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Executives

Patricia S. Morris – Chief Financial Officer & Senior Vice President

Ali Jenab – President, Chief Executive Officer & Director

Jonathan Sobel – Group President, Media

Analysts

Douglas Whitman – Whitman Capital, LLC

Clayton Moran – Stanford Group

Joe Maxa – Dougherty & Company

Richard Fetyko – Merriman Curhan Ford

William Morrison - ThinkEquity Partners

James Gilman – Cross Research

Ralph [Weinblat] - Trivium Capital

SourceForge, Inc. (LNUX) F2Q08 Earnings Call February 26, 2008 5:00 PM ET

Operator

Greeting and welcome the SourceForge second quarter fiscal 2008 financial results conference call. At this time all participants are in listen only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Miss Patty Morris, Chief Financial Officer for SourceForge. Thank you. Miss Morris, you may begin.

Patricia S. Morris

Good afternoon and welcome to SourceForge’s conference call reviewing our second quarter 2008 financial results. Let me remind you that this discussion will include forward-looking statements which will be make pursuant to the Safe Harbor provisions of Section 21(e) of the Securities Exchange Act of 1934. Investors are cautioned that statements made during this call that are strictly historical in nature constitute forward-looking statements which involve risks and uncertainties such as statements regarding current or future financial performance, management’s plans and objectives for future operations, product plans and performance, management’s assessment of market factors, expected contribution to revenue of various products and services offered by SourceForge and statements regarding the strategy plans of SourceForge and companies with which it collaborates. Actual results may differ materially from those expressed or implied in such forward-looking statements due to various factors and these results may be material and adverse. Such factors include unforeseen delays and expenses associated with our plans to make improvements to the code base of and develop and open API for our SorceForge.net website and to develop and execute on additional platforms and related initiatives, our ability to attract and retain qualified personnel, the effectiveness of our new advertising product in reaching and generating from their target audiences, our ability to realize monetization improvements, decreases or delays in online advertising spending in the current economic environment and the ability of our media group to achieve the expected efficiency benefits of its recent organization realignment. Additional factors that could cause actual results to differ from our forward-looking statements are specified in filings with the Securities & Exchange Commission including SourceForge’s annual report on Form 10-KA for the year ended July 31, 2007 and its quarterly report on Form 10-Q for the first quarter of its fiscal year 2008 and October 31, 2007. These documents are available at the company’s website, www.SourceForge.com and at the SEC website, www.SEC.gov.

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles or GAAP SourceForge reports non-GAAP financial results. Investors are encouraged to review the reconciliation of these non-GAAP financial measures to the comparable GAAP results and the accompanying statement regarding use of non-GAAP financial information which can be found in SourceForge’s earnings press release announcing SourceForge’s financial results issued after the stock market’s close today and posted on the company’s website.

A replay of this conference call will be available on our website later today. The replay will also be available by telephone, toll free 1-877-660-6853 or 201-612-7415 referenced replay account 286 and call ID 270845.

With that I’ll turn the call over to SourceForge’s President and CEO, Ali Jenab.

Ali Jenab

Thank you everyone for joining us today. Let’s start with highlights from the second quarter. Year-over-year overall revenue growth came in at 28%. This includes a 33% growth in e-commerce revenue, impressive growth for an e-commerce business particularly during this holiday season and it was ThinkGeek’s biggest quarter ever. We had a 10% year-over-year growth in the medial revenue and our balance sheets remain strong. We increased our cash position by $4.1 million. Patty will go over the numbers in more details at the end of the call. Right now however I want to give you an update on where we stand in delivering on some of the goals we’ve set over the past couple of quarters.

Let me start with our media business. We saw a 10% increase in media revenue to $4.2 million compared to $3.8 million in the second quarter of 2007. We added 22 new advertisers this quarter including Toshiba, SunTrust, [Palm Delamunda], [Kinonic], Hyperic, Samsung and Safari Books Online. SourceForge.net added more than 65,000 new registered users and more than 7,000 new projects over the quarter. There are currently more than 170,000 registered projects and nearly 1.8 million registered users in the SourceForge.net community. In the area of international sales we’ve begun to reach out to partners abroad to help us achieve better monetization of our international inventory. In addition to our previous deal with Oliver Smith & Partners in England we recently signed a deal with Sensys Media based in Sydney, Australia to resell our Australian inventory. We expect within one to two quarters to have relationships in place covering our most significant international market. We strengthened our sales force bringing our total headcount in the sales organization to 18. The media team hired additional direct sellers this past quarter. The company has also hired a new Ad Operations Director who comes to us from Fox Interactive Media.

