Executives
Steven G. Crane - Chief Financial Officer, Treasurer
Joseph C. Lawler - Chairman of the Board, President, ChiefExecutive Officer, Director
Analysts
Robert Stimson - WR Hambrecht + Co.
William Martin - Raging Capital
Larry Delano - Private Investor
Michael London - Private Investor
Jeffrey Mettle - Private Investor
Carlos Rangel - MAP
George Mulligan - Private Investor
Lawrence Goldstein - Santa Monica Partners
CMGI, Inc. (CMGI) F1Q08 Earnings Call December 3, 2007 5:00 PM ET
Operator
Hello and welcome to the CMGI first quarter fiscal year 2008operating results conference call. At the company’s request, this conference isbeing recorded. (Operator Instructions) And now I would like to turn theconference over to Mr. Joseph Lawler, Chairman, President and CEO; and Mr.Steven Crane, Chief Financial Officer. Please go ahead, Mr. Crane.
Steven G. Crane
Good afternoon. Thank you, Paula. Good afternoon, everyoneand thank you for joining us for CMGI's fiscal 2008 first quarter conferencecall. I am Steve Crane, CFO of CMGI and I am joined today by Joe Lawler,Chairman, President and CEO. In just a few moments, Joe will share his thoughtson our financial performance and achievements over the past quarter and providean update on our strategic initiatives. After Joe’s comments, I’ll review inmore detail CMGI's first quarter results.
Before we start, I want to remind you that this call isbeing broadcast as a live webcast from our website at www.cmgi.com. Please alsonote that the information we’re about to discuss includes forward-lookingstatements for purposes of the Safe Harbor provisions under Private SecuritiesLitigation Reform Act of 1995. Such statements involve risks and uncertainties.The company’s actual results could differ materially from those discussedherein. Factors that could contribute to such differences include but are notlimited to those items noted and included in the company’s SEC filings,including our annual report on Form 10-K and quarterly reports on Form 10-Q.
The forward-looking information that is provided by thecompany in this call represents the company’s outlook as of today and we do notundertake any obligation to update forward-looking statements made by us.Subsequent events and developments may cause the company’s outlook to change.
During this call, we’ll be referring to non-GAAP operatingincome. These non-GAAP measures are not prepared in accordance with generallyaccepted accounting principles. A reconciliation of non-GAAP financial measuresto the most directly comparable GAAP measure can be found in our earningsrelease issued earlier today, a copy of which is posted in the investor sectionof our website.
I’d now like to turn this call over to Joe Lawler. After ourformal remarks, we’ll be happy to take your questions. Joe.
Joseph C. Lawler
Thank you, Steve. In terms of operating performance, thefirst quarter was a good quarter for CMGI and a very good start to fiscal 2008.There are three points I’d like to cover with you on this call today. First,our financial results in the quarter are in line with or better than ourexpectations.
Second, we continued to make operational progress thisquarter. Our sales and marketing efforts are progressing. Our shared servicesmodel is having an impact and the implementation of our enterprise resourceplanning platform is on track. We continued to make planned investments in ourbusiness that will enable us to reach our long-term objectives.
Third, we’re in the middle innings of the transformation ofour business into a global leader in supply chain services. We are pleased withour progress and are prepared for the work ahead of us to complete ourtransformation and have our business running optimally.
Revenue for the first quarter was $274 million and was inline with our internal plans, which positions us to be in line with financialguidance we provided for the full fiscal year.
In the quarter, we had $45 million of lower revenue from twopreviously announced discontinued client programs. Excluding revenue from thoseprograms, year-over-year revenue growth from other areas of our businessincreased by approximately 15% and came from both existing and new clients.
Gross margins for the quarter were 14.2% of revenues, whichis a strong improvement over the 10.6% reported in the first quarter of theprior year. Margin performance improved greater than expected in all regionsand was driven by work mix, continuous improvement initiatives and highervolumes for certain client programs.
Operating income for the first quarter was $9.1 million, anincrease of 81% compared to the operating income in the same quarter last year.As a percentage of revenue, operating income increased to 3.3% compared with1.8% in the first quarter of last year. This improvement was mainly due to thestrong gross margins during the quarter, somewhat offset by an increase inselling, general and administrative expense as a result of $1.6 million ofrestructuring expenses and the planned investment in our IT infrastructure.
Operationally we continue to make progress, improving ourinfrastructure with the implementation of our new ERP platform. When completed,this system will enable us to drive purchasing efficiencies, optimize solutioncenter operations, improve capacity utilization, and use standard processesglobally.
As a result of all of these changes, we’ll be able tosignificantly reduce our IT and finance related costs and drive further costreductions to help us achieve our long-term financial goals.
The implementation of our ERP platform is on track. Wecontinue to expect that almost 60% of our sites and 50% of our revenue will beoperating on the new ERP system by the end of calendar 2007 and all sites willbe converted by mid-calendar 2008. We continue to be in a period of investingand as we’ve previously disclosed, we plan to invest $31.5 million in this ERPproject.
Also during the quarter we changed the equity structure ofour business with the implementation of a reverse stock split. As a result ofour history of acquisitions and stock splits, our company had nearly 500million shares outstanding with a stock price in the $1 to $2 range.
