iPass, Inc. Q4 2007 Earnings Call Transcript

iPass, Inc. (IPAS)

Q4 2007 Earnings Call

February 13, 2008 5:30 pm ET

Executives

Tim Shanahan - Director of Investor Relations

Ken Denman - Chairman and Chief Executive Officer

Frank Verdecanna - Vice President and Chief Financial Officer

Analysts

Lily Woo - PGRA Capital

Brian Essex - Morgan Stanley

Fredrick Ziegal - Soleil Security

Tariq Siddiqui - Manning Napier

Justin Arnold - (inaudible) Management

Ed Einboden - WM Smith & Company

Lou Sykes - Scenic Capital

John Art of Kauffman

Xavier Arnold - Summit Capital

Presentation

Operator

Good day ladies and gentlemen and welcome to the iPass, Inc. conference call. My name is Atia and I will be your operator for today.

(Operator instructions).

I would now like to turn the presentation over to your host of today’s call Mr. Tim Shanahan. Please proceed.

Presentation

Tim Shanahan - Director of Investor Relations

Thank you and good afternoon. We are here today to discuss our financial and operating results for the 4^th quarter and full year of 2007. I am Tim Shanahan and will be managing the call and introducing the company’s speakers Ken Denman, Chairman and Chief Executive Officer of iPass and Frank Verdecanna, Chief Financial Officer. Before I turn the call over to Ken I would like to bring the following to your attention. The date of this call is February 13, 2008. Our presentation today contains forward-looking statements about events and circumstances that have not yet occurred. Statements regarding our projected financial results for the 1^st quarter of 2008, statements containing words such as will, expect, believe, and should and other statements in the future tense are forward-looking statements. Actual outcomes and results may differ materially from expectations contained in these statements due to a number of risks and uncertainties. These risks and uncertainties are set forth in our press release of today as well as in our quarterly report on form 10-Q under the caption ‘Factors affecting operating results’, filed with the SEC on November 8, 2007 and available at www.sec.gov. IPass undertakes no responsibility to update the information at this conference call under any circumstances. The press release announcing our financial results is available on our website at www.ipass.com in the ‘Press Room’ section under ‘Press releases’. The current report on form 10-K furnished with respect to our press release is available on our website, in the investor relations section under SEC filings. In addition in this earnings call we will provide non GAAP financial results. The press release on our website includes texts and tables that reconcile and explain the reconciliation of these non-GAAP results to gap results. Our non-GAAP results exclude the effects of stock-based compensation, restructuring charges, valuation allowance for deferred tax assets, amortization of intangible assets, and cumulative effect of change and accounting principles and the related tax effect of the non-GAAP adjustment.

This earnings call is also being recorded for replay and is being webcast and will be available in our website for one quarter until the next quarter’s call. I will now turn the call over to iPass Chairman and CEO Ken Denman.

Ken Denman - Chairman and Chief Executive Officer

Thanks Tim and good afternoon everyone. As you may remember in last quarter’s call I mentioned that iPass was on track to return to profitability on a GAAP basis beginning in the 1^st quarter of 2008. Now based on the trends we are seeing in the business on recent months we believe iPass remains on track to meet that goal. This represents a major milestone in the process we began back in 2006 to transform the business of iPass . If you will recall our strategy to transform the business was, first, to generate cash from our dial up business which was steadily eroding as users switched to new modes of connecting to the internet. Even in the 4^th quarter we continued to add significant customer value and generate profitable revenues from our legacy business as an aggregator of remote access providers. During our transformation we worked to replace the declining revenues with sales from the wireless and broadband services that we expect to dominate our industry in the coming years. Today, we have largely completed this transition from dial only revenues to revenues from a combination of broadband software and service fees. Today, our enterprise customers see us as a single source for unifying enterprise mobility management. As a result, during the 4^th quarter our revenues from broadband software and service fees represented 73% of revenues compared with 27% for dial up.

Moreover for the full year of 2007 our broadband revenues grew nearly 90% on a year over year basis. Software and service fees revenues also showed an impressive increase, growing on a year over year basis by nearly 34%. In quarter 4, of the $14.5 million of software and service fee revenues, $2.8 million relate to a change in estimate for the recognition of our minimum commitment billings. You will know more about this from Frank in a few minutes. Our customers continue to embrace our enterprise flat rate pricing plans with nearly 50% of quarter 4 revenues coming from flat rate or subscription base pricing. All of these leave us looking to the future with confidence. A confidence that is reflected in our boards decision to authorize a new share repurchase program. Even though we believe iPass is on target for profitable 2008 the 4^th quarter fell short of our expectations. First, we had lower than expected non recurring software and service fee revenue including device management, license sales and professional services. Some of these deals we expected to close at quarter 4 but were pushed into quarter 1 2008. Had these deals closed we expect them to contribute to revenues in quarter 1. Second, sales of our mobile date cards were lower than anticipated we expected a few larger deals to happen and they did not get there especially in December. We reaped on a noticeable pause in our enterprise customers decision making and spending. We do however anticipate mobile data to be an important growth area in 2008 and beyond.