We’re seeing steady, continued interest in Marketplace which in the short time it’s been live has grown to approximately 1,500 sellers. We’re building out our new data center which is a critical foundation to supporting more web traffic and offering more web services. We have begun moving some of our sites to the new data center. The data center build-out should be complete by the end of this quarter. We also launched a new job board on SourceForge.net.

Turning to our e-commerce business which had a stellar second quarter we saw 33% e-commerce revenue growth in Q2 compared to second quarter of last year. We shipped over 248,000 orders in Q2 a 24% increase year-over-year. Our average order size increased to $71 a 7% increase from the same period last year. Top sellers included the digital photoframe, palm [inaudible], control helicopter, LED process light and the USB turntable. [Inaudible] did a fabulous job during the holiday season where e-tailers generally saw 19% growth.

Those are the highlights of what we did over the past quarter. Now let’s get to what’s coming up and how we’re going to do it. To do that rather than turning the call directly to Patty for financial details as we’ve done in the past I want to instead let the newest member of our leadership team, Jon Sobel, share his insights. You will recall we introduced Jon last quarter. As a former executive of CBS Interactive and Yahoo, Jon has a long history of web media experience. He also brings a deep background in commerce and community behavior. We wanted Jon on the team specifically because he brings the right experience for this role. Jon’s been with us for a little more than three months. Over that period he’s gained a good understanding of our media business. Let me turn the call over to him so he can walk you through some of his thoughts.

Jonathan Sobel

Good afternoon to all of you on the call. Let me start by saying that what I’ve seen since coming on board confirms what I knew when I joined, we’ve got an enviable audience, credibility with that audience, a unique role in technology as a voice in the increasingly important open source community and a great team running our sites. During the last few years SourceForge has done an impressive job of building and keeping a loyal and large technology audience a difficult task by any measure and now we are focused on working with the audience to create more business value.

As you will hear we have a lot of plans for our web services and they will require some work. I believe that the number one question on each of your minds is how are we going to grow the media business? Speaking broadly, and I will say more on each theme in a moment, we are going to do two things. First we are improving the ways we monetize our current advertising traffic. We expect this will begin to add incrementally to our revenue in this current quarter. We’ve got to get better about our pricing and optimizing the traffic we have. Second, we are going to fundamentally improve the things we enable our user to do on the web, both on our sites directly and elsewhere. To that end we’ve begun an effort to transform our sites into richer and more open platforms. Done right, and I want to emphasize we have begun this work without materially changing our cost structure, this effort will strengthen our connection to users, not just on our sites but across the web. It will include our core code for SourceForge.net and an open API so that developers and users can themselves build upon our platform. The open API should be completed over the next two to three quarters. With these changes both we and the developers who use our services can integrate a variety of tools and features into our experience, things like software development tools, recommendation tools, reputation and ratings, real time communications and all the other things that are increasingly used by sophisticated web audiences. Among other benefits we expect this will all create additional activity and engagement on our sites and within our communities, activity that translates to increased advertising and monetization opportunities.

Here are some details. With regard to the first theme better monetization, we need to better monetize the existing pages on both SourceForge.net and Slashdot. That means doing what we do now better. Things like marketing, sales and yield management. Ali spoke a few moments ago about strengthening our sales force. Additionally, international sales is an example of an area where we’re focusing. A significant portion of our traffic as you probably know is international. Using better channels to sell this inventory can lead to better pricing. The Australia deal which we closed a few weeks ago is an example of such efforts and within a quarter or two we expect to have several more such relationships in place. Another change is marketing which for us will be a significant function. Marketing will include better understanding and communicating with both users and advertisers.

I’m announcing today that Mike Rudolph has been appointed Vice President of Marketing. Mike is an experienced marketer who spent five years as Director of Marketing at eBay and nine years as the Director of Operations at Ziff Davis. He most recently led the SourceForge.net team. Mike’s previous responsibilities, as I will describe in a moment, will be handled by a team led by Jeff Bates, one of the founders of Slashdot. A related effort has been the development of two new advertising products, an immersent download page for clients that has performed well in trials and a new ad format for Slashdot which offers good targeting for advertisers. These products were developed in the past quarter and once out of the trial phase we expect they will improve our mix of advertising solutions in the near term and along with other improvements to our monetization will collectively add to the top line. But as you know the internet continues to rapidly evolve, an explosion of openness and software, community and media is driving fundamental change. Were we to focus only on monetizing existing traffic without increasing engagement we would miss many of our best opportunities.

This relates to the second theme I mentioned above, the development of more robust platforms. Both marquee technology advertisers and users are increasingly seeking new types of engagement on the web which we intend to provide. For example on SourceForge.net we have primarily defined ourselves in relation to projects that we host directly and this will remain an important measure of our vitality. However users of the modern web are far less than destination oriented than even a few years ago [Watchfront] to open the SourceForge.net platform to projects hosted elsewhere on the web. It’s a major initiative we will be working on immediately.