The reverse split brought our outstanding share count to alevel we believe is more appropriate for our business and in line with othercompanies our size. We implemented the reverse split for several additionalreasons. First, we wanted a stock price above what is perceived as a pennystock level, which better reflects our position as a substantial globalbusiness with a strong balance sheet and a track record of positive operatingincome.
Second, the stock should be better able to attract a widercircle of investors over time because more institutions are able to buy stocksabove $5 per share and brokers are better able to recommend the stocks to theirclients.
Third, institutions will incur lower transaction costs as aresult of a fewer number of shares being acquired by them to achieve theirdesired investment level and finally for all of the above reasons, we believethe reverse split increases our opportunities for greater equity analystresearch coverage and therefore enables us to get our story in front of morepotential investors.
Looking forward, our long-term goals are unchanged and themarket for supply chain services continues to be strong, with the potential forhigh single digits to low double-digit growth.
Our efforts to grow our revenue are centered on opportunitieswithin five target vertical markets, as well as expansion of new higher marginsolutions. We also continue to invest in our business to drive operationalimprovements and increase long-term profitability.
As we have discussed in the past, our target financial modelconsists of annual gross margins in the range of 12% to 14% as a percentage ofrevenue, lower selling, general and administrative expense, includingrestructuring, amortization and stock compensation expense at a level of 7% ofrevenue, and therefore gross margins minus SG&A expenses yields operatingincome in the 5% to 7% range.
Achieving our goal for operating income in the 5% to 7%range as we enter fiscal 2009 is dependent upon several factors: first, ourrevenue needs to grow at high single digits to low double digits, in line withour estimate of market growth; second, we must continue to focus on highergross margins, which are a function of price, volume and work mix; third, wemust complete our ERP implementation, which will reduce our selling, generaland administrative expense spending on this project; and fourth, we must realizethe cost reductions enabled by the new ERP system, which includes theelimination of significant redundancies in our business as a result of havingmany duplicate IT systems that are currently running.
Turning to @Ventures, our venture capital business has beenvery productive for us. During the first quarter, one of our portfoliocompanies, the Generations Network, agreed to be acquired. We expect to receiveinitial proceeds of approximately $14 million in our second fiscal quarter andcould receive additional proceeds of up to $700,000 in the future.
During the first quarter, 212 Resources, an @Venturesportfolio company, secured a $250 million credit facility from GE Energyfinancial services, a unit of GE. The capital provided will be used to financethe implementation of 212 Resources’ patented water treatment technology inpartnership with major oil and gas producers.
We also recently invested $2 million in M2E Power Inc. aspart of that company’s $8 million series A financing. M2E Power is a providerof efficiency solutions for mobile and large-scale power generation.
To date in our @Ventures Five Fund, we have made eightinvestments totaling approximately $26 million in a compelling clean technologymarket and we continue to be optimistic about the prospects for thesecompanies.
In summary, we reported good financial results in thequarter with revenue and profitability results in line with or better than ourexpectations. We continue to make operational progress. Our shared servicesmodel is having an impact and the implementation of our ERP platform is ontrack and expected to be complete this fiscal year, both of which support ourlong-term financial goals.
As we continue into fiscal 2008, we are in the middleinnings of the transformation of our business into a global leader in supplychain services. We have a lot of work to do but we are pleased with ourprogress.
Despite this progress, we are disappointed by the recentperformance of our stock. Many shareholders have called the company asking whatcould be driving the stock performance over the past several weeks. Thefundamentals of our business have improved. We continue to make progress withthe transformation of our business and have a supply chain business with stronggrowth prospects. The company has over $250 million of cash or more than $5 pershare of cash on the balance sheet, annual revenues well over $1 billion, andstrong improvement in gross margins and operating income moving toward ourtarget model of 5% to 7% of revenue.
And we have seen positive developments and liquidity eventsfrom our @Ventures business that adds more cash to our balance sheet whilewe’ve been investing in one of the hottest segments of the market -- cleantech.
Although we are disappointed by the stock price, we have along-term view for our business and have confidence the market will recognizethe value of our company as we deliver results in the future.
Thank you for your attention. I’ll now turn the call backover to Steve to comment further on our financial results.
Steven G. Crane
Thanks, Joe. CMGI reported net revenue of $274.7 million forthe first quarter of fiscal 2008, a decrease of 3.1% compared to net revenue of$283.6 million for the same period one year ago. The decrease was expectedprimarily due to the lower revenue from two previously announced discontinuedclient programs, as Joe noted earlier.
The lower revenue from those engagements was partiallyoffset by revenue growth from other customers. Excluding revenue from thoseengagements from both the first quarter of 2008 and seven, revenue increased by15.2%.
In order to assist you in tracking the revenue performanceof our base business on an apples-to-apples basis, I would like to review thenet change in revenue between fiscal 2007 and 2008 attributable to the twodiscontinued client programs.
