InnerWorkings, Inc. Q4 2007 Earnings Call Transcript

Feb.27.08 | About: InnerWorkings, Inc. (INWK)

InnerWorkings, Inc. (NASDAQ:INWK)

Q4 2007 Earnings Call

February 21, 2008 5:30 pm ET


Nicholas J. Galassi - Chief Financial Officer

Steven E. Zuccarini - Chief Executive Officer

Eric D. Belcher - Chief Operating Officer


George Sutton - Craig Hallum

Franco Turrinelli - William Blair

Randy Hugen - Piper Jaffray

Yousseff Squali - Jefferies

Lev Polinsky – JP Morgan


Good day, everyone and welcome everyone to the InnerWorkings, Inc. fourth quarter and fiscal year 2007 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to the Chief Financial Officer, Mr. Nick Galassi.

Nicholas J. Galassi

Good afternoon, everyone and thanks for joining us on our fourth quarter and full year 2007 earnings call. I’m Nick Galassi, the Chief Financial Officer of InnerWorkings. Joining me today is our Chief Executive Officer, Steve Zuccarini; and our Chief Operating Officer, Eric Belcher.

Before we begin, I’d like to note that this call will include forward-looking statements relating to future results that are made pursuant to the Safe Harbor provisions of the Federal Securities Laws. These statements are subject to a variety of risks, uncertainties, and assumptions that may cause actual results to differ materially from those stated or implied by the forward-looking statements.

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Listeners to the call are advised to review the risk factors contained in our Form 10-K.

Please note that this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without our prior consent.

At this time, I’ll turn the call over to our Chief Executive Officer, Steve Zuccarini, who will recap selective fourth quarter and full year highlights. Next, our Chief Operating Officer, Eric Belcher, will discuss our integration progress and organic hiring efforts. I will then spend a few minutes on financials. Steve will conclude and we will finish with your questions.

Steven E. Zuccarini

Thanks Nick and thank you everyone for joining us on the call today. I am pleased to report that InnerWorkings had its strongest quarter and year-to-date with record sales and earnings. We’re also excited to report significant operating leverage in the fourth quarter. Let me share with you what our highlights for the quarter and full year are.

Fourth quarter revenue rose 47% to a record $90 million, up from $61.2 million in the same quarter last year. Operating income increased 58% to $8 million from $5.1 million in the prior year’s fourth quarter. Our full year results were equally strong. Revenue totaled $288.4 million, an increase of 80% over 2006 and our operating income was $23.2 million, up over 80% compared to $12.8 million in the prior year.

As the results illustrate, InnerWorkings has demonstrated a strong track record of success by executing on the strategic plan we have communicated to the investment community. Our high service and low cost model continues to gain traction in the marketplace. The proof of this is in our customer retention and growth and consistency in our overall financial performance.

The good news for our shareholders is we have barely scratched the surface of our opportunity. As we’ve talked about on our past calls and at our recent Analyst Day, we see our target market opportunity of $130 to $140 billion and this $170 billion in growing US print industry. Thus, in terms of market share, our penetration still remains less than 1%. So let’s dig back into some of the more specific details on this last quarter and our full year performance.

Transactional revenue increased 126% year-over-year and we serviced over 2,800 customers in the fourth quarter of 2007 versus roughly 1,900 in 2006. During the course of ‘07, we serviced over 4,500 transactional clients versus approximately 2,200 in ‘06.

Our enterprise client growth also remains robust. Six new enterprise accounts were signed during the fourth quarter. They included companies in the pharmaceutical, consumer package goods, and manufacturing industries. Enterprise revenues increased 60% year-over-year to $180.2 million with a customer base of 116 enterprise accounts versus 92 at this time last year.

You know we’d like to point out the addition of International Truck and Engine Corporation, a wholly owned subsidiary of Navistar International Corporation to our enterprise base. This enterprise client win further illustrates the growing trend towards the outsourcing of print services. As part of this three-year engagement, IW will provide managed services to help International achieve targeted savings across a broad range of print categories including brochures, catalogs, production manuals and print-on-demand.

In addition to print procurement, InnerWorkings will also be providing warehouse and distribution services to our supplier network and dedicated onsite personnel at International’s corporate headquarters in Warrenville, Illinois.

Another key aspect of our strategy is to attract strong talent to our sales team and expand our geographic footprint in the large print markets. Eric Belcher is going to highlight our continued ability to attract top quality talent. But I’d like to walk through some high level numbers with you right now.