We’ve also begun a very fundamental and fast moving effort to enhance our website so the quality of our audience and the level of activity you expect from them will be visible and more appealing to advertisers. The goal is to create a wide range of functionality for users of our site, for project members of projects we host and for partners across the web. Once our core code is sufficiently enhanced to support this modern web technology makes such efforts far more feasible and less costly than even a few years ago. To that end we have realigned our media group so that it is streamlined and can move quickly to develop flexible web services. Our approach is that of an emerging internet company.

Along with the changes I mentioned a moment ago in marketing and sales we have reorganized or core web applications team and product teams into one group headed by Jeff Bates. Through leading community management tools and techniques such as its moderation system for online dialog Slashdot of which Jeff was a founder has successfully hosted an unusually robust [iconaclassic] community of millions for ten years and we expect to benefit from joining the product efforts of Slashdot and SourceForge.net.

As for our core technology in the coming quarter we are going to begin improving our core code and opening up our API for SourceForge.net so that in the same way as happens in other open platforms developers and users can write applications for our sites. Specific features that we anticipate including in our websites within the next year include advertising supported video especially related to our open source projects, integration with leading open source software development tools for our developers, increased availability of the vast amount of data that SourceForge.net and its community of developers generate and a variety of other web functionality which may include recommendations, statistical, geographic and reputational information and communications so developers can communicate and better work with another.

For all of these platform related initiatives we expect the benefits of this approach to begin by the end of calendar 2008. The last point in anticipation of an important question, it is going to take up to three quarters for us to improve our core code and open our API in ways that we believe will materially increase our revenue. In the interim how are we and you to know if we are doing this well? Much of the work we will be doing may not be immediately visible and so we will provide you with additional measures of what we think are important indicators how we as a management team are doing with all of the efforts described above. In particular measures of audience and advertiser engagement will be critical. We are going to identify the most useful business metrics and will share these measures with you at our next earnings call.

As I wrap up I want to return to something I said at the beginning of these remarks when we spoke about our audience. Large audiences exist in many forms on the web but some audiences such as ours are especially interesting because of the audience’s quality. We believe both SourceForge.net and Slashdot are best characterized as leading examples of pure production, a profound and growing force on the web and a theme we are uniquely positioned by virtue of our history to lead. Additionally in contrast to many social networks which are broadly horizontal our communities are strong verticals with a common interest in innovation and technology. To realize the potential of this audience both for them and for us we need to support their interaction across the web. The actions I described today will help us do that. As I said a few moments ago in the short term we are improving monetization by focusing on international sales, improving sales and marketing and delivering new advertising services. In parallel we are opening and strengthening our platform. We’ve got our work cut out for us. I wouldn’t want it any other way. The assets at SourceForge are considerable and we’re confident we’re putting the right pieces in place to generate value for our investors.

Let me now pass the call to Patty who will take you through the numbers.

Patricia S. Morris

As reported in our press release net income on a GAAP basis for the second quarter was $0.03 per share. On a non-GAAP basis net income for the quarter was $0.04 per share in line with the $0.04 per share guidance we provided on the last conference call. Second quarter revenue from continuing operations for the company as a whole increased 28% year-over-year to $21.9 million. Media revenue for the second quarter increased 10% year-over-year to $4.2 million from $3.8 million for the same period last year. The $17.7 million of e-commerce revenue that we generated in the second quarter was above our guidance and grew by 33% from $13.3 million for the same period last year. Gross margin from continuing operations for the second quarter of fiscal 2008 was 32% compared to 37% in the same period last year. E-commerce gross margins for the second quarter of fiscal 2008 decreased to 27% from 28% in the same period last year and were impacted by product sales mix. Media gross margins which decreased to 56% from 69% in the same period last year were impacted by costs associated with our new data center as well as amortization of internally developed software for our Marketplace platform.

For the second quarter operating expenses from continuing operations excluding the impact of corporate and facilities related allocations formerly absorbed by the software division increased to $5.3 million from $4.7 million for the same period last year or a 14% increase. The increase is a result of higher sales and marketing costs as well as higher research and development costs as we capitalized a lower portion of internally developed software. For the second quarter of fiscal 2008 GAAP income from continuing operations was $2.2 million or $0.03 per share and $2.7 million or $0.04 per share on a non-GAAP basis. For the second quarter of fiscal 2007 GAAP income from continuing operations was $2.8 million or $0.04 per share and $3.1 million or $0.05 per share on a non-GAAP basis.