Between fiscal 2007 and fiscal 2008, these programsrepresent $45 million in the first quarter, $46 million in the second quarter,$33 million in the third quarter, and $12 million in the fourth quarter, for atotal of $136 million. We previously disclosed the net change in revenue wouldbe $146 million from these programs but have amended that number to $136million as a result of further analysis of the programs.
Turning back to our performance for the first quarter of2008, geographically compared to the same period last year, revenues were lowerin our Americas and Europe operations, primarily due to the two discontinuedprograms. Certainly a bright spot was our operations in Asia, where revenuesincreased 30.5%, primarily due to strong client activity in that region, aswell as the inclusion of the results of our operations in Japan, which wasacquired in Q3 of fiscal 2007.
Operating income or loss improved in Europe and Asia,primarily due to improved gross margins, which was driven by improved work mix,efficiencies generated by our focus on continuous improvement, and highervolumes in certain client programs.
Overall, gross profit increased from $30 million in thefirst quarter of fiscal 2007 to $39.1 million in the first quarter of 2008, anincrease of 30%. As a percentage of revenues, gross margin improved from 10.6%in the first quarter of fiscal 2007 to 14.2% in the first quarter of fiscal2008. This greater-than-expected improvement in gross margin was primarilydriven again by work mix, continuous improvement initiatives, and highervolumes for certain client programs.
SG&A for the first quarter, which includes restructuringand amortization related expense, was $29.9 million, or 10.9% of revenue, whichwas higher than the $25 million or 8.8% of revenue reported in the year-agoperiod. SG&A was higher due to restructuring expenses that wereapproximately $1.8 million higher than the year-ago quarter and were related torestructuring actions taken in North America. The increase in SG&A was alsodue to planned investments in the company’s ERP implementation.
As Joe outlined earlier, we expect SG&A as a percentageof revenue to improve over time as we reduce duplicate costs and other expensesassociated with our ERP implementation and drive further operating efficienciesas a result of being on one ERP application.
Operating income improved from $5.1 million in the firstquarter of fiscal 2007 to $9.1 million for the first quarter of fiscal 2008, anincrease of 80.9%, primarily due to the improved gross margin. As a percentageof revenues, operating margin improved from 1.8% for the first quarter lastyear to 3.3% for the first quarter of this year.
For the first quarter of fiscal 2008, CMGI recorded netincome of $8.6 million compared to net income of $10.3 million in the firstquarter of fiscal 2007. We reported diluted earnings per share from continuingoperations of $0.19 per share for the first quarter of fiscal 2008, comparedwith diluted earnings per share of $0.20 per share for the first quarter offiscal 2007, and fully diluted earnings per share of $0.18 for the firstquarter of fiscal 2008 compared to fully diluted earnings per share of $0.21 inthe first quarter of fiscal 2007.
The decrease in net income between $8.6 million and $10.3million was primarily due to a $3.6 million year-over-year increase in incometax expense. Specifically, the company reported $2.1 million in income taxexpense in the first quarter of this year and last year, the company reported atax benefit of $1.4 million primarily as a result of a reduction in ourvaluation allowance for certain net operating losses in Europe.
Non-GAAP operating income represents total operating incomeexcluding net charges related to depreciation, restructuring, and amortization ofintangibles and stock-based compensation. CMGI's non-GAAP operating income was$17.1 million for the first quarter of fiscal 2008 versus non-GAAP operatingincome of $10.2 million for the same period in fiscal 2007.
The company believes that non-GAAP operating income or lossprovides investors with a useful supplemental measure of the company’soperating performance by excluding the impact of non-cash charges andrestructuring activities.
Each of the excluded items were excluded because they may beconsidered to be of a non-operational or non-cash nature. Historically, thecompany has recorded significant impairment and restructuring charges. Non-GAAPoperating income or loss does not have any standardized definition andtherefore is unlikely to be comparable to similar measures presented by otherreporting companies. Non-GAAP operating income and loss should not be evaluatedin isolation of or as a substitute for the company’s financial results preparedin accordance with generally accepted accounting principles of the UnitedStates.
As of October 31, 2007, CMGI had working capital ofapproximately $294.9 million compared to $282.5 million at October 31, 2006.Included in working capital as of October 31, 2007 were cash, cash equivalents,and marketable securities totaling $261.2 million compared to $222.2 million atOctober 31, 2006.
Last quarter, CMGI announced that its board of directors hadauthorized the purchase of up to $50 million of the company’s common stock overan 18-month period. During this first quarter, the company purchased 568,000shares of CMGI stock at a total cost of $8 million, and that’s on a post-splitbasis. We believe that repurchase of the company’s shares represents anexcellent long-term investment and reflects our optimism for CMGI's future anddemonstrates our commitment to enhancing shareholder value.
Regarding our financial guidance, our outlook for fiscal2008 remains unchanged and we continue to expect revenues in fiscal 2008 in therange of $1.1 billion to $1.15 billion.
We continue to expect operating income to be approximately2% to 2.5% of revenues for fiscal 2008 before any restructuring we mayundertake. At this time, we continue to estimate restructuring costs for fiscal2008 to be in the range of $5 million to $8 million.
I will now turn my comments back to Joe.