Even in today’s very challenging economic environment we booked nearly $20 million in new business during the 4^th quarter. That is in line with the $20 million to $25 million roughly we booked in every quarter for the 6 previous quarters. These strong bookings give us confidence that we will continue to add new customers and continue to grow revenues. Our sales pipeline is critical to sustaining growth of course. Among the new sales we booked in quarter 4 were 9 Forbes Global 2000 customers bringing our total to 417, an addition of 40 over the course of 2007. We now serve nearly 4,000 enterprise customers.

Turning to our gross margins, we saw a decrease in the 4^th quarter of 2007, we attribute this to the short fall in high margin non recurring software and service revenues I just mentioned, as well as, the continued shift in the revenue mix from dialed to mobile broadband. While we see mobile broadband as a huge area for the future, our network access cost for these services are higher than dial. As we continue to add new customers under our enterprise flat rate pricing and we continue to renegotiate pricing from our partner providers we do expect these margins to increase over time. Our overall growth in broadband software and service fee revenues contributed to the $192.2 million in total revenues for the full year 2007 representing an increase of nearly $10 million or a 5% growth rate year over year compared to 2006. And we achieved this growth despite nearly $38 million of dial revenue erosion year over year.

In addition to our quarter 4 new bookings of committed revenues, iPass solution provider partner CherryRoad GT was awarded a project to provide an iPass based mobility solution to the US Department of Justice. The total amount of the award was for up to $45 million over a 5 year period, and should generate purchase orders in the near future.

Our strong channel partnerships continue to make significant contributions. Our agreement with Orange Business Services integrated 10,000 additional WiFi hotspots in France, Belgium and the UK into the iPass global broadband roaming network further extending our strong position in Europe. We also added an additional 1,700 WiFi hotspots across 15 countries in Europe. IPass customers now have access to more than 95,000 WiFi internet venues worldwide. Our mobile data coverage also increased in 2007, we now offer our customers access to mobile data networks in the US in addition to mobile data coverage in the UK, Singapore, the Netherlands, Japan, Hong Kong and China. With iPass as the sole provider for remote connectivity including mobile data services, IT department. With iPass as the sole provider for remote connectivity including mobile data services, it has gained the advantage of being able to track expenses and being able to control more easily. Our flex connect partnership with Orange Business Services, the enterprise services division of France Telecom, continues to show great results, we have already closed several multi million dollar deals with Forbes Global 2000 customers as a result of this new partnership. We expect our execution on the iPass corporate restructuring in quarter 4 to reduce our non stock compensation network operations, R & D and SG & A expenses by approximately $3 million in quarter 1 of 2008 which is right on target with what we announced last November. With $75 million in cash and no debt we continue to have a strong balance sheet. With that in mind our board has authorized a new stock repurchase plan. Under this new plan iPass is authorized to repurchase up to an aggregate of $30 million of our common stock over the next 24 months. We expect the share repurchases to be funded primarily with cash flow from operations. The board believes this plan underscores iPass’s financial strength and considering our recent stock price we believe the share repurchase plan represents an excellent opportunity to enhance shareholder value over the long term. This position combined with the trends we are seeing an increase in revenues and a steadily growing customer base give us continued confidence that iPass will achieve profitability in line with our overall goals for 2008. Now, I will turn the call over to Frank Verdecanna our Chief Financial Officer to discuss our financial results.

Frank Verdecanna - Vice President and Chief Financial Officer

Thanks, Ken. Revenues for the 4^th quarter ended December 31, 2007 were $50 million versus $47.7 million last quarter. Full year revenues were $192.2 million versus $182.7 million last year, an increase of nearly $10 million and 5% year over year growth. Broadband revenues in Q4 were $22.1 million versus $19.6 million in Q3 a 13% increase. For the full year, broadband revenues were $75.1 million compared to $39.7 million in 2006, or nearly 90% year over year growth. Mobile broadband revenues came in at $15 million in Q4 compared with $112.7 million last quarter an increase of 18%. The 4^th quarter marks the first time mobile broadband revenues exceeded dial revenues in the quarter. We were able to achieve this significant milestone due to mobile broadband growing between 9% to 29% over the last 8 quarters, while dial revenues have eroded between 8% to 15% during the same period. Full year broadband mobile revenues were $48.8 million compared to $21 million last year an increase of 133% year over year. Fixed broadband revenues were $7.2 million in Q4 compared with $7 million in Q3 a 3% quarterly increase. Full year fixed broadband revenues were $26.3 million compared to $19.2 million last year, 37% year over year increase. Software and service fee revenues in Q4 were $14.5 million versus $12.4 million last quarter a 17% increase.