Turning to the balance sheet we finished the second fiscal quarter with cash investments balance of $58.6 million an increase of $4.1 million from the prior fiscal quarter. Our guidance for Q3 reflects the continued sales and marketing and engineering investments we have been making including the full quarter impact of these investments. We expect our third quarter FY 08 EPS on an non-GAAP basis to be around break even plus or minus $0.01 excluding stock-based compensation expense. We expect overall revenue to be between $11 to $12 million. We expect media revenue to be between $5 million and $5.5 million. We expect e-commerce revenue to be between $6 million and $6.5 million or 20% growth year-over-year.

Let me send it back to Ali who will wrap up today’s call with some closing comments.

Ali Jenab

Thank you all for joining us today. To reiterate what I said at the top of this call we had a good quarter. We are delivering on objectives we promised we would deliver on. We are driving short term efforts to improve monetization and increase engagement with the SourceForge community and we’re making the right moves to position the company for the intermediate and long term future. I want to remind everyone of something Jon said in his remarks earlier because I think it captures a very important point about what we are doing and where we’re going. It is not enough to have great looking sites with no community. Very few media companies sell to the elite, edgy and influential audience we do. Our success depends on creating world class properties built on a model of engagement and interaction whether our own platform or elsewhere on the web. That’s why I’m excited about the work we’re doing to open our API, build out the platform and enhance our sites. And that’s why I’m excited about where we’re headed.

Operator, we’ll go ahead and take questions now.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Douglas Whitman with Whitman Capital.

Douglas Whitman – Whitman Capital, LLC

Congratulations on a solid quarter guys and, Patty, just a quick housekeeping, the accounts receivable days were amazingly low and is that the high percentage business that came out of e-commerce and should we expect them to take significant rise next quarter in terms of days?

Patricia S. Morris

No, actually the improvement you see on the DSO is really fundamentally related to our profits in house and our increased focus on collections within the finance group. So as a result of having somebody on staff full time we would expect to see a continued trend towards favorable DSO.

Douglas Whitman – Whitman Capital, LLC

Congratulations, that’s a very impressive number. Jon, could you talk a little bit on the SourceForge side, it seems to be that you’re doing a better job of management of when ads run out, not continuing to run them when they’re not being paid for anymore. If you could talk a little bit about when that might have an effect on your revenues and how you put that into place.

Jonathan Sobel

Thank you, Doug, I appreciate the compliment although I would emphasize that in my own thinking the thing you noted is probably not a significant driver of increased monetization. I think it’s fair to say we are getting a much better handle on managing our inventory in general and what you see reflects that and that general theme is something that we’re looking to improve how monetize our sites. With regard to campaigns that may run slightly over is often happens at websites. I don’t feel that in and of itself is likely to be a major driver.

Ali Jenab

One thing, Doug, that I mentioned on the call is we added a Director of Ad Operations from Fox Interactive and she joined us in the month of January and we’re putting a lot of emphasis around managing our inventory a lot better on the site and she’s going to lead the effort there and we should start doing a better job managing that moving forward.

Douglas Whitman – Whitman Capital, LLC

The company has a tremendous amount of international traffic and it’s always been a tough part to commercialize and a lack of resources there, is part of Mike’s job coming as CP of Marketing to help set some of these international relationships or who’s going to really be doing it? You guys have had some time now with Jon there to kind of get his feet on the ground and what’s kind of the game plan to take that, I don’t know that 60% or 705 of your total international traffic and get more monetization out of it?

Ali Jenab

We added one partner in Sydney, Australia which Australia has a lot of traffic on our site because same English speaking language and so on so we did a good job adding census to there. But that’s one of the items that Jon is focused on and also to some extent a business development role that Andrew Zeiger on more a moving forward basis is probably going to focus on so with the latest reorg we’re positioned to be able to capitalize on that and actually Mike and his marketing world is going to help but it’s more of a business development role and Jon himself is focused on some of that. Jon, I don’t know if you want to add to that.

Jonathan Sobel

No, that’s very thorough.

Douglas Whitman – Whitman Capital, LLC

And then, Ali, if one of you could talk a little about one of the things you mentioned was and Jon talked about it a little bit in conversations is download ads and when can we start to see material revenues potentially from that and where is the website capability at this point and

SourceForge process to run that? How long will it take then for the sales force to really get out there and start selling, taking advantage of that?

Jonathan Sobel

I believe you’re referring to one of the two products that I referenced in my prepared remarks. I’ll explain briefly for everyone’s benefit what that is. A fairly significant portion of SourceForge.net’s traffic is associated with the downloading of open source projects. The download page is something that many of our users see and by virtue of its association to projects is targetable inventory. We’ve begun trialing a product that essentially relates the type of advertising on the page to the subject matter of the download which we believe will be something of interest to advertisers. It does, as Doug indicated, require some work. We’ve begun trialing it and we’ve been pleased by the early results. I can’t give you an estimate of exactly when it will be out of trial and it is also of course hard to predict marketplace reaction to a particular ad product but we’re very enthusiastic about this because it was something that was very quickly developed and we think it is one of the many types of things that we generally referred to a moment ago that will take the opportunities that exist with our audience and our traffic and begin to target them better for advertisers.