Joseph C. Lawler
Thanks, Steve. I look forward to speaking with you again onour next earnings call, but now Steve and I are happy to answer any questionsyou may have. Paula, if you would open it up for questions.
Question-and-AnswerSession
Operator
(Operator Instructions) Our first question will be from Bob Stimson.Your line is now open.
Robert Stimson - WRHambrecht + Co.
Steve, thanks for the more detailed comments on the revenuebreakdown. I think that helps a little bit more. Should we assume on therevenue side if we’re comparing apples to apples, i.e. less a couple bigclients, that that’s kind of the normalized growth rate in terms of what youare seeing? Is it more in the 15% range, a little bit lower than that? If youcan just give me some guidance there, and then I just want to ask an income taxquestion.
Joseph C. Lawler
Bob, I’ll give you a brief answer to that. What we believeis pretty consistent with what we’ve been telling everyone on these calls andthat is that we think the market is growing in the high single digit to lowdouble digit range. We think that’s the best long-term indicator for where ourgrowth will be. We’d like to believe that we’ll gain share as we go along butat this point, we think that high single digit to low double digit is wherewe’ve got to get to.
The churn in our business, which has resulted in flatrevenues, has been a problem for us, as you well know. So now what we areseeing is some good underlying growth. You take these two programs out of thereand that 15% is good underlying growth but we don’t -- and of course, Japan isin that 15% as well, Bob. In fact, if you take the Japan number out of there, Ithink it’s closer to 12%.
Robert Stimson - WRHambrecht + Co.
Okay, because I’m just trying to reconcile as I look -- I’mjust trying to reconcile my quarters a little bit and as I look at the Januaryquarter, and you back it out a little bit, I think if you use like a 14% growthrate, you come up with a pretty good number so I think we’re almost through theJanuary and the April quarter will kind of be that -- until we get more on a“normalized” trajectory for growth.
Joseph C. Lawler
And Bob, the other thing that obviously we’re giving youguidance on is we’re saying $1.1 billion to $1.15 billion in revenues, right?And if there’s $135 million, $136 million of those prior programs, you cancalculate where we’ve sort of pegged the guidance for growth this year.
Robert Stimson - WRHambrecht + Co.
Got it, and I’ve already done that, so thank you. Steve,real quick, on the -- I think the numbers get a little confusing becausealthough you’re giving the revenue guidance and you’re giving the number of 1.1to 1.150, on the EPS side it gets a little confusing because of I think the taxrate kicking in at 18.8%. Are we supposed to now start using a different taxrate in the assumptions in terms of EPS?
Steven G. Crane
I think that’s a good question. I think as I think about thetax rate for this year, our view is that the tax rate is going to, for the fullyear is going to come in probably somewhere between on a pre-tax, fully loadedbasis somewhere between 13% and 17% at this point. As you know, so much of itis going to be dependent on the geographic location of where those revenues orthose pretax incomes are coming from.
But I think that we’ll fine-tune that but that gives -- Ithink that gives you a reasonable range.
Robert Stimson - WRHambrecht + Co.
Okay, great. And then on the margin side, was theresomething unique in the margin this quarter? I mean, you guys got to your 14%target quite nicely, so kudos there. Was there an anomaly there or was thatjust better mix of business? Some of your newer initiatives seem to be payingdividends and can it go higher than that I guess is the question I want to ask.
Joseph C. Lawler
Again, good question. I think the issue for us is wecontinue to believe that with market pressure out there, the 12% to 14% isreally our sustainable target range and we are going to see some spikes. It’s alittle lumpiness because of work mix at different times of the year. We tend tosee a little higher margins in a couple of quarters, a little lower in theothers. But there is no question the combination of work mix, our lean orcontinuous improvement initiatives certainly helped us out that quarter. But wewouldn’t guide you to anything outside of the range that we’ve seen.
Robert Stimson - WRHambrecht + Co.
Great. Well, I’ll get off and let other people ask somequestions and then I’ll come back. Thanks.
Operator
Our next question is from William Martin with RagingCapital. Your line is now open.
William Martin -Raging Capital
Good afternoon, gentlemen. Thanks for taking my question. Iwas hoping you could just talk a little bit about new client engagements in thequarter.
Joseph C. Lawler
One of the difficult situations that we have is theinability to broadcast or publicize client engagements because we tend to workin the supply chain for our clients, they do not want to publicly announce therelationship that we may have with them. And so you don’t see a lot ofannouncements coming out from us.
That said, you saw a strong increase in our base business inthe quarter. We continue to be encouraged by the pipeline and the activity thatwe see coming into our pipeline and again, if you do the math in terms of thetwo programs out of this year and the guidance that we are giving on full yearrevenues, I think you get a sense that we are continuing to anticipate goodstrong existing and new client activity.
But unfortunately, I can’t give you more specifics on that.
William Martin -Raging Capital
Jumping to the HP relationship, I was wondering if you’vebrought a little bit more color there. What is the state of that relationship?Is there an opportunity to potentially re-grow that relationship movingforward? And also, just talking about renewals, what kind of pricing are youseeing on renewals? Is there pressure there or are things fairly stable in themarketplace?