As Ken mentioned earlier $2.8 million of software and service fee revenues in the quarter relate to a change in estimate in connection with our minimum commitment usage base contracts. In prior periods, revenues were recognized per minimum commitment billings, as collected because we have little visibility in to whether or not we would collect those fees. In certain instances we would grant credits to customers for minimum commitment fees. With the introduction of our enterprise flat rate pricing model in Q3 of 2006 however, we have been able to enforce collections of those minimum commitment because we give customers the option to change to a flat rate pricing plan or continue on a usage base plan but pay any minimum commitment short falls. We have now collected a 4 year of data that demonstrates we have successfully enforced this new policy. As a result of the change in our business we are now able to recognize those revenues when billed. Software and service fee revenues for the full year were $49.3 million compared to $37.2 million in 2006, showing a 33% year-over-year growth. Our revenues in Q4 were $13.4 million versus $15.7 million in Q3, a 15% rate of decline. Full year 2007 dollar revenues were $68 million versus $105.7 million last year, a decline of 36% compared to 2006. Our combined broadband, software and service fees revenues in Q4 were $36.6 million, a 14% increase over the third quarter. For the full year 2007 our combined broadband, software and service revenues were $124.5 million compared to $76.9 million in 2006, a year-over-year increase of nearly 62%. For the fourth quarter broadband, software and service fee revenues represented 73% of our total revenues and dial represented the remaining 27%. In the quarter US revenues according for 52% of total revenues and international revenues accounted for the remaining 38%. Network access costs were $18.6 million in the fourth quarter or 37.2% of total revenues versus $17.4 million or 36.4% of total revenues in the fourth quarter. Full year 2007 network access costs were $69.5 million or 36% of total revenues as compared to $56.9 million or 31% of total revenues for the full year 2006. Our gross margin was 62.8% in the fourth quarter compared with 63.3% in Q3.

Now let us review our operating income and operating expenses. We had a GAAP operating loss of $4.6 million in the fourth quarter compared to a loss of $2.7 million in the third quarter. We had a non-GAAP operating income of $415,000 in the fourth quarter versus the loss of $400,000 in Q3. During Q4 our combined non-stock compensation expenses for network operations, R&D and SG&A expenses were $31 million compared to $30.7 million in Q3. We expect to reduce our non-stock compensation, network operations, R&D and SG&A expenses by approximately $3 million in the first quarter of 2008 as a result of our November restructuring and we expect these expenses to remain relatively flat throughout the year.

Now I would like to review our net income and earnings per share both on a GAAP and non-GAAP basis. Our GAAP financial results for the fourth quarter were significantly affected by a non-cash charge for establishing a valuation allowance on our deferred tax asset. After consideration of their applicable guidelines specified by Statement of Financial Accounting Standard No. 109, we concluded that the provision of a valuation allowance on our deferred tax asset accounts was appropriate. While this charge significantly affected our GAAP financial results. It did not have an adverse impact on iPASS’ liquidity or in part management view of our business. We had a net loss of $30.8 million or $0.49 per diluted share on a GAAP basis versus the net loss of $1.1 million or $0.02 per diluted share in the previous quarter. The loss was primarily a result of a non-cash charge of $26.9 million for establishment of a valuation allowance on our deferred tax asset and a $3.3 million restructuring charge relating to the reorganization we announced last November. We had non-GAAP income of $1.1 million or $0.02 per diluted share compared to $400,000 in the third quarter or $0.01 per diluted share. We ended the quarter with cash and short-term investment of approximately $75 million, a $1 million increase over the third quarter driven by operating cash flows.

Now, I would like to review our projections for the first quarter for 2008. The following statements are based on information to iPASS today. These statements are forward looking and actual results may differ materially. For the quarter ending March 31, 2008, we anticipate revenues of approximately $47.5 to $50.5 million which anticipates continued growth after consideration of the change in estimate for minimum commitment billings in the fourth quarter. We anticipate fully diluted GAAP earnings per share to be between a $0.01 loss and $0.02 earnings per share. We expect fully diluted non-GAAP earnings per share to be between $0.02 and $0.05 per share.

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

Ken Denman – Chairman and Chief Executive Officer

As I mentioned earlier, in 2007 our revenues grew each quarter on a year-over-year basis. Our continued revenue growth combined with the corporate restructuring we announced last quarter provide a solid foundation for cash flow from operations and we are beginning to see the expected results take shape. Even in this challenging economic environment we continue to deliver very solid new customer acquisitions. New bookings were strong with nearly $20 million of new business booked in the quarter and the pipeline remains strong promising to build on the approximately 4,000 inter-product customers we serve today. We fought hard, very hard to continue to grow and now we believe we will deliver profitable growth as we said we would. With that, I will turn the call back to the operator for your questions.

Question-and-Answer Session

Operator

(Operator instructions.)

Your first question comes from the line of Lily Woo of PGRA Capital. Please proceed.

Lily Woo

Yes. Hi. I was noticing that the broadband ASP, basically the revenue per broadband user has been increasing steadily in each of the last three quarters going from $76 in second quarter per user per quarter to $78 and then this fourth quarter, it had hit $80.66. Is this steady increase due to the flat rate pricing or is this due to increased usage and if you expect this kind of a trend, is it a meaningful trend that I am looking at and will it keep going higher? Could you give me some color on that?

Ken Denman

Sure, I will be happy to. I will start by saying fundamentally we have seen growth in the EMEA market, the European market in particular where in general our prices are higher and so if that region of the world continues to grow more rapidly than say North America and Asia, you are seeing one of those effects, a higher priced market, a higher ASP in general becoming a bigger and bigger part of the pie if you will.

Lily Woo

So, the European ASP is pulling that up. Do you expect the increase to continue going forward? Is that realistic?