Operator

Our next question comes from the line of Clay Moran with Stanford Group.

Clayton Moran – Stanford Group

Can you give us some of the metrics or at least maybe some of the direction and your advertising inventory? For instance what percent is now filled directly or what percent through Google AdSense and then how much is really available to sort of bring new advertisements in?

Ali Jenab

It has not materially changed from the previous quarter. We negotiated to Google deal as everybody knows in the December timeframe so actually the Google metrics it was a December, it was a mid-quarter type activity for us but the Google type revenue stream should improve a little bit for us because the ads are monetizing a little bit better and also we got a little bit better percentage than we had before but it’s not a material fact. And as far as percentage sold it’s not a material change from previous quarter because the minute that percentage sold improves you’re going to see a substantial change to the revenue stream, overall revenue of the company and we’re hoping we’re going to improve on that this quarter and that was reflected on our guidance moving forward too.

Clayton Moran – Stanford Group

And so I would assume then that there wasn’t significant change in CPM rates either?

Ali Jenab

Correct, the CPM rates held pretty well.

Clayton Moran – Stanford Group

Two more questions, if I could, you didn’t mention anything – at least I didn’t hear it – about unique users, can you let us know what the unique user number was in December?

Ali Jenab

We had it in our press release, it’s 32 million.

Clayton Moran – Stanford Group

And then any comments on use of cash at this point?

Ali Jenab

Naturally we always evaluate what we’re going to do with our cash and we are reviewing it at our next Board meeting which is over the next couple of weeks that we’re going to meet to try to figure out, but nothing materially changed until the Board makes the decision on it. They’re going to review it.

Operator

Our next question comes from Joe Maxa with Dougherty & Company.

Joe Maxa – Dougherty & Company

I was wondering what your customers were saying regarding their advertising budgets? Just looking at your guidance, about $1 million plus, up sequentially. Give us a little color on that and your confidence level in reaching those numbers.

Jonathan Sobel

We’ve asked our advertisers and I spent some time with our sales executives asking about economic conditions out there in the marketplace. We’ve experienced anecdotal instances in which people have indicated they’re pulling back on their budgets. We haven’t seen an overall trend and we are of course not certain one to two months out whether that will hold or whether conditions will change. In providing the estimate to you that we have, which of course is an estimate about next quarter, we look at a number of things and so as far as it is possible to be confident not one month into a three month quarter, we’ve looked at kind of historical levels at this point in the quarter and we’ve done a market check so as much as we ordinarily would, we feel good about the numbers we’re putting in front of you.

Joe Maxa – Dougherty & Company

Is there anything driving it? Because more sales people are more efficient or obviously there’s other than just say the market, you know historical that we’ve done this.

Ali Jenab

Joe, as you know we’ve started to hire additional sales people when we had the downturn in the middle of the summer and we’re basically getting some nice yield and some nice activity level from the people that we hired over the summer. We added a few more, as I mentioned we’re up to 18 now over the last month or so, so we view it that some of the effort that we’ve done around sales is beginning to pay of as we said it was going to and at the same time with Mike moving to marketing, we’re hoping that’s going to provide additional fuel in the future moving forward. Mainly the larger sales organization and better focused sales organization and Jon’s put a tremendous amount of focus on getting the sales team focused. He’s done a fantastic job on that part. That’s what’s driving some of it.

Joe Maxa – Dougherty & Company

Patty, on the gross margin and the media being at 56% was there anything else that played into it other than the two items you mentioned?

Patricia S. Morris

No, the significant items were the data center, the increased costs with the second facility as well as the depreciation that started on that as well as the amortization and then bear in mind over last year we had implemented the operative solution from the advertising operations perspective and so there are some costs associated with that, that you wouldn’t see in the prior year numbers.

Joe Maxa – Dougherty & Company

A couple other things, Ali, Google with their open source projects, I think up to 80,000, also Yahoo has come out with the Yahoo Buzz may compete somewhat with your Slashdot. Any concerns on those two larger players coming in offering similar type of solutions?