Joseph C. Lawler
The HP relationship is a good relationship. It was good whenthat one program left us last year, continues to be good. HP’s business hasbeen good and we’ve certainly benefited some from that. You’ll see some moredata when we file our Q as to where HP’s volumes are but our relationship withthem is good and we do -- we are constantly looking at new programs. We arefrequently getting new business from them and so the relationship is good.
William Martin -Raging Capital
Could you just talk a little bit about what kind pricing youare seeing on renewals and the market there?
Joseph C. Lawler
The pricing market, the market for our services continues tobe competitive. I would say we continue to see pressure coming from a varietyof sources, the direct supply chain competitors and those others that aretrying to pick up pieces of our work, so we need to be selective. I think manyof you heard me talk in the past about certain targeted solutions which havehigher margins associated with them. We try to focus our sales organization andour pricing teams on those solutions that yield higher margins for us and so wecontinue to work the product mix. But there certainly are times when we toocompete for core pieces of business, maybe because of other relationships thatwe have with a client and we find that they are price competitive.
So I would not tell you that I see any easing of pricingpressure in the marketplace. Margins are tough everywhere and that’s why peoplecome to us.
Steven G. Crane
Conversely, I don’t think it’s necessarily -- it’s notchanged, just not I don’t think worsened, if you will, so --
William Martin -Raging Capital
Could you just spend just a second just talking about whatyou view your chief competitive differentiators are in the marketplace and whoyou do run into? And thanks again for your hard work. I appreciate theopportunity to ask some questions.
Joseph C. Lawler
There are a variety of competitive differentiators for us.One has been the global footprint. One of the things that enables us todistinguish ourselves from others in this marketplace is our ability to movegoods from points of low cost manufacture to points of consumption from Asia toEurope to the Americas, and that is -- that’s a strong capability for us and a unique position that we enjoy inthe market.
The second is we’re very -- there are a number of players inthe contract manufacturing space that are very good at [inaudible] productionbut they are not -- their strength is not shorter run configuration for localmarkets. So one of the things we do very well is we configure products with aunique power, unique language, unique packaging requirements for local markets,which is not a core competency of many of the folks that we compete withdirectly. And certainly our financial strength, our brand, and our broad set ofsolutions -- we offer e-commerce solutions, we offer call center capabilitiesand we certainly offer localized configuration solutions for our clients, arethings that differentiate us.
William Martin - RagingCapital
Great. Thank you.
Operator
Our next question is from Larry [Delano], a privateinvestor.
Larry Delano -Private Investor
Joe, Steven, are you there?
Joseph C. Lawler
We’re here, Larry.
Larry Delano -Private Investor
I’ve been watching you for about 10 years. This is the bestreport I’ve seen. I’m excited -- very excited. This is good work. You’re wayahead of what I think people on the street were looking for. But I’ve gotseveral questions, if you’ll write them down and address it.
The option rate securities, I’d like a little color on thatand are we at risk? Did we take a loss? I noticed it looks like you have cutback in that zone. You went from $282 million to $261 million and $8 million ofit was buy-back. I’d like Steven to address why there’s such a big shortfall incash and are you going to put out a press release on [Cobalt Bio]? It lookslike your average buy-back was done at $14 a share and it’s now tonight at $10and unfortunately again, we get no credit for a beautiful report tonight. Soare we going to pick up the buying at this level?
And Joe, can you address the fact that with -- you were soearly in clean energy and the @Ventures and that was a bulls eye target and youhit it, and if you add up the cash and shares outstanding, you’re reallygetting no premium for your @Ventures or Modus. What are you going to do toaddress this situation? Thanks.
Steven G. Crane
If you want, I’ll cover the first. So Larry, on the optionrate securities, just to make the point, these were securities that were backedby student loans and had nothing to do with the mortgage related business.That’s number one. But most importantly, as you picked up, Larry, we’ve beenmoving out of the option rate securities and actually we are completely out ofthem. They were a short-term investment and in light of market conditions, wejust decided it would be more prudent to put it into complete, kind of moneymarket, very short-term stuff, which this was short-term anyway but this iseven -- what we put it in is even shorter term at this point.
So we are evaluating where on a short-term basis we shouldbe investing our cash, with obviously the number one thing is preservation ofprincipal; number two is the yield that we get out of it. So that’s the answerto number one.
In terms of the cash, you rightly said we went from 282 to261, of which about $8 million of it was related to the stock buy-back. Therest of it was really related to our working capital needs, so gearing up forprograms, as you know after watching the company for quite a while, we’regetting into one of our peak cycles. The second quarter tends to be a highquarter for us at year-end, so we are building up working capital and I expectthat will be swinging back over the balance of the year.
The share buy-back, I just have $14 a share and just yourcomment, I agree with you. I think our plan is that this is a -- we announcedthe beginning of the program last quarter, that it was an 18-month buy-backprogram and I think we will roll it out over that length of a period, so we’llreport, as you know under the SEC, we have to report it quarterly, so we’llalways report quarterly to you all what we did acquire during that quarter.
And I think the other questions, Joe, there was clean energyand Cobalt.