Ken Denman

We do actually. One of the main reasons I would say is that we are continuing to see high quality footprint to come on in that region. As we mentioned we have advanced telecom footprint, available to us back in October. We have also talked in our comments about another sort of 1500 across 15 different countries and just recently the rest of the Swisscom Eurospot broadband network which actually has a number of high quality hotels and airports and other venues. We previously have up to 250 of those venues and we now have about 1700. So, we have opened up an additional 1500 venues, access to an additional 1500 venues from a very high quality provider gives us basically all of their footprint across a number of countries in Europe and we have more in the pipeline, some key players that we have been chasing for some time. So, in terms of the trend, I would expect it to continue and the driver is high quality footprint continuing to come in to the fold.

Frank Verdecanna

I will just add to that one of the other things that helps driving is we do continue to bring on more users that use both mobile data and WiFi. So, we have users that we have a bundle price plan which use both WiFi and our 3G service.

Lily Woo

Okay. And that bundle pricing is higher than just one or the other?

Frank Verdecanna

Exactly.

Lily Woo

Okay. Can I also get an update on, you have mentioned FlexConnect a while ago as a channel for selling more of the iPASS software to certain telcos? Is that one of the things that is driving the software revenue increase and generally how is FlexConnect in terms of bringing on subscribers to do those international telcos?

Ken Denman

Lily, we are really happy with the results we are seeing. The most recent one that we are tallying in as I mentioned in my comment we believe has had a multi-million dollar impact in terms of booking is our relationship with Orange Business Services, the Enterprise services arm of French Telecom and it is not just software although we are pushing Enterprise flat rate deals and we typically are pricing with our partners on an Enterprise flat rate basis so that looks very much like a software. It’s priced receipt per month but we see this as fundamentally one of the best channels that we can have and as we convince key network providers, key telecom operators of different ILCA, that we are the best debris solution and they ought to sort of get out of the business of trying to do software for unifying mobile kind of activity for their customer base and actually use iPASS. We see a much lower acquisition cost. We do not have to have as a great achievement as many feet on the streets in those countries. We can allow our country managers and their territory managers to work very closely with those international partners such as Orange Business Services, such as Telstra, such as Deutsche Telecom and there are more that I could name and there are more that are in the pipeline. So, this is the fundamental strategy for us in terms of broadening our distribution and making our distribution more efficient and I continue to see a lot of good upside here.

Lily Woo

Okay. And is that what is also driving the so called Off-Network user increase or are those people, FlexConnect customers considered off network users?

Frank Verdecanna

No. Well, actually … I am sorry to interrupt. I will let you finish your question.

Lily Woo

That was it actually. I am trying to quantify as you mentioned FlexConnect, where should I be seeing that at that growth and success. Should I be looking for that success in increase software revenue or increase Off-Network user number? How is it driving margins on some quantifiable perspective? Where should I be looking for that financial impact?

Frank Verdecanna

Got it. So, it is interesting because I think fundamentally, those customers, FlexConnect customers will look, often times like the rest of our customers. The end users and more importantly the companies that sit behind these FlexConnect partnerships actually look very much like the customers that we have gone out and tried to acquire directly. So, the places that I would look would be an acceleration of our penetration of the Enterprise flat rate, I think you should look for an acceleration and our ability to sign large Forbes Global 2000 customers because again these large carriers have relationships already with those companies in their regions typically and it really improves or increases the sale cycle especially in an environment where many companies, many enterprises are trying to reduce the number of vendors that they work with. With regards to… I would not focus so much on the Off-Net on that equation or as an indicator around FlexConnect. Off-Net is the phenomenon that I think is very powerful and validates our model, that is, being the sort of unifier mobility and conductivity for enterprises. Now what do I mean by that? We have a great commercial Enterprise Grey Footprint out there, that is the On-Net but at the same time because of the nature of WiFi in the back of this, spectrum is free, lots of people can put networks up. Most companies have wireless LANs on campus. Many people have wireless LANs at their home. There is a lot of free network out there. There is also the combination of premium-priced network at some venues and also free ad date networks. Our role is to make sure that users can move seamlessly between all of those networks. In general, while we are tending to focus on the airports, hotels, conference centers, convention centers, and restaurants that are more “Enterprise Grey”, where it is all about the real estate, it is all about the location, location, location and people are willing to pay a premium price there. There is tons of other non-commercial footprint. In fact, the majority of the WiFi footprint around the world is non-commercial. And people want to connect at those places as well. The fact that they are using the iPASS client to connect, whether they are at a free network or at the campus or at an Enterprise Grey Network like an airport, it is very, very good for us. It says we have value from the security perspective, from the ease of use perspective, etc. and very importantly I do not have network access costs associated with those Off-Net venues so it makes our Enterprise flat rate model even more compelling from a financial perspective from the iPASS side.

Lily Woo

Okay. Great. Thanks a lot.

Operator

Your next question comes from the line of Brian Essex of Morgan Stanley. Please proceed.

Brian Essex

Hi. Good afternoon guys. I just want to ask you a question. Ken, you noted in your prepared remarks that you saw a notable “pause” in customer decision process. Was there any particular catalyst or vertical that you could point to that led to that pause? Any segment of the market that led to that trend in particular?