Ali Jenab

The Google platform has been around almost approaching two years now. A lot of the emphasis and 80,000 they don’t officially publish their numbers so we don’t know what exactly the number is. They have a tremendous amount of projects as far as their focused projects that they have. We surveyed the community, I was at the open source think tank earlier this month. We still view that SourceForge as being the dominant platform that the neutral open source community views as a place they want to go to do basically hosting and also downloading of the open source. So I feel like we’re still in pretty good shape. As far as Yahoo’s introduction versus Slashdot, Slashdot has a pretty devoted community that keeps coming in and we’ve experienced big over the years and I think the loyal community just keeps liking what the solution that Slashdot offers. Jon, I don’t know if you wanted to add anything to that.

Jonathan Sobel

No.

Joe Maxa – Dougherty & Company

Last thing here for Patty is the taxes, you paid little taxes at least on the effective tax rate here. What are you looking at going forward?

Patricia S. Morris

This quarter in particular, Joe, obviously with the profit there was a little bit of taxes associated with that but it’s also ThinkGeek’s holiday season and so there’s franchises taxes in the state of New Jersey related to the distribution center there. So we should still be looking at a baseline alt min tax on a go forward basis which will not likely be material.

Operator

Our next question comes from the line of Richard Fetyko with MCF & Company.

Richard Fetyko – Merriman Curhan Ford

Just curious with your focus on the international media revenue opportunity could you give us a sense of the monetization comparison between the international and the US traffic? I don’t know if it’s – is international effective CPM’s half of what they are in the US? Kind of a comparison so we can get an idea of what level of improvement you can achieve there?

Ali Jenab

One thing I can use as an example is the partners that we sign up, what kind of experience our partners have and the partner we signed up in Australia basically roughly sees between $30 and $50 CPM rates in their market for the kind of ads they sell. So overall I would say it’s equivalent, in some markets potentially better than what we see here but again it changes from market to market and also as you know the dollar probably plays a favorability right now depending on the market because of the weakness in the dollar.

Richard Fetyko – Merriman Curhan Ford

And so let me maybe rephrase it with that as a follow up. Before you sign with up Oliver Smith I guess, what was the level of improvement in monetization that you see after you had signed up with them? Did it increase?

Ali Jenab

More than improvement is that a lot of the inventory that was there is you now have a chance to monetize other than running Google type ads which on Google ads we get about a $1.00 CPM and I don’t know all the breakdown by geography, it might even be a little bit lower than that and the UK would probably be pretty good. But $1.00 to $2.00 range versus when you’ve got a dedicated sales team then they sell in the similar ranges our sales team sells it in some markets actually better.

Richard Fetyko – Merriman Curhan Ford

And the last comment would be just really a comment I think. When you open up your platform to your users the way that Jon described it I think it’s a brilliant idea.

Operator

Our next question comes from the line of William Morrison with ThinkEquity.

William Morrison - ThinkEquity Partners

A few questions, I was wondering if you could clarify comments you made in response to an earlier question. I thought I heard you say that the Google deal that you improve the economics and so you get a better percentage and monetization is going up and therefore that should drive better growth out of that revenue stream and is accounted for in your guidance but your guidance by numbers at the midpoint is roughly 3% year-over-year growth relative versus 10% last quarter. So just how do you sync that with – is the core business a direct sales experiencing weaker – can you maybe give us a little bit I don’t know if it’s either Ali or Jon, give us a better sense of the timing. I agree with the former speaker that and the strategy. I mean it sounds like a great strategy in the right direction to go, but can you give us a better sense of when not necessarily in the quarter but with some kind of timeframe and when we could expect all these investments to pay off and an acceleration in your media business?

Ali Jenab

Let me answer two things, one the Google revenue, Bill, that we were talking about was -sequentially what it did to us versus the previous quarter – naturally it’s no secret that during the summer we lost some sales team. We had to get our footing back so I do appreciate the year-over-year comparison on the 3% but if you really look at it we’ve been in a couple of quarters of rebuilding the team and also refocusing the pipeline there and I would focus on the sequential traction there in this climate being pretty favorable. So I view it as we’re doing a pretty good job to get to that revenue stream that we are. My comment earlier about Google, I said it’s not a significant driver because Google in total is around anywhere from $800,000 to $1 million a quarter so it’s a little bit of change in that number so it’s not a significant driver for the quarter, it’s not going to be the majority of the ops sequentially, it is going to be a direct sales team effort that’s causing the up from quarter to quarter. Jon also mentioned that some of the work that we’re doing as far as APIs and so on is a two to three quarter play before we get a significant enhancement and it’s going to pay off. So I would say toward the end of the calendar year is when you’re going to see some of the enhancements to directly pay off.