During the fourth quarter, we added 45 new sales executives. Of these individuals, eight were gained through organic hiring and 37 sales executives were brought on as a result of our acquisitions of New York based, Corporate Edge; Minneapolis based, Data Flow Media Systems; and Dallas based, Graphic Resource Group. These were all deals that we completed in the fourth quarter. Encouragingly, these companies as well as all other ‘07 acquisitions are being quickly and effectively integrated into our larger business.

In 2007, we expanded our national footprint and now maintain a meaningful presence in six of the top 10 US print market. We’re quite pleased with the sales force additions made via acquisitions and through our organic hiring. We still remain the most exciting destination for experienced and talented sales people in the graphic arts industry today.

In the last few weeks, we completed our yearly sales force review. One of the biggest validations of our sales strategy was the increasing number of high performance people within our sales team. For example, in ‘07, 62 of our sales representatives sold at least $1 million in revenue and this compares to 40 reps selling at least $1 million in revenue in 2006.

Continuing with our historical performance gains, sales rep productivity, again increased over 15% from 2006 to 2007. The success realized further illustrates our team’s depth, the significant market opportunity available to them, and our ability to cross sell and up sell existing customers. I can tell you the sales team is looking forward to a highly successful 2008.

Our client retention and growth was a major success theme for us in ‘07 that we intend to build on in 2008. We did business with 23 of our top 25 accounts from 2006 for a 92% retention rate and revenue in 2007 from our top 25 accounts from 2006 increased by 35% compared to ‘06, again signifying that our key customer relationships are strong, they are growing, and we’re gaining deeper penetration at these accounts.

We’ve talked to you a lot about investing in our infrastructure and that includes hiring top talent. Recently, we’ve added senior executives to our sales and operations teams from companies such as Eastman Kodak, A.T. Kearney, Domtar and Experian. We are confident we have the team in place to fuel and manage our future growth.

I would like to close by talking about the economy. We know this is a topic of great concern for many of you on this call. As you know, we are a young company and we have never gone through a recessionary period. In my almost 30 years in the business, I personally lived through several recessions or down cycles in the printing industry, but what truly excites me today and differentiates our experience in this uncertain time from what I’ve experienced in the past is that what we have to sell here at InnerWorkings resonates even louder in times of economic uncertainty.

Let me walk you through a few pertinent discussion points about our value proposition to our clients. The key component of our strategy is that we facilitate a lowest cost decision for our clients. If you would have talk to the CFOs or some of our prospects or better yet some of our clients, you would here three key themes that have become crucial for them as they consider how to navigate this economy. These include; how do I reduce overall print cost, how do I better allocate or reduce employee head count, and how can I reap the benefits of technological advancements without allocating significant resources towards non-core activities.

Our businesses and our business model accomplish all three of these objectives. First, the heart of what we do is help our clients find absolute dollar savings in their print spend.

Second, the efficiency of our process helps facilitate head count reduction for better, yet, head count redeployment to other parts of their organization, areas like marketing, which is crucial in today’s economy.

And finally, we provide a technological procurement tool that provides clients insight into an area of indirect spend that many have never tracked before and that’s without charging any licensing fees or quick fees. This constitutes our value proposition and given how it allows our customers to remove the eye or investment from their ROI equation, is why our model resonates so well with our client partners.

Much of the business we performed for customers is not considered discretionary. These are funds that support to drive new revenues as oppose to purely creative spending. And further the savings we generate for our customers enable them to stretch their marketing dollars even further, and put that money back into their business and marketing campaigns.

Thus InnerWorkings is truly well positioned to be the partner of choice during challenging economic times. In fact in recent months, we have found that our service offerings are resonating better than ever with our customers.

Another benefit to our model is unlike traditional printers burdened with intensive assets and startup costs, our asset-light business can launch relationships overnight. As the downturn continues, we expect to see more competitive pricing from our suppliers, as overcapacity in the space and unused equipment create even more leverage for InnerWorkings.

So to conclude, while our company has not lived through a down cycle and clearly some customers will be seeking ways to extend their existing budgets as they come under financial pressure, our ability to sell and service new clients as well as expand current client relationships should only be enhanced by this environment. So our enthusiasm for 2008 remains high despite any economic uncertainty that is still of central focus for all of us.