Joseph C. Lawler
Larry, the comments on both of those, as far as Cobalt isconcerned, as most of the investors know, we take minority positions in@Ventures and therefore we do not drive the initial public announcement aboutmany of the investments that we make and since Cobalt has chosen for its ownbusiness reasons not to make a public disclosure at this point, they have askedus not to do that either, so we have not. We have invested $1.5 million and atthe appropriate time will make a more public announcement than the one I justmade.
As far as clean tech is concerned, we really -- we thinkthat we’ve invested in an excellent space. The board has authorized us to spendup to $50 million. We’ve invested a little over half of that, about $26 millionto this point. We continue to see a pipeline of opportunities there. The boardis very engaged in the uses of our cash in order to drive the best long-termshareholder value and so we’ll continue to evaluate how that fits into our overallbusiness model, but at this point in time we continue to execute the plan andare pleased with the investments that we’ve made to this point.
So thanks for your questions, Larry.
Operator
Our next question is from Michael London, stockholder. Your lineis now open.
Michael London -Private Investor
Thank you. Hello, gentlemen. I am not so pleased with theresults of your quarter. It seems like we’re just treading -- really treadingwater. The increases you are talking about in terms of your annual sales andmarket capitalization don’t seem that consequential.
I am curious as to the $202 million that you are showing incash. Is that much cash just sitting in money market accounts?
Steven G. Crane
Yes, it’s actually the total cash that we have is $261.2 millionwhen you add it all up and the balance of that is, as you rightly say, ismostly in money market type activities.
Michael London -Private Investor
But in a conference call three or four years ago, I hadasked you gentlemen why you didn’t use your cash you had at that time to buyback stock or pay a cash dividend and at that time, your reply was thatmanagement thought they had better uses for that cash. And so I’ve watched verypatiently and I haven’t seen any better uses being made of that cash and I’mpuzzled as to why management and the board thinks it should sit there with cashlike that when it now represents half the market capitalization of the companyand frankly, nobody seems to have any good plans for that much cash. I mean, that’sa quarter of a million dollars plus sitting there, and it seems like somethingmore productive could be done with it, other than draw interest.
Joseph C. Lawler
I get your question, Michael. A couple of things; first ofall, I’ve been very clear on a number of prior calls that we continue to lookat various other alternatives for uses of that cash. As you know, we’veannounced a $50 million buy-back. As you know, we’ve committed to invest up to$50 million in our @Ventures fund. We have operating requirements in our coresupply chain business as well because that cash, some of that cash is initiallygenerated in parts of Europe and parts of Asia and it takes a while for thatcash to flow back to a central location.
In addition, we named this -- about four months ago, wenamed somebody to look at merger/acquisition opportunities, corporatedevelopment activities for the company. We’re fairly early on in that processand we are continuing to investigate things that could make a lot of sense forour business.
Michael London -Private Investor
I’m sorry. From my point of view --
Joseph C. Lawler
And Michael, I’ll say that the board is highly engaged. Theboard -- and I agree with you. It is not our job to sit on large pools of moneywithout appropriate applications of that cash and so we take a very active rolein determining what the best use of that cash is and make those decisions on astimely a basis as we can.
Michael London -Private Investor
Well, I’m sorry. That’s just sounding like a broken recordfrom my point of view, so --
Joseph C. Lawler
I understand. I appreciate your questions and comments.
Operator
Our next question is from Jeffrey [Mettle]. Your line is nowopen.
Jeffrey Mettle -Private Investor
I had a question on the level of SG&A associated withthe redundancy in ERPs and call centers, and also what the level of CapEx anddepreciation is going to be once the ERP is completed. And also my lastquestion, and I’ll let you go after that, is how hard it’s going to be once ERPcenter is up and running, the new ERP is up and running to integrate any kindof acquisitions?
Steven G. Crane
Sorry, what was your first question on the level ofSG&A?
Jeffrey Mettle -Private Investor
It was what the level of SG&A is associated with theredundant ERPs and call centers.
Steven G. Crane
Okay.
Jeffrey Mettle -Private Investor
I’m assuming once the ERP is installed, you are going to --your level of SG&A should fall going forward.
Joseph C. Lawler
What we’ve got, and we haven’t specifically disclosed thesenumbers, nor are we prepared to specifically disclose them now, but what isoperating in our SG&A is today first of all the project costs associatedwith the design and implementation of the team that is implementing the SAPsystem. We carry that cost today.
Number two is we carry a redundant cost of data centers,multiple data centers that we operate and we will be moving to essentially asingle data center with one back-up data center when we complete theimplementation.
Number three is we operate about nine different ERP systemsto date, nine different instances of a couple of different ERP systems. Thecost of all of those things is one of the reasons that we have said publiclythat we will bring the cost of our SG&A expense as a percentage of revenuefrom the 10% to 11% range down into the 7% range. So there’s both theelimination of those duplicate costs, there’s further standardization that isenabled as a result of those costs, but then we also need and expect revenuegrowth, which also reduces that percentage of SG&A as a percentage ofrevenue.
So as far as the CapEx and depreciation, we’ve indicatedthat it’s a $31.5 million expense. That’s what we’ve been spending over thepast couple of years and we’ve reported those numbers going forward.