William Morrison - ThinkEquity Partners

So just to be clear, a couple of clarifications, one I heard you just say something that you did that sounded a little bit different. You said that you think, if you look at the incremental gain in revenue to the midpoint of your guidance is roughly $1.1 million, that’s still lower than the sequential absolute revenue you’ve done from the second or the third fiscal quarters in the last two years and you said I think that you thought it was pretty good considering the climate. Is the climate bad? I thought I heard Jon say you’ve seen anecdotal evidence but not a trend that would suggest a bad environment for –

Ali Jenab

Right. Correct. I am more talking about the climate and what we had to deal with to get the sales organization back on track in the team and the last two years those big step ups was all drive by single transactions, two years ago with AMD, last year with Intel [inaudible] center. This is basically more of a broad perspective that we said we’re going to go after broad accounts rather than getting a huge driver for one quarter and then when that customer pulls back then you’ve got challenges moving forward. This is more of a broad push rather than a particular account push.

William Morrison - ThinkEquity Partners

Then on the e-commerce side why the big – it seems like you’ve had accelerating growth I believe now for the last two quarters and you’re guiding to a pretty significant 1,200 to 1,300 basis points deceleration. Are you just being conservative or is there something there I’m not –

Ali Jenab

If you historically look at our business we always say we’ve got a big driver in the holiday season and during regular quarters, depending on what the quarter looks like, we’ve guided as low as 15%, as high as 25%. Normally coming off a holiday season this is not a huge driver next couple of quarters. It’s still great growth year-over-year but I wouldn’t really focus on that if you look at historically we’ve done that on numerous faces and then it comps the business growth back up again. That business is running quite healthy and we’re doing a pretty good job managing it so that is not uncharacteristic of what we’ve done in the past.

William Morrison - ThinkEquity Partners

Just be clear though, when you’re talking about year-over-year growth rate that should exclude the seasonality from one quarter to the next, right? Is there a reason that the year-over-year growth rates are bursting like from one quarter to the next?

Ali Jenab

Because of the nature of our audience, the audience for some reason just buys a lot more toward the holiday season than they’ve done before. A few years back the quarter before a holiday season we only had a 15% year-over-year growth and all of a sudden we’ve got a 38% growth during the holiday season. That’s just the nature of what we’re seeing and we also want to make sure we provide a guidance that we’re comfortable meeting.

William Morrison - ThinkEquity Partners

I guess last thing on the e-commerce business, if I were to kind of print out your transcript and look through all the comments that you and Jon made I would guestimate that you’ve spent 95% of your comments on the media business with very few comments on e-commerce and I’m curious you know, it sounds like most of your investment and time and management focus is going towards driving the media business, the Marketplace and all of that outside of ThinkGeek. Have you thought again about, or what do you think about in the near term selling the business into strength, I mean the e-commerce business seems to be extremely well with much better margins that most e-commerce players out there. I would think it would be an attractive asset to any number of e-commerce players.

Ali Jenab

Naturally we always evaluate how we can maximize shareholder value. At this point we feel like Caroline and the team out of Virginia are doing a great job running that business. It is a business that’s very cash flow positive and profitable and helps us absorb the public company costs that we spend money on. As far as the comments I think I was pretty balanced, half and half but absolutely we’re 100% focused and Jon’s entire job is running the media business and we feel like that’s where a huge outside opportunity is for us and that’s the reason for it. But at this point we view the e-commerce being part of our strategy.

Operator

Our next question comes from the line of James Gilman with Cross Research.

James Gilman – Cross Research

Several questions here, first, Patty if I look at past results – this is in reference to cash flow from operations – this was your highest ever as well as for the first half. Is that correct?

Patricia S. Morris

Yeah, for the year-to-date we generated $3.1 million in cash from operating activities. We had a really, really strong first six months.

James Gilman – Cross Research

Congratulations on that. In reference to the – I know there’s been some concern from maybe some investors on asset-backed securities in the current environment, any impact there this quarter and looking ahead and what are your thoughts there?

Patricia S. Morris

From an asset-backed perspective we have about $226,000 of asset-backed securities sitting on the balance sheet today which is a significant change from where we were sitting in October. Obviously our plan is to be as conservative as we can with regards to any risky instruments and to liquidate them as quickly as we can, but we’ve done a good job at taking the balance down which was I think over $8 million for the quarter ended October 31st.

James Gilman – Cross Research

And then some basic housekeeping here, it might have been either you or Ali had mentioned and I failed to hear, but the number of orders for the e-commerce business this quarter?

Ali Jenab

It was 248,000 orders.

James Gilman – Cross Research

And then impressions and delivered and inventory utilized?

Ali Jenab

We didn’t officially publish any numbers on that one. They said it’s pretty similar to previous quarters.

James Gilman – Cross Research

And then Jon had mentioned earlier about investment in the media business for the next three quarters working on the code and such, how is this going to affect the financial costs associated with that? What kind of incremental increase should we look at there?