Now, I’d like to turn the call over to Eric Belcher, our Chief Operating Officer.

Eric D. Belcher

On the call today, I’ll focus on our acquisition criteria, the integration of Corporate Edge, and the recent additions to our business development team.

As we previously outlined during our December 2007 Analyst Day, our acquisition criteria consist of several well-defined guidelines. These include acquiring companies that one, have experienced sales representatives with significant tenure and strong stable client relationships. Two, have deep domain expertise in one or more product categories.

Three, are end markets where we currently have a limited geographic presence. Four, share our philosophy on evaluation of their business and willingness to partner with us through a multi-year earn-out structure. And five, are of an appropriate size and have a long-term track record of success.

Under these guidelines, we selectively acquired a number of companies in 2007. And as a result of these transactions we have established a strong national footprint in both major geographic markets and in key product categories. And we firmly believe that we have acquired the best company for us in each market we have entered, both by reputation and in terms of the businesses ability to grow and combined with our technology and our resources.

Looking at 2008, our acquisition strategy has not changed and we expect to continue to opportunistically acquire top tier businesses. As we announced in early December 2007, InnerWorkings made its largest acquisition to date when we acquired New York based Corporate Edge. The acquisition of Corporate Edge strengthens our expertise in premium products and adds specialties, and it also provides access to 20 new Fortune 500 clients, which are now prime prospects for our broader print procurement offering.

The integration of InnerWorkings technology and financial back office functions into Corporate Edge’s operations is going as planned and is in line with our previous acquisition integrations.

From a sales integration standpoint, we are pleased to report that the cooperative selling between InnerWorkings business development team and Corporate Edge has already generated incremental revenue and we are involved in numerous meaningful discussions with Corporate Edge’s clients to further drive our print revenue.

For example, we recently began a joint sales effort with the current Corporate Edge customer, a Fortune 150 company, focusing on a print procurement solution. Corporate Edge brought the relationship and track record with this prospect and we added the scale and breadth of service offerings necessary to compete effectively. Had we not acquired Corporate Edge, we wouldn’t be involved with this prospect today.

We’ve also had a very successful quarter in recruiting high profile sales executives. The backgrounds of these hires include valuable experience gained at Bertelsmann, Canon, and [Sinvale] to name a few.

It’s important to note that this talent comes to us under a variable compensation plan and in most cases these executives left positions where they were highly compensated to join us. What they see in InnerWorkings is what we see, a massive market opportunity in front of us and a great place to build the career.

So to conclude, in 2007, we achieved a healthy balance of organic and acquisitive growth that helped us to develop a meaningful presence in a number of major markets. And in 2008, we’ll continue to pull on all the levers of our multifaceted growth strategy.

Now, I’d like to turn the call back to Nick.

Nicholas J. Galassi

Thanks Eric. I will review our financial results for the quarter and the full year. As Steve mentioned, our revenue for the fiscal fourth quarter was $90 million. This represents a 47% increase over revenue of $61.2 million in the same quarter of the prior year and was driven by strong gains across both transactional, and enterprise clients.

We increased our fourth quarter enterprise account business by 51% to $55.1 million from $36.4 million in the fourth quarter of 2006. As Steve mentioned, we added six new enterprise accounts this quarter and continue to increase penetration of our existing enterprise accounts, which help to drive results.

For the transactional segment of our business, revenue increased 41% to $35 million as compared to the same period in the prior year. This was largely driven by better account penetration and the broadening of our sales force. For the quarter enterprise sales represented 61% of total revenue and transactional sales represented 39%. While we continue to see strong transactional revenues as a result of recent acquisitions, we’re pleased with the current mix of enterprise and transactional revenue.

Now turning to full year performance, revenue for 2007 was $288.4 million compared to $160.5 million in 2006, an 80% increase. Both enterprise and transactional revenue showed significant increases as well.

Transactional revenue rose 126% to $108.2 million compared to the prior year. The increase is largely the result of the 76 new sales reps we added during the year. Enterprise revenue increased 60% to $180.2 million as 24 new enterprise accounts were added in 2007.

For the full year enterprise accounts represented 62% of revenues with transactional revenue driving the remaining 38%. This compares to 70% and 30% in 2006 respectively. The increase in percentage of transactional revenue reflects the transactional nature of the companies we acquired in late 2006 and 2007.