Ken Denman

You know Brian the sort of interesting thing was is it was pretty broad based. There is some vertical that we are more engaged with than others just in the nature of the business that we do. We are deeply engaged with pharma, pharmaceuticals in general. We are engaged with some of the extraction industry. We are increasingly engaged in the retail sector because with our fixed broadband businesses, it is giving us a lot more and better opportunities to talk to folks in those sectors and also in software space. One of the lesser, smaller categories for us but growing is financial services but historically it still has been a relatively small segment for us. I would say across the spectrum, sort of the whole financial capital market, the sub-pricings started happening, 300 points drop per day, it felt like people either went on holiday early, that the Christmas calendar accelerated. Suddenly, we were not getting the people that we were getting to before and had verbals on. We thought deals were done. It was all of a sudden a very indecisive climate whether people were saying I am just going to have to push this to the next quarter or they just sort of went quiet. My read was that there was a sort of an emotional impact late in the quarter where folks went out sure about their business so they were taking slower decisions. And again, because we do not have a huge amount of non-recurring revenues in our business, it did not kill us but it definitely had an impact. We felt it and I noticed it now. Coming out of the quarter, we have seen some of those things that slowed down and did not happen already have closed. A few of those deals have sort of kicked in but this is a time I think when most businesses are watching the markets very carefully trying to understand their own economics and be very, very careful about their decision making and their expense budget because of the uncertainly of how 2008 will shape out from an economic perspective.

Brian Essex

It sounds like a late event that looks like it is maybe clearing up a little bit going into the first quarter of 2008.

Ken Denman

I think that is fair. I think that is fair. I would say there is still caution out there but it is nowhere near what we saw in the back end of the quarter. I think people have sort of they have taken in all of the factors. They probably got their budget set for the year but there was a little bit of fear trepidation. It is moving out. I think that is a fair characterization.

Brian Essex

Okay. New ones filed. The CherryRoad project. Do you have any more details on that, in terms of qualifications and maybe ramp over the next five years that you expect within that? Is it a full $45 million award that you would be eligible for?

Ken Denman

Well, first of all I think CherryRoad is a management services provider so they are wrapping their value around packaging a service and making sure it is delivered and helping with the project management, etc. so part of that is revenue obviously they would get but it is fundamentally the iPASS platform of our mobile office platform plus the provision as well of mobile data service. So every unit if you will or every seat that we ship is basically our mobile office client plus a mobile data card and we just started from a very good relationship in a sense a good test that we had we CherryRoad in attacking the Alcohol, Tobacco and Firearms Bureau and out of that grew an RFP because it was kind of an award winning model for helping people be mobile and secure and CherryRoad won that award, the award specifically called out the iPASS platform and the iPASS provided mobile data service. So, it is a combination of our mobile office with WiFi, internet dial, etc. with the mobile data card to combine service at obviously a bundle price. That is, the basic platform that is out there and as frankly, we want to take it across the Department of Justice. We think there are a lot of opportunities in the other agencies. I do think it will roll out over the course of this year. In terms of specific numbers, I cannot give you those but Alcohol, Tobacco and Firearms Bureau is already a customer. We have already gotten a couple thousand seats with them. I think there is an opportunity for thousands of seats this year and each year beyond and whether that is the sort of mid-single digits or high single digits, I will not go that far. I cannot be that clairvoyant at the moment but if this is thousands of seats in our view from everything that we know and our best estimates from what we have heard, it is sort of thousands of seats per year.

Brian Essex

Okay. Great. Thank you very much.

Operator

Your next question form the line of Fredrick Ziegal of Soleil Security. Please proceed.

Frederick Ziegal

Hi guys.

Ken Denman

Hi. Fred.

Frederick Ziegal

A follow on to the prior discussion, do you have the sense of other agencies that may be thinking about trying to do what DOJ is undertaking?

Ken Denman

We are out there swinging. The great thing about a deal like this is that it is a great reference account. I mean, once you are in the wheel house a CIO at one of these agencies you typically have a lot of opportunity for those folks to sing your praises and obviously it is good for government but that is one process and it is tested, dated, hardened and actually commercial. We were commercial with them through all of last year and you can bet, Fred we are knocking on every appropriate door and hopefully, if possible, with our new customer in hand and so I should not give specific names but the name of the game here is that we have a good reference account in the Federal Government. We have been trying to make a significant impact on the Federal Government sector for some time. We have other good partners in the Federal Government sector but we have not been able to get to this size of a deal opportunity before now so this is an important milestone for us and to the other issue, do you want to buy that way? And also to our channel partners because there are a number of channel partners who find that to be a very compelling solution for them to effectively OEM as they go into some verticals, rhetorics, pharma, or auto, or other verticals I can mention where they’re using devices of some form factor and they need a software package that will help them manage that in-point if you will, and they find our offering to be compelling. So we’re sort of going down two routes now, which is our channel partners will continue to deliver that and likely add a license basis although they have the subscription off option. With our field sales team, the iPass team will focus more on the mobile office solution that includes what we call the mobile management system and sell that on a near price flat rate basis. And so I really do think going forward we are going to take some of that moppiness out of the equation by moving more towards the recurring revenue model basis.

Frederick Ziegal

So the keen metric done is going to be the percentage of revenues that are coming EFR which was 50% in Q4 cause sounds like that will just drive along the device management as part of the package.

