing relationships.

Franco Turrinelli - William Blair & Company

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

Nick Galassi

No, it will increase. As we get larger, 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's growing at. But it's the function of really enhancing the relationships with some 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 give us the commission expense component of that?

Nick Galassi

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

Franco Turrinelli - William Blair & Company

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

Nick Galassi

You should. Although we demonstrated some very strong operating leverage in the quarter. It was down slightly compared to last year for some other reasons we talked about, again continuing to invest in the business, continuing to build out things like implementation 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 so when we look to make strategic hires, we are not sacrificing for short-term results. So, we do continue to expect to see strong operating leverage in the business 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, Chris Gutek.

Chris Gutek - Morgan Stanley

Thanks. Hi, guys. First just to follow-up on that last line of questioning. I guess, Nick, if you look at the revenue guidance for the full year, it looks like it will be towards the top end of the range or slightly above. And just hypothetically assuming that these earnings are short of the middle of the range, it does assume that the operating margin in the fourth quarter will be up somewhat nicely year-over-year.

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

Steve Zuccarini

Chris, it's really more of a function of just with the fixed component of our overhead in our business, as we continue to grow that top line revenue number, you are going to see continued leverage in it. So, on our fourth quarter, that's higher than the third 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 the fourth quarter to that point about expecting leverage over time, it seems like the [stores], there has continued to be and obviously given the company's relatively young age, therefore going forward will continue to be additions to the senior to mid management level staff. I'm curious, if there are meaningful members of open positions or is it just a very few selectively one or two people here and there over the next year to two, in addition to aggressive hiring on the sales force?

Steve Zuccarini

Yeah. There are not meaningful holes 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 hires people that we think help grow the business, help add and augment some of the teams that we have. But as we've said today, there are no material or significant holes in any of the senior management positions.

Chris Gutek - Morgan Stanley

Okay. And then regarding the two acquisitions done subsequent to the Brown+Partners, maybe I missed on your prepared comments. But did you guys disclose the revenue or earnings impact of those deals?

Nick Galassi

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

Chris Gutek - Morgan Stanley

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

Steve Zuccarini

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

Chris Gutek - Morgan Stanley

Okay, thanks.

Steve Zuccarini

Thank you.

Operator

Next, we'll hear from Randy Hugen, Piper Jaffray.

Randy Hugen - Piper Jaffray

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

Nick Galassi

Randy, this is Nick. Yeah, we did not have any specific projects or items in the third quarter, but we do expect seasonality to be consistent as we've seen in years past.

Randy Hugen - Piper Jaffray

All right. And then our gross margins on just the transactional clients still in line with, where they have been in pervious quarters?

Nick Galassi

Yes.

Randy Hugen - Piper Jaffray

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

Eric Belcher

Well, this is Eric. The acquisition pipeline remains strong, as it has been here over the past year and half are so. At any one point in time, we are in dialogues with a number of companies, and all we can say at this point in time is we are in those discussions 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 that you made. Could you just help us engage the percentage of transactional revenues versus enterprise, are there more one or the other?

Nick Galassi

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

Youssef Squali - Jefferies & Company

Okay, helpful. And then, if I look at your margins on an EBITDA basis, they were roughly in line with last quarter and they were slightly down from year ago period, so we came in at roughly 9%. Historically, though, you've talked about kind of your goal is to kind of keep pushing them up 60 to 100 basis points every year. Has anything changed in your 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 overall operating leverage. Again, we did have a very strong quarter from an operating leverage perspective and we expect that to continue. But it is important to note that we do look to make strategic hires and to bring on people and not sacrificing the short-term for the long-term and focus on the long-term benefit. But there is continued operating leverage in the model.

Youssef Squali - Jefferies & Company

Okay. And I guess lastly for me here. Have you noticed any weakness in the economic sensitive segments that are well published right out there?

Steve Zuccarini

Youssef, this is Steve. As you know InnerWorkings, we are really primarily focused on gaining market share. So, all of the macroeconomic weakness that we are seeing really has not had any significant 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 the cost cutting measures, the openness of chief procurement officers and CFOs to our model, which is all about low cost, reducing headcount, not having to pay for 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 Imran Khan, J.P. Morgan

Lev Polinsky – J.P. Morgan

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

And then in terms of the commission expense going forward, should we think about a more in the sort of 6% and above range, where it had been for last few quarters or do you see it trending more towards 5% or 4.5% something going forward? Thank you very much.

Nick Galassi

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

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

Regarding account payables, we continue to run accounts payables the way we have. We have an early payment program with the number of our vendors that we take advantage of. Last quarter Q3, our days to pay is actually right in line or slightly less than our days to pay from Q2. So, there are no real changes or anything standing out in accounts payable.

Lev Polinsky – J.P. Morgan

Thank you.

Operator

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

Steve Zuccarini

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

Operator

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

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