For the quarter, gross profit was $23.4 million versus $15.4 million in the year ago quarter. Gross margin increased by 80 basis points to 26% from 25.2%. Driving this growth was higher margin transactional business and increased early payment discounts for suppliers.

Gross profit for the year was $73.4 million versus $36.5 million in 2006. Gross margin increased to 25.4% during the year, up from 22.8% in 2006. The main factor driving the gross profit increase for the year was the higher percentage of transactional business, which typically has higher gross profit margins.

General and administrative expenses increased to 11.5% of revenue in the current quarter compared to 9.4% during the same quarter of the prior year. This increase was largely due to an increase of salaries and benefits as we: one, continue to build our infrastructure to support our growth; and two, add personnel via acquisitions.

For the year, general and administrative expenses increased to 10.9% compared to 8.6% during the prior year. The increase is due to the addition of personnel from hiring, the additional personnel through acquisitions, and an increase in professional fees associated with becoming Sarbanes Oxley compliant.

During the quarter operating income showed strong growth rising 58% to $8 million from $5.1 million in the prior year quarter. Operating margin was 8.9% during the quarter compared to 8.3% in the same quarter last year. Operating income for the year totaled $23.2 million, an increase of 81% from 2006’s $12.8 million.

Our general and administrative expenses demonstrate our continued investment in the business, which we regard, is necessary to sustain our current growth trajectory and competitive advantage in the marketplace. Most importantly, our increase in operating profit in the quarter is evidence of our ability to grow the bottom line at a faster pace than the top line.

Income before taxes exhibited continued strength during the quarter. Fourth quarter income before taxes was $8.6 million, which was a 58% increase from the fourth quarter of 2006. For the year, income before taxes totaled $25.9 million an increase of 90% from 2006’s $13.6 million.

Now let’s focus on the bottom line. For the quarter, GAAP net income was $12 million and fully diluted GAAP EPS was $0.24. As we brought to your attention in our third quarter 2007 earrings call, fourth quarter results included reduction of a $6.6 million valuation allowance and a $12 million deferred tax asset created as part of the January 2006 share repurchase.

Net income excluding this one time adjustment was $5.4 million during the period and diluted earnings per share were $0.11. This compares favorably to the fourth quarter of 2006, which had net income of $3.4 million and diluted earnings per share of $0.07.

For the year GAAP net income increased to $22.5 million from $8.3 million in the prior year and fully diluted GAAP EPS during year was $0.45. Excluding the fourth quarter’s reduction of the tax valuation allowance, full year 2007 results included net income of $15.9 million and diluted earnings per share were $0.32 in 2007. This again compares favorably to 2006’s net income of $8.3 million and diluted earnings per share of $0.21.

Turning to the balance sheet, which remains in excellent condition, during the quarter we generated $1.2 million in cash flow from operations. We ended the year with $44.7 million of cash and marketable securities. Our strong cash position combined with no debt and low capital requirements position us to continue to follow our upward growth trend.

Looking ahead to full year 2008, we reiterate the guidance we provided in mid December 2007. Revenues are expected to be in the range of $450 to $490 million and earnings per share on a fully diluted basis are expected to be in the range of $0.50 to $0.54. As you recall we raised 2007 revenue guidance in mid December to $285 to $290 million following our acquisition of Corporate Edge.

Our guidance philosophy in 2008 remains the same. We have included in our 2008 guidance the anticipated impact of small tuck-in acquisitions, as they remain an opportunistic way to grow our sales force, geographic locations, and client relationships. If we were to do an acquisition at a size comparable to Corporate Edge, we follow the same approach and provide you with an update to our annual expectations.

Lastly, as it relates to general seasonality of our business I want to emphasize that we believe that 2008’s quarterly revenues will be subject to the same types of seasonal swings that we have experienced in all of years of operations.

Despite ongoing growth, the sector traditionally tends to do more business in the second half of the year thus resulting in quarterly variations in performance. Therefore, first quarter is seasonally weaker than the fourth quarter and management is taken this seasonality into account and is managing the business accordingly.

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

Steven E. Zuccarini

Thank you, Nick. Fiscal 2007 was a year of exceptional performance for InnerWorkings and I couldn’t be more pleased with the contributions made by all of our employees. The company continues to create an outstanding track record of success further validating our business model.

The strength of our client relationships and associated consistency of our financial performance was evidenced in our ability to forecast our expectation to you in a very accurate manner. And I’ve been in this industry for almost 30 years and learned a great deal working through a variety of market environment.