Ken Denman

Yes. In Q4, about 46% of our revenues, or nearly 50%, came from subscription-based services so that includes EFR. Then we include mobile dating, 6-pod dating, that number also.

Frederick Ziegal

Okay. Where do you think EFR is going to be exiting 2008? What would you guess, percentage of revenues?

Ken Denman

Yeah, I think it’s subscription basis. I think we’ll probably get close to 70% by the end of the year.

Frederick Ziegal

Okay. Alright. Thanks.

Ken Denman

You bet.

Operator

(Operator instructions).

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

Tariq Siddiqui

Hi, guys. Just to follow on with the EFR. How many of your users are actually on EFR at this point? Any thoughts on that?

Ken Denman

At TreeGrow MX, the number of EFR users we present with a bottom on-mat and off-mat but there are a lot of different plans out there, some falling in the EFR bucket, some falling in the usage rate bucket, so we haven’t really dissected any more than that.

Tariq Siddiqui

Sure, and you guys said it was exactly 60% this quarter, and the rest of the revenues come from subscriptions?

Ken Denman

Yes, subscription-based revenues. So that includes molding and fixed.

Tariq Siddiqui

And the researching charges that you took that are going to help you achieve $3 million in cost savings in Q1 from Q4 of 2007; is that correct?

Ken Denman

Yes. The main driver there is a reduction in workforce from 575 at the end of Q3 to about 504 by year end.

Tariq Siddiqui

Okay. I guess the one that I’m trying to understand a little bit here is the active network access cost as a percent of the access revenues continues to go up, is up about from 59.3% last quarter to 52.4% here. Why is there not leverage as you’re going out there getting more minutes, more users, more minutes, more users. It just seems as opposed to even growing lock and step but the revenues are going faster than revenues. Any thoughts as to when that might flatten out?

Ken Denman

I have three types. I think it’s in Q4 as the top quarter to measure that with because we did have a pretty significant shortfall in the software and service side.

Tariq Siddiqui

This is just on the access revenues. I’m just saying the dial-up plus the broadband revenues divided by the network access cost. So, nothing from that side of things.

Ken Denman

Well, we did have pretty significant arrangements on the dial-up side in Q4, and we also had pretty strong growth on the broadband side. So, it’s primarily a revenue mix. As we look forward, I think our expectation is that gross margins stay relatively flat within a range of 50% to 52% throughout the year, any one quarter would be plus or minus percent or so, but I think the way we kind of see your side now is that.

Tariq Siddiqui

Okay. And then, did you have any thoughts on the whole Starbucks, T-Mobile, and AT&T and how does that affect iPass?

Ken Denman

We actually do have some thoughts on that. First of all, the good news here is that all of the parties involved are important partners as far as iPass is concerned. Starbucks, T-Mobile, and AT&T. Importantly, we have relationships with both T-Mobile and AT&T. They are great partners for us, and we hope and believe that we will continue to expand our business with them. And so as this transition occurs at Starbucks, iPass will be available and open for use to our customers as it’s always been. So we’ll work with those two companies as we always have, but during this transition we are going to work with them to try to make the transition as seemless as possible. But from the perspective of our users, there really is no change. The Starbucks footprint will remain part of the iPass footprint, and that’s kind of the most important point to make here.

Tariq Siddiqui

Sure, but the fact that I can walk into a Starbucks now and not have to pay anything, does that lessen the need for me to actually open to my iPass account and so forth seeing as that I think it’s two hours free that they give you when you buy something or the other. Does that lessen the need for me to actually go through my iPass client and so forth when I could just get it for free?

Ken Denman

No, it will actually, and as I said before, our customers who are our users don’t tend to think about what’s free and what’s not. They tend to use the iPass client. That’s part of the power of being embedded as the enterprise mandated or supported platform of choice and because we are sort of perfect they see, and they’re just use to using us to connect. Now, as far as the commercial, the different commercial models that are going on in space, please remember that T-Mobile also has models and price plans where the service looked or was effectively somewhat created to various kinds of purchases. Like for instance if you had T-Mobile hotspot cell phone plan or you purchased various kinds of T-Mobile accounts, you could effectively get free service if you wanted to. That’s more on the consumer’s side; we never really, we’re sort of playing over there. The fact that AT&T broadband customers will have access to “free service” doesn’t really change the game for enterprise users and individual business travelers who have iPass on their, or who have been using iPass and in the future we think we will be using iPass on their SmartPhones and handhelds. I think they’re going to use our platform to connect just like they always have. And remember, at the end of the day, we are enterprise flat rate typically, so it just looks more or less free to the user.

Tariq Siddiqui

Okay. And in terms of the changes that you did in the software, the counting, is it fair to say that if you hadn’t made that change, you would have missed your target of the sequential growth rates?

Ken Denman

Yes, Tariq, that’s fair. The change in estimate was about $2.8 million of additional revenue in Q4.

Tariq Siddiqui

Okay. Fair enough. Thank you.

Ken Denman

Okay.

Operator

Your next question comes from the line of Justin Arnold (inaudible) Management. Please proceed.

Justin Arnold

Can you talk a little bit about the couple of things that were pushed into Q1 on a dollar basis? What was pushed into Q1?