Patricia S. Morris

As Jon indicated there shouldn’t be a material in our cost structure related to some of the changes he’s doing. That said, I also commented on we had increased our investments from an R&D perspective relative to the engineering side where we were capitalizing a little bit more of that cost. So you might see a slight increase in the run rate from an engineering perspective. We capitalized less costs for Marketplace and they focused more on the core technology. And then the other comment that I made was specific to the sales and marketing efforts. We’ve already made the investments, brought the heads on board but Q3 we will see a full quarter impact of those hires.

James Gilman – Cross Research

In that theme there, sales force 18 with the – how many additional hires are you planning for this quarter?

Ali Jenab

I think we’re at optimum headcount at this point so we’re planning to run the organization at the current level pretty much.

James Gilman – Cross Research

And how long do you think you’ll do that? Would you think you might start hiring again after the –

Ali Jenab

Maybe second half of the year we might add a few more but we feel like the sales team has grown quite nicely and we’re just going to focus on – couple of headcounts here and there within the organization. Other than that there’s no material major push to add headcount at this point.

James Gilman – Cross Research

And then the last question is in reference to going to your agri-filings I think one of your larger shareholders I guess you could say is maybe taking an activist position in that they’ve asked in a letter to you as well as the Board to do a share repurchase, earlier question on the use of cash is that what will be talked about at the Board?

Ali Jenab

Correct. I forwarded the letter to all my Board members and they’re under discussion in it and we’ll be talking live at the Board meeting regarding it.

James Gilman – Cross Research

Would you expect a formal announcement in response to that?

Ali Jenab

It is absolutely the Board’s decision. If the Board’s decision is that’s something we need to disclose we absolutely will disclose it.

James Gilman – Cross Research

And when is the Board meeting?

Ali Jenab

We don’t officially announce our Board meetings but it’s happening over the next couple of weeks.

Operator

(Operator Instructions) Our next question comes from the line of Ralph [Weinblat] with Trivium Capital.

Ralph [Weinblat] - Trivium Capital

This is probably the best strategy description or game plan I’ve heard on a conference call for you guys and it’s certainly nice to see, it looks the media business troughed and now the plans are to grow it, I guess maybe Jon could take from a big picture standpoint help us think about down the road, which we can define as ever long as you want, the opportunity on the media side to either further monetize versus what you’re doing or what metrics we should look at, whether it’s revenue per available salesperson who’s ramped. I mean at the end of the day you pretty much have 32 million unique users who are focused on IT with all these projects, it’s a viral property and when you look at, it gets back to the valuation question do you have $0.86 in cash, a $250 million NOL and the value of CollabNet’s probably $0.20 to $0.30. There’s sort of a mismatch which I know you know I think, but could you just go through maybe, Jon, what your views are of how big this can be to monetize over, even though the opportunity might get bigger as you open the APIs and such, just some ways to think about it?

Jonathan Sobel

I will do that, I’m sure everyone appreciates the necessary caution that I will use in being specific in responding to your question, but I appreciate the spirit of it and I will gladly share our thoughts. First off there is no question that this audience is a very desirable community of people to have. Open source is moving to the floor and open source developers and users are increasingly found in all walks of life where people did not previously expect them. We know from academic work that’s been done on our site, a number of uses of open source fall off our IT department and we know if the activity that everyone reads about on Facebook and on all kinds of other platforms that are opening up that this type of work by people is valuable and important. We have an influential and a leap audience around our sites and my optimism springs from the following observations, we know that they want to collaborate in ways that the web is uniquely able to enhance and there are all kinds of things on the modern web that we can provide to further engage these people with each other and with us, whether they’re on our sites or elsewhere on the web through – and I’ll do my best to avoid the use of various web vernacular – but things like widgets make it quite easy to reach out to projects and users across the web and engage with them. Over the long run successfully increasing engagement leads to more pages being created, more interactions with people where they provide information that if you responsibly manage it can itself lead to monetization and with the outpouring of new advertising technologies such as video more opportunities to creatively engage with people. All of these things as I tried to indicate with some specificity are things that are not that hard to do with a motivated group of colleagues. We have a number of people here who deeply believe in open source and who are good technologists. We have one engineer who has [valinics] penguin tattooed on his left shoulder and people here believe. So I look at all of that. I understand what audiences that are successfully engaged can do for a company’s value and I think as you may have indicated at the end of your question there is a lot of untapped business value in working successfully with this audience.

Operator

(Operator Instructions) There are no further questions. I will turn the call back over for any closing comments.

Ali Jenab

Thank you very much for joining us and we’re looking forward to talking to you next quarter. Thanks.

Operator

Ladies and gentlemen, that does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: SourceForge F2Q08 (Qtr End 01/31/08) Earnings Call Transcript

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