While our company is not yet experienced the down cycle, again, I want to reiterate that our ability to sell and service new clients as well as expand current client relationships should only be enhanced by an emphasis on a more efficient and effective print management solution.

I’m pleased with the progress we have made and confident in our prospects for expansion in this $170 billion US printing market. We expect to continue on our growth trajectory and believe our status as a partner oriented low cost provider positions us well in an economic downturn. Going forward, we expect a healthy balance of both organic and acquisitive growth and I believe the investments we have made in the business continue to reap outstanding rewards and we are encouraged by the opportunities that lie ahead.

I’d now like to open it up for questions.

Question-and-Answer Session


(Operator Instructions) We will take our first question from George Sutton - Craig Hallum.

George Sutton - Craig Hallum

But the sales force productivity looks really strong in the quarter and I wondered if we could drill down there. I’m trying to get a sense of how high is high as we see these numbers improve year-over-year and sequentially. How should I look at that going forward seasonally and then how high is high in terms of sales force productivity?

Steven E. Zuccarini

We’ve been seeing anywhere from 15% to 18% sales rep productivity year-over-year and we continue to experience that again from 2006 to 2007. So, you’re seeing numbers average revenue per sales rep go from about $1.3 million to probably $1.550 million. So you’ll continue to see that growth trajectory into ‘08 so we feel very confident about that.

About seasonality, again as Nick mentioned, the seasonality trends in this printing industry are still 55% to 60% of the revenue in the back half of the year, we planned that way, and we feel very confident about again, full year expectations.

George Sutton - Craig Hallum

I know one of the things we’re confident with as we enter a downturn as your revenues get a positive bump, in the sense that procurement managers are more interested in the savings that they can get, but what about people in terms of finding new sales people in that environment and then also acquisitions, are you starting to see more availability sales people, more availability potential acquisitions?

Steven E. Zuccarini

The first part is we’ve never had a better pipeline of sales executives to look at an interview right now than today, and part of it is two reasons. One, being a public company having the successes that we have in a fairly depressed tough market environment in the graphic arts industry makes us a great place to work.

We also have a very enviable position when you own no physical assets of having unlimited capacity which is a great way to be when you’re in sales. So, I’ll have to tell you the pipeline of sales executives has never been brighter and as Eric mentioned, we just brought in seven business development people that have just terrific backgrounds as we enter 2008. So, I’ll ask Eric to talk about the acquisition pipeline.

Eric D. Belcher

Also on the sales recruiting, I do think that there is an advantage that InnerWorkings has an advantage in recruiting sales talent during difficult economic times, as we are the low cost supplier in the marketplace.

Now, with the respect to the acquisition pipeline, we haven’t seen the potential recession impacting our pipeline either positively or negatively. I imagine that there may be some companies out there coming under some stress some strain but we’re in the market for profitable healthy well run businesses and so I don’t see any market impacts helping or hurting on that front.


We’ll take our next question from Franco Turrinelli - William Blair & Company.

Franco Turrinelli - William Blair

I just wanted to get some clarification from you. I think you mentioned that 35% growth from your top 25 customers is that correct.

Steven E. Zuccarini

And that’s Franco, that’s the exact 25 top 2006 customers, apples-to-apples in 2007.

Franco Turrinelli - William Blair

And I am assuming all those top 25 are enterprise customers, is that right?

Eric D. Belcher

Not all of them, but the majorities of them are.

Franco Turrinelli - William Blair

Let me just customer retention, that’s the actual question. If we look at enterprise up a very strong 55% and certainly we are very excited to see it that strong. What I’m getting at is how much of that growth is coming from the existing customer base and how much of it is from new customers?

And when you drill down into the growth from the existing customer base, you’ve mentioned the economic headwinds; I’m just trying to get a sense of what the real kind of continuing opportunity is to grow that customer base?

Nicholas J. Galassi

The growth from the existing accounts in the top 25 from 2006 grew at about a rate of 35%. Overall, if you look at our enterprise business for the year going north of 50% that was a pretty healthy mix between new accounts and existing accounts. So, while we’ve added a number of enterprise accounts during the year, approximately 24 that all were impactful and relevant for our new enterprise business.

We did take a number of our existing relationships from ‘06 and grew that into ‘07. That’s really a combination of two things. One, it is incremental spending by some of our customers and we’re seeing an up-tick there in ‘07 and more importantly, it’s deeper penetration into those enterprise accounts.