Ken Denman

It didn’t. Generally, what I was talking about there were some of the non-recurring deals on the device management side and professional services side, so there are hundreds of thousands on that side. I don’t think we quantified more than that, but that’s kind of the numbers we’re talking about.

Justin Arnold

Okay. And, can you help me out? Maybe Frank can help me out with where you guys GAAP EBIDT is in Q1? Just so I have stuff underneath. Just wondering what you guys are thinking in terms of EBIDT.

Frank Verdecanna

Our expectation is that we are GAAP-possible in Q1. So, the GAAP EBIDT number will be even more profitable so a higher number obviously than the bottom line.

Justin Arnold

Okay. Thank you.

Frank Verdecanna

You’re welcome.

Operator

Your next question comes from the line Ed Einboden of WM Smith & Company. Please proceed.

Ed Einboden

Hello everyone.

Ken Denman

Hello.

Ed Einboden

I just wanted a couple of quick questions. I know you guys talked about the headcount exiting 2007 and I was wondering what your plans were for 2008. Do you still some further headcount reduction in the year or are you at a level that you guys are pretty comfortable with.

Ken Denman

We expect the headcounts to remain relatively flat. We think we are sized to run this business and the growth in this platform. I may have mentioned in the last call we felt that this was what we needed to do to get to profitable growth. We will be running the business from here. I do not think you should expect anything other than normal, minimal increase that might sort of go along with inflation and probably more driven by actually real growth in the business. My goal is to scale this business off of this size, off of this platform so you should think about roughly 500 employees around the world, that is what we need to deliver our plan going forward.

Ed Einboden

Okay. And lastly, just wanted to find out at what point in, I guess maybe even if you guys can specify a dollar amount if you would be so kind to talk about where you think the dial-up may stabilize?

Ken Denman

That is the $64,000 question. It is sort of like interest rates and other things. I am rogue to try to predict it. We have always said that at some point we might reach out and see it flatten out. We have not yet seen that which makes me cautious. You would think that the smaller number the absolute gets, the closer you get to that point. We are hopeful but we are not planning for it. I think the safest thing for us to do is to assume it just keeps going down and that is what we are assuming. Most businesses like that. They eventually reach some steady state. Again, as you can tell by hedging and having an eye and ear, we all want to try to pick a point. We just have not had any luck in terms of trying to understand where it is going to go at least at this point.

Ed Einboden

It seems to be almost accelerating on a percentage basis. Do you guys still see that as being something that is possible in the next few quarters?

Ken Denman

Well, it is I think the worst we have seen in this kind of 13% to 15% range. We have seen it reach that kind of level two or three times and then bounce back down so I think the good news here is that we thought $38 million in our erosion in 2007. Based on the absolute size of that bucket now there is (never say never)… highly unlikely that we would anywhere near that level of absolute erosion and if you look at the worst case scenarios of sort of 13% to 15%, you get to a much lower number in terms of absolute dollars on a year-over-year basis. And so if you take that much lower number and if you compare that to the bookings that we have been able to accomplish over the last year and sort of think about those, sort of $35 to $40 million, that those bookings roughly $90 million translating into sort of $35 to $40 million of revenue, it kind of gives you a sense that the worst is behind us in terms of dollar erosion on our overall business, the drag is lessening and the growth that we have built over the last several years and the broadband software and service fees should help us accelerate the growth rate of this business. I would just recommend that you go to the website or you go to the investor tab or to the conference link for this call and you will see a chart that represents broadband software and service fee revenue growth on a quarter basis over roughly the last two-and-a half years. What that, I think portends is really solid opportunity for us to finally break free of the dollar erosion anchor. Fundamentally, that is the chart that is the growth business. That represents everything except dial and if this were a chart that most companies put up that represented their business books would say “My goodness, this is a growth engine.” So again, the smaller the absolute number gets, the better I think our story gets and that is one of the reasons why we are excited about 2008.

Ed Einboden

Okay, Fair enough. Thanks you guys.

Operator

Your next question comes from the line of Lou Sykes of Scenic Capital. Please proceed.

Lou Sykes

Just a follow up on this change in the revenue recognition is it fair to assume that there are no costs essentially tied to that, so it is 100% margin?

Ken Denman

Absolutely.

Lou Sykes

And you said that it is basically a one time adjustment so we should not see any more of that in the next few quarters or so.

Ken Denman

Yeah, it will be minimal impact going forward. Basically, the Q4 revenue had both the Q4 billings and then also any collections on anything we have reserved at 9/30. So to the extent that we receive that was still reserved from the 09/30 balance in 2008 that would be additional revenues but again we are not expecting that to be anything significant.

Lou Sykes

And then quickly on the targeted savings of $3.25 million, the previous caller asked whether that would be in comparison to the fourth quarter, I think you said yes but I just wanted to confirm that we should really look at the expense run rate in the fourth quarter and take $3 million off of that.

Ken Denman

That is correct.

Lou Sykes

Is that because the staff reductions were basically effective as of the end of the fourth quarter?

Ken Denman

Exactly. We did the restructuring in the latter half of Q4 so we you will have a full impact of it this quarter.

Lou Sykes

Okay. Great. Thank you.

Operator

Your next question comes from the line of John Art of Kauffman. Please proceed.