As far as the ability to integrate acquisitions into the newERP platform, at this point in time I don’t have a real simple answer exceptthat it’s a heck of a lot easier to integrate both a new client as well as anacquisition into a single instance ERP platform than it is to implement a newclient or an acquisition into multiple instances.
So said differently, today we operate different ERP systemsin Europe than we operate in Asia than we operate in the Americas and evenbringing a new client on board of some significant size represents anon-boarding challenge for us. That becomes much simpler, much faster as aresult of the systems and the same logic would apply to acquisitions.
Jeffrey Mettle -Private Investor
So would the run-rate of -- as a follow-up, would therun-rate of maintenance CapEx be about $8 million to $10 million less a yeargoing forward once ERP is installed?
Steven G. Crane
That’s an estimate. We don’t give CapEx per se, Jeffrey andour depreciation -- I’ll answer your question another way. Our depreciation isrunning this quarter we said, you saw was $4.9 million. Annualized it’s $20million to $21 million, so not a bad estimation for that overall. This quarterwe spent a little bit under $7 million for CapEx in the quarter.
Jeffrey Mettle -Private Investor
Thank you.
Operator
Our next question is from Carlos [Rangel] with MAP. Yourline is now open.
Carlos Rangel - MAP
Good afternoon. Thank you for taking my call. I would liketo congratulate you on a great quarter, great sales execution and it’s good tosee the gross margins at this level. I have three questions for you.
The first one is on the logistic side, you get a greatpicture about the economy and I was wondering what the pulse is like -- whatare you seeing and if there’s a slowdown in the economy, how that might affectthe business, through a slowdown in volumes -- does that affect your revenuesand how does it affect it?
I also have a question about the seasonality of sales. Iwonder if you find your fiscal Q1 or Q2 better for selling new type of servicesor is it better -- is it kind of straight line throughout the year?
And lastly, on the @Ventures portfolio, I was wondering ifyou may consider at some point revealing the percentage stake or ownershipstake you have on each company.
Joseph C. Lawler
Okay. Thanks for those questions. Let me just start from thetop. As far as the -- we’re not economists but we certainly monitor verycarefully the current and the near-term volume fluctuations from our clients.And we look at those across the various vertical markets. As you know, we focuson the consumer electronics, communications, storage, software and computerhardware vertical markets.
We have seen strong volumes with our clients in thosemarkets certainly through the first quarter of this year. We don’t forecast aswe go forward but -- forecast anything more than the guidance numbers thatwe’ve already given you and we said that we are sticking to the guidance that we’vepreviously given around the revenue numbers. That should be an indication thatat least through what we are able to see right now in terms of these volumesthat our clients are off to a pretty good start. I think we are all concernedabout what the outcome to the current fall season may be.
We have a 4% to 5% share of the market so we are notaffected in the same ways that people who have much larger share of say thelogistics market might be affected. But I would say at this point we arecautiously optimistic that in the first -- certainly in the first quarter andthe outlook right now is that we don’t see a major slowdown in the economyhaving a significant impact on our business.
There is seasonality in our business, however, and I thinkif you just go back and plot out Q1, Q2, Q3, Q4 results for us over the pastseveral years, you would certainly see that the first Q1, Q2 results tend to behigher than the Q3, Q4 results as a function of the vertical markets and theclients that we serve in those markets, and I expect that will continue.
And then finally, as far as @Ventures is concerned, becausewe have a minority position, we typically do not disclose our ownership ofindividual clients and so therefore, at this point in time we’re not preparedto do that but a minority position, one that’s not consolidated typically meansthat we are under a 20% share of the business and that’s usually our going inposition.
Carlos Rangel - MAP
Thank you.
Operator
Our next question is from George Mulligan, a privateinvestor. Your line is now open.
George Mulligan -Private Investor
I noticed that you are going to be investing $50 million in@Ventures. I knew about the $50 million buy-back. I knew about the $50 millionthat you are interested in using to buy another company but I like the idea ofputting $50 million into @Ventures, especially when you can get $14 millionback this coming quarter. Am I correct, it’s coming back this coming quarter?
Steven G. Crane
That’s correct.
George Mulligan - PrivateInvestor
Okay. Now, you are going to -- you lost like $40 million, or$45 million in sales previously announced this past quarter and next quarter,and then it goes down I think to $33 million and then it goes down to like $12million or something like that, or instead of losing $136 million, you arelosing -- or instead of losing $147 million, you are losing $136 million, whichis an $11 million benefit.
So I’m looking at that $14 million helping those numbers forthis coming quarter and then the next quarter, you are going to be losing lessbusiness and then the next quarter, even less. So that should all help youroverall earnings, am I correct?
Joseph C. Lawler
Yeah, I think your point, George, which is accurate, is thecomparables are toughest in the first two quarters and then less so in thesecond quarters.
Let me just clarify for others listening in on the @Venturescomment; the $50 million that I referred to is the same $50 million that theboard authorized in 2004 and it is the same funding that I’ve been talkingabout for quite some time.