We’ve talked at length, Steve and I, about how important one of our growth strategy is of continuing to more deeply penetrate these large enterprise accounts and I think we saw that resonate especially with some of our large accounts during 2007.

Franco Turrinelli - William Blair

And Nick, I think you’ve commented before I’m just kind of verify you feel that you are still scratching the surface of the opportunity in terms of penetrating, right?

Nicholas J. Galassi

Definitely, we feel as though if you look at our entire universe of enterprise accounts which is today a little bit over about 115 or so, we’re really only about 20%, doing about 20% of their overall print spend. Which really goes to the point that with the existing relationships that we have today, there is a tremendous amount of upside, and really right now our best prospects are our existing customers.

Franco Turrinelli - William Blair

Two additional questions if I may, maybe both of these for Steve. Steve, as a near sight to the printing industry generally, how much does the Olympics and how much does presidential election impact print spending. Particularly, maybe with the Olympics I think they would be a lot of marketing around that. Are we kind of early enough with Corporate Edge to catch some of that upswing?

Steven E. Zuccarini

You’re a neophyte but you’re dead on. In the printing industry every four years, the print spend does lift in the years of Olympic and election years. So yes, we are early enough with Corporate Edge to catch some of that. We’ve actually even been involved in printing some of the pre-Olympic vehicles here for 2016 in Chicago.

Secondly, the printing industry is an industry that has a lag in the recession. So, you’re going to see two to three months of lag before the whole industry starts to see a little bit of recessionary pressure. But keep in mind this is a $170 billion industry growing at 3%, that’s $5 to $6 billion. In a recessionary period it’s still growing, but it only might grow at $2 to $2.5 billion.

So, as you know our business model is about market share growth and we are such a small percentage right now. We’re excited about the opportunity even during a recessionary period.

Franco Turrinelli - William Blair

You closed out the year very healthy position in cash and marketable securities, $45 million or so, could you just comment a little bit on what your current thinking is in terms of the use of that cash, it’s clearly sufficient for acquisitions. But you’re comfortable with that, is there any thoughts to deploying it may be to share buybacks or what’s your kind of thinking on the cash and marketable securities right now?

Steven E. Zuccarini

Yes, right now, I think we’re going to continue to execute on our plan. As you know when we buy these acquisitions, there’s multiyear payouts as they hit their earn outs. So, we have that cash allocated. We’re generating positive cash. We don’t believe we need to go back to the market to raise cash. So we’re going to continue to move down the path exactly the same way as we have at this point in time. So does the Board and the management team continue to look at alternatives? We do that at all times for our shareholders. But at this point in time, I think our strategy is right on.

Franco Turrinelli - William Blair

Sales commissions as a percentage of revenue?

Nicholas J. Galassi

For the quarter, sales commissions were 4.9% of top line revenue for Q4.


Our next question will come from Randy Hugen - Piper Jaffray.

Randy Hugen - Piper Jaffray

When we think about seasonality in ‘08, should we expect a sequential revenue decline of a few million dollars in Q1 similar to ‘07? And then is there a reason why the revenue growth rate may either slow down or pick up as we move through the year?

Steven E. Zuccarini

Randy, if you look at historically in our business, not just in ‘07 but going backwards all the way really into inception, the first quarter is typically weaker than the fourth quarter. That is what we’ve traditionally seen and that’s really just a function even in years when we were growing at 150%, 180%, 200% with much smaller numbers, you were seeing that and that’s really simply a result of the seasonality shifts in the business.

A lot of printing is focused around kind of the holiday season back half of the year, weighted. So we don’t really see anything today in seasonal shifts that would alter our thinking or regarding that. Regarding the growth, again we established guidance of $450 to $490 million. I think that’s at the mid-point somewhere around the 60 plus percent growth rate.

So for us at those levels, we think that’s a very achievable goal. We think it’s in a very aggressive goal. We think it’s a very strong sign of the business and we’re looking forward to getting in ‘08.

Randy Hugen - Piper Jaffray

And than will the margins have the same seasonality we’ve historically seen as well?

Steven E. Zuccarini

A lot of the business has variable cost in it. If you think about our gross profit, our commission expense and even to some extent, our procurement staff is a variable for revenue but there is as is in the case with our businesses a fixed component in our G&A.