John Art

Yes. Hi. I was wondering if you could go through the product line, by the revenues product line by product line and break out gross margins, where gross margins have trend less the last couple of quarters and what you think you can do to protect or improve next year?

Frank Verdecanna

Sure Jonathan, this is Frank. On the dial side, we have revenues of $13.4 million in the quarter and the dial margins has been relatively stable over the last two years at 70%. On the broadband side we had revenues of $22.1 million and broadband margin for the fourth quarter are right about 36% and if you look at the improvement in broadband margins, I would point to the mobile broadband margin being the bigger piece of that pie and if you look at where we were in Q4 2006, mobile broadband margins were about 26% and in Q4 2007 they are about 34%, pretty significant improvement during the year and we expect that level of improvement going forward in 2008. On the software and service fees, it is basically 100% margin.

John Art

Could you break out what exactly is in the software and service fees, how much of the revenue there or the other categories might be aside from this accounting issue might be one time revenue either hardware sales, software sales, something like that?

Frank Verdecanna

One time revenue?

John Art

Yeah, if you could take out the change in estimate, one time revenue is typically about 10% of that bucket.

Frank Verdecanna

In the last quarter that would have been the same? Yeah, if you take out the $2.8 million it is roughly 10% of that bucket.

John Art

Because the math does not quite work because basically, I should assume that this accrual was a one time accrual and that we go to the end of the base rate now goes down to 11.7%, you would have reported 11.7% instead of the 14.5% in software and services without the accounting adjustment?

Frank Verdecanna

True.

John Art

Effectively a one time catch up. And you received cash against that in full 2008?

Frank Verdecanna

Some of that is related to Q4. The $2.8 relates to both the Q4 billing and the collections from the 9/30 amount so there are some of the December billings and part of the November billings.

Operator

The next question comes from line of Xavier Arnold of Summit Capital. Please Proceed.

Xavier Arnold

Hi, good afternoon.

Ken Denman

Good afternoon.

Xavier Arnold

I just wanted to go back to the $2.8 million dollar of additional revenue issue and you have the guidance for next quarter of $37.5-55. If I were to try to compare that with Q4, what would be the number?

Ken Denman

I would take the current quarterly revenue of $50 million and take out the $2.8 million, and that’s kind of a comparison, so I think you see at all parts of our range, the $47.5-50.5, we expect growth in Q1.

Xavier Arnold

Okay, but with some of the $2.8 belonging in to Q4 and aren’t you going to be using the same accounting for Q1?

Ken Denman

The $2.8 is actually incremental. So that incremental revenue is in Q4.

Xavier Arnold

Sorry. Had we not have to change in estimate, we would not have seen that $2.8 million. So it doesn’t reoccur into Q1?

Ken Denman

Yeah, (inaudible) base if I would take out the $2.8 million in Q4 to compare to Q4 and Q1.

Xavier Arnold

Because we used 47 too on there.

Ken Denman

Compares to what they would expect.

Xavier Arnold

Okay, great. Thank you.

Operator

We have a follow up questions from the line of Tariq Siddiqui of Manning Napier. Please proceed.

Tariq Siddiqui

Hey guys. Just you guys gave mobile gross margins you ran out from 26% in Q4 of 2006 to 34% this quarter, and then, you know software and services are at that stable, 90% dial up revenue is at 70% gross margins. I guess what I’m trying to figure out, how come your gross margins are decreasing in this year then? I’m just very confused by that.

Ken Denman

So Tariq, yeah, we are seeing improvement in the mobile broadband margins. The different is, dial up is really looking at 70% margin and even though we saw improvement in mobile broadband, yeah, the overall revenue niche is pretty different. So if you look at, we’re ending the year with dial up representing only 27% of our total revenues.

Tariq Siddiqui

You guys have any thoughts…

Ken Denman

That compares to Tariq, cause at the end of Q4 to the 50% of our total revenues a year ago.

Tariq Siddiqui

A year ago, exactly. And then on the 6^th broadband, what are the gross margins there? You guys gave the mobile side, but…

Ken Denman

That was slightly just about 40% and that’s been relatively stable.

Tariq Siddiqui

Alright, thank you very much guys.

Operator

At this time, if we are sure there are no more questions I would like to turn the call back over to Mr. Ken Denman for closing remarks.

Ken Denman

Thank you very much operator. Ladies and gentlemen, thanks for joining us for our quarter forum of 2007 call, we look forward to talking to you again after the completion of quarter one and as we go into our year of profitable growth, the year of 2008. It’s been a very difficult, though, energizing at some level of transition, you know it’s great to be on this side of the cabin that you row. We look forward to delivering the promise on the business and the promise of the vision that we set out for where we could get to if we could navigate this very painful thought of changing our revenues almost a hundred percent in the course of three years and that’s effectively what we’ve done. With very few companies, I think, if you look around, there are few companies that have been successful in doing almost complete product of next swap-out and remained, you know, relatively a break-even and analyze way to generating your real profit, real cash and growing and I think that we have that opportunity. I think we represent that case study and starting from this quarter, we are looking forward to delivering on our promise and we thank you for coming with us on this journey and we hope that you’ll join us in May or late April for the next chapter. Thanks very much have a good evening or day, wherever you are.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great evening.

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