The liquidity event for the Generations Network is actuallynot an @Ventures Five investment. It is a pre-@Ventures Five investment that iscoming back to us, just for clarity for everyone. We’re not announcing any new investmentsin @Ventures. We are continuing to execute the plan that we’ve been working on.
George Mulligan -Private Investor
Thank you for the clarification. Regardless, I like the waythat that’s going because it’s not sitting on the money, as the other gentlemenpointed out, which I too am unhappy about. I’m also unhappy about the stockbeing $10 a share when it was the equivalent of $16 a share prior to the lastconference call.
Joseph C. Lawler
We agree with you, George.
George Mulligan -Private Investor
The ERP is costing you $31.5 million overall. That ends themiddle of next year. What is your ROI projected for the following year and theyear after that as far as what you think you are going to be able to earn not onlyinternally but also from your customers? Also, you do cross sales to your@Ventures customers using the supply chain management opportunities that couldhelp boost their value.
Joseph C. Lawler
There’s a lot of questions there, George. I think the financialmodel we’ve laid out pretty clearly and I think if somebody wants to take sometime and run out the financial models in terms of revenue growth, margin andbottom line, they can start to calculate that.
George Mulligan -Private Investor
I guess my question on ERP is if that’s strictly used forinternal use or is that something where you actually make money from yourcustomers to be able to use that ERP? In other words, one thing I mentioned toMr. Crane was what if you were able to use the ERP to help like a HurricaneKatrina or the tidal wave over in the far east? Could you be able to take anduse that, your expertise to be able to help with those? I know SAP sells thatand Oracle sells that separately but can you be able to use that as a way to beable to increase your revenue, or is that some market you’re not interested in?
Joseph C. Lawler
Our intent is to use the ERP system to drive our businessmodel, internal efficiencies and we’ll get that done right and then we mayexplore some other options but that’s a full-time job for us.
George Mulligan -Private Investor
All right. Thank you for the clarification.
Joseph C. Lawler
Thanks, George. Any other questions, Paula?
Operator
We do have one other question from Lawrence Goldstein withSanta Monica Partners. Your line is now open.
Lawrence Goldstein -Santa Monica Partners
I was wondering -- is there anything left, any investments,perhaps obscure, left from the old days of Safeguard?
Joseph C. Lawler
Of CMGI?
Lawrence Goldstein -Santa Monica Partners
Excuse me, of CMGI -- shows you what I have on the brain.
Joseph C. Lawler
There are still a couple of investments from what we calllegacy @Ventures funds, much like the one I just commented on, the GenerationsNetwork.
Lawrence Goldstein -Santa Monica Partners
Are there any assets there, investments that you can getstruck by lightning if something happens?
Steven G. Crane
Do you mean other liquidity other than --
Lawrence Goldstein -Santa Monica Partners
Are there any assets which if you get real lucky, would be aboon?
Joseph C. Lawler
Well, you know, we mark these things to the lower of cost ormarket on the balance sheet and Steve can tell you what the carrying value forthese are. But we continue to monitor them. We have our @Ventures partnersoversee these businesses. They sit on the boards of these businesses and theyare incented to find liquidity events that are good for our shareholders, muchlike the one we are just announcing now on the Generations Network.
Lawrence Goldstein -Santa Monica Partners
Okay. Thank you.
Joseph C. Lawler
As a minority investor, we just don’t forecast what thepotential is for any one of these investments and those markets tend to -- themarket for these businesses tend to bounce, but much like we’ve invested in the@Ventures Five clean tech space, the same approaches were taken to non-cleantech businesses in some of the prior @Ventures investments and we’re continuingto work on those and to bring them to liquidity at as attractive a price as wecan.
So Paula, any other questions? I think we can take one morequestion.
Operator
We do have one other question from George Mulligan, a private investor. Your line is now open.
George Mulligan -Private Investor
A quick question -- you are looking to possibly buy acompany for $50 million and I would obviously love to know what kind of fit youwould probably like to have, and you are probably not going to answer thatbecause you have the @Ventures, you have the ModusLink. But are you using theModusLink to possibly find that other company?
Joseph C. Lawler
George, I don’t know where your number is coming from. Wedid not make any statement about spending X amount of dollars on any specificacquisition. My only comment regarding acquisitions is that we put a seniorresource to look at corporate development, which includes acquisitionopportunities.
George Mulligan -Private Investor
Then I must have misheard you because I thought you had setaside $50 million towards that end. Maybe I got those mixed up with the@Ventures investment.
Joseph C. Lawler
So to be clear, we’ve committed up to $50 million for abuy-back. That we’ve announced. We’ve committed to spend up to $50 million on@Ventures in the @Ventures Five Fund. In addition to that, we have workingcapital needs for our core ModusLink business. The extra or residual cash overand above that is the cash that the board is very focused on putting to thebest possible use.
George Mulligan -Private Investor
Okay. That’s even better.
Joseph C. Lawler
Okay. I think that should conclude our comments for now.Paula, if you would wrap up our call. I really appreciate the questions todayand we look forward to talking to you again on the next call.
Operator
Thank you. That does conclude today’s conference call. Youmay disconnect at this time.
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