So, yes, as you’ve seen in 2007 and years prior, you are going to typically see higher EBITDA margins in the later quarters. For example in this year, we achieved 9.6% EBITDA margin in the fourth quarter which is one of our highest EBITDA margins yet. So yes, you’ll see a little bit of that seasonality shift as we continue to grow the business in ‘08.

Randy Hugen - Piper Jaffray

Could you give us an idea of the different scenarios implied by the low-end and high-end of the guidance and what really needs to happen for you to hit the high-end?

Steven E. Zuccarini

If you think about the business, the visibility we have going into any year, going into 2008, we have about 75% perfect visibility into the business. And that’s really a function of the enterprise nature of so much of our business, knowing that the contracts are there, knowing what the recurring nature of the businesses is.

The difference really between the high-end and low-end of the range is just a function of the timing of when some of these larger enterprise relationships come on board. We’ve talked about in the past, with these large enterprise accounts, there is typically a ramp up. It could be anywhere on the short end of three to six months. It could also take a period of two years to ramp up into 100% of an enterprise relationship.

So really, it’s a function of the ramp up. And there are some small acquisitions contemplated in there, much the same way as was the case in 2007, and if we do anything material like we did with Corporate Edge, you will see us go right back to the marketplace and revise that guidance.

Randy Hugen - Piper Jaffray

How far along are you in moving, I guess, to the certified supplier network, kind of in terms of percentage of your overall print spend?

Steven E. Zuccarini

Today, about 1200 vendors, somewhere between 1200 and 1300 vendors are certified. We’ve got another several hundred over and above that probably more like 1500 plus that are using the vendor portal on a regular basis to come in and search for jobs and things like that.

Right now probably at least a third of our business is being generated through some type of certified supplier, and we talked about on a previous quarter call we have a procurement staff. We’ve got a Vice President of Procurement that’s focused on our vendor relations. He and his team are focused on adding to the certified supplier list. And so we expect into ‘08 and ‘09 to increase the amount of spend through those certified suppliers.

Randy Hugen - Piper Jaffray

What was the share count for the fourth quarter?

Steven E. Zuccarini

The share count for the fourth quarter was about 50.3 million fully diluted shares.


We’ll take our next question from Yousseff Squali - Jefferies and Company.

Yousseff Squali - Jefferies

Rather than go back to the counter cyclicality that could be in this business, I was wondering have you seen any of it so far? Have you had any kind of customers coming to you and talking about it, or effectively shifting more money because of what they are seeing in the economy?

And related to that, I think you talked about potentially seeing more leverage in the model from suppliers. Have you seen or are you seeing any signs of that?

Steven E. Zuccarini

One, the counter cyclicality of the business, the fact that we are starting to see in the marketplace some of the customers cutting back to traditional printers on some of the overall programs, what ends up happening there is the printers are now sitting with more open capacity and are getting much more aggressive in the short-term on the pricing, which translates into savings for our customers.

The other part of this is we’re receiving phone calls now from people that we’ve spoken to in the past and have demonstrated the value proposition, and have told this at this time they weren’t really interested. Where all of a sudden under the pressure they are feeling right now, they pick the phone back up and reach back out to our sales executive and management and said, “I’d really like you to come back in here and explain your value proposition in greater detail to me.”

So I know that’s anecdotal but we’re starting to see that more and more right now.

Yousseff Squali - Jefferies

And I guess from a P&L perspective, if we were to look to see where that would hit, it would primarily be on the gross margin side, correct?

Steven E. Zuccarini


Yousseff Squali - Jefferies

Nick, on last quarter’s call you talked about organic growth or maybe it was Steve and said something to the effect that organic growth was more to 50%. Would you care to try to quantify what the organic growth was this quarter?

Steven E. Zuccarini

If you look at ‘06 and ‘07 and calculate the $128 million of growth that we had this year, over 60% of that was organic.

Yousseff Squali - Jefferies

Okay, any idea for the quarter?

Nicholas J. Galassi

Yes, for the quarter it’s important to know the distinction of Corporate Edge. So if you look at our growth for the quarter, excluding the large acquisition we did in December of Corporate Edge, our growth was about 60% organic, 40% acquisitive.

If you add in the revenue generated from Corporate Edge, because that was a late 2007 acquisition, the number shifts a bit and the total revenue growth was about 40% of the growth was organic and 60% was acquired and that’s really just a function of adding a pretty material acquisition late in the year.

Yousseff Squali - Jefferies

And on Corporate Edge, did they bring any corporate clients because your six net adds in the quarter is inline with your typical run rate?

Nicholas J. Galassi

Yes, Yousseff. For the quarter we had six. Two of those came from Corporate Edge and four were natural. Of those four, one was a convert from a transactional to an enterprise account.

Yousseff Squali - Jefferies

Nick, what kind of tax rate is baked in your guidance?

Nicholas J. Galassi

In the guidance going forward about 39.3% or 39.4% effective.


We do have a follow-up question from Franco Turrinelli - William Blair & Company.

Franco Turrinelli - William Blair

So, I think, you told us that Corporate Edge was abut $59 million run rate business if I remember correctly. So I am thinking the Corporate Edge added somewhere in the $5.5, $6 million to the quarter, I think, it closed at the beginning of November, is that more or less correct?

Nicholas J. Galassi

Corporate Edge actually closed at the beginning of December. That was the December 1 acquisition, and actually Franco again because of the seasonality in the promotional products add specialties even a little more heavily weighted than traditional print. So Corporate Edge generated a little bit more revenue than that, they were in the $8 to $9 million range for the quarter.

Franco Turrinelli - William Blair

I am thinking so InnerWorkings sort of ex-Corporate Edge let’s call it $82 million. And I went back and looked in 2005 1Q was down about 20% over 4Q, in 2006 it was about flat, but I think there were some acquisitions in that mix. We go to 2007 it was down about 5%, over the fourth quarter.

I actually don’t have a real good feel for what the organic sequential decline would be. What I’m trying to deal is obviously we’re going to have three months worth of Corporate Edge in the first quarter versus one month’s worth. I’m just trying to figure out what the offset to the natural seasonality from that is going to be. It keeps you on going, Nick?

Nicholas J. Galassi

A little bit, yes, so again because of the strong December the Corporate Edge had and because of the, again, more pronounced seasonality of the promotional products industry you won’t really see much of an uptick for Corporate Edge from the fourth quarter or the first quarter. It’s going to be largely flat. The remainder will be the rest of the kind of standard more core print business, which is going to traditionally be down quite a bit from a December quarter to a March quarter.

Steven E. Zuccarini

It’s the more pronounced nature the of ad specialty business even more so than print.


Imran Khan – JP Morgan will have our next question.

Lev Polinsky – JP Morgan

Hi, this is actually Lev, dialing in for Imran. It seems like commission expense ticked down this quarter, and is that driven by early pay discounts or mix or a combination of the two and how that looks going forward. And same with G&A, if you could give us an idea going forward as a percentage of revenue sort of where you see that trending?

Steven E. Zuccarini

Yes, so regarding commission expense, it did tick down this quarter; again it’s just a hair under 5% for the quarter. That’s a little lower than we’re used to seeing. The reason for that is not early pays or things like that that’s all up in the gross profit.

The reason for that commission rate is, again, when you have a quarter like we did in the fourth quarter that had a fairly heavy amount of transactional business just to reiterate it was about 39% for the quarter. You’re going to see a little bit wider fluctuations in both gross profits and commission expense, because those do vary pretty significantly amongst different transactional accounts.

Some transactional accounts could be sold at 40%; some could be sold as low as 15%. And the same respect those commission rates could ramp up as high as 45% of gross profit or as low as 20% so it’s just a function of having a little bit more transactional business. I think going forward we finished 2007 with a commission rate as a percentage of revenue of about 5.7%. That feels like about the right number going forward somewhere in the 5.5% range feels about right.

Regarding the G&A expense again, yes, it did increase in the fourth quarter. It did increase in 2007, and that’s really it’s a function of a couple of things. One is adding an infrastructure to support our hyper growth. Like we stated in the past, we want to become the first billion dollar outsourcer print. Execution is key for us and so we are going to make sure that we have the right infrastructure in place to support that growth and execution.

And you have incremental spending and things like professional fees as we spent the year becoming Sarbanes Oxley compliant, which was obviously a critical thing for us in our young life as a public company. I think G&A should be relatively consistent going forward. You might see it up a bit, but overall from an EBITDA perspective, we do expect to continue to see improved operating leverage on the EBITDA line like we have in the past.


With that, it does appear we are out of time for any more questions. Ladies and gentlemen, I would like to thank everyone for participating in today’s conference call. This does conclude today’s InnerWorkings Incorporated call.

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