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Executives

Nick Galassi - Chief Financial Officer

Steve Zuccarini - Chief Executive Officer

Eric Belcher - President and Chief Operating Officer

Analysts

George Sutton - Craig-Hallum

Franco Turrinelli - William Blair & Company

Jim Friedland - Cowen & Company

Youssef Squali - Jefferies

Vance Edelson - Morgan Stanley

Randy Hugen - Piper Jaffray

InnerWorkings, Inc. (INWK) Q1 2008 Earnings Call May 8, 2008 5:30 PM ET

Operator

Good day and welcome to the InnerWorkings, Incorporated Quarterly Earnings Conference Call. This call is being recorded. At this time, I would like to turn the call over to the Chief Financial Officer, Mr. Nick Galassi. Please go ahead, sir.

Nick Galassi - Chief Financial Officer

Thanks Aaron. Good afternoon everyone, and thanks for joining us on our first quarter earnings call. I’m Nick Galassi, the Chief Financial Officer of InnerWorkings. Joining me today is our Chief Executive Officer, Steve Zuccarini; and our President and 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 first quarter highlights. Following his recap, our President and Chief Operating Officer, Eric Belcher, will update you on the integration of InnerWorkings acquisitions, our new enterprise account successes, and our sales recruiting efforts. I will then spend a few minutes on financials. Steve will conclude and we will finish with your questions. Steve?

Steve Zuccarini - Chief Executive Officer

Thank you Nick and thank you everyone for joining us on the call today. We are very pleased to address our internal forecast for the first quarter performance. These results further underscore our track record of success and the confidence we have in the business.

A key factor driving our continued growth is the increasingly broad based acceptance of InnerWorkings' business model and the acceleration of the markets recognition of our print management solution. This recognition has been earned in part through the strong results reported over seven quarters as a public company. Since our IPO, we have generated approximately $0.5 billion in revenue. InnerWorkings is producing considerable business for over 3,500 customers and has emerged as one of the largest outsourced print procurement providers in North America.

Acknowledgment of the InnerWorkings emergence and the opportunity inherent in a print management solution has opened new doors for us both from a recruiting and sales perspective. Our model is resonating in the marketplace. We are seeing customers that we previously pitched, but had remained non-committal, returning to us to reopen discussions. The combination of our growing reputation and the economic environment that will continue to put the spotlight on cost management are clearly driving this phenomenon. We expect this trend to drive our business throughout 2008 and beyond.

Let me share with you highlights for the quarter. First quarter revenue rose 48% to a record 87.2 million, up from 58.9 million in the same quarter last year. Operating income increased 53% to 5.8 million from 3.8 million in the prior year's first quarter as the business continues to show improved operating leverage. These strong results were driven by sustained execution against our strategic plan.

Further, we were able to maintain our high quality top and bottom line growth rates despite facing the headwind of a less certain economic environment and the fact that the first quarter is seasonally not our strongest. Encouragingly, our high service, low cost model continues to gain traction in the marketplace. The proof of this is in our growth and our strong customer retention along with the consistency in our overall financial performance.

As we have outlined on past calls, we see tremendous opportunity in this 170 billion and growing US printing industry. In terms of market share, our penetration remains less than 1%.

Next, I would like to highlight some of the most noteworthy achievements in the first quarter. Transactional revenue increased 33% year-over-year and we serviced over 2,900 customers in the first quarter of ’08 versus roughly 2,000 in the year earlier period.

Enterprise client growth also remains robust. Five new enterprise accounts were signed during the period. Enterprise revenues increased 58% year-over-year to 55.6 million with a customer base of 121 enterprise accounts versus 99 at this time last year. One of our new enterprise clients was converted from our transactional client base, which further illustrates the power of our service offering as we are able to take project or spot type accounts and convert them into long-term engagements.

Given our goal of signing four to six new enterprise accounts each period, our first quarter total of five falls right in the heart of that range. But what’s even more encouraging is that we continue to gain traction with our large clients. Further, based on a strong April, we expect that in the second quarter, we will surpass the number of enterprise wins we have achieved already in the first quarter. While these wins are exciting, it’s important to know that the revenue associated with the new relationships is growing and will ramp up over the course of 2008 and 2009. But again, they clearly show the power of the value add and our momentum here is a clear sign of the brand we are building with our customers.

Another positive during the quarter was our continued success in driving organic growth. In fact, more than 45% of our growth was organic during the first quarter of ’08. This result comes despite the fact that InnerWorkings' largest ever acquisition, Corporate Edge, closed in the fourth quarter of ’07. Continued strong organic growth highlights the sustainability of our expansion, which is predicated in large part on our highly successful business model.

Recruiting top sales talent to our organization is another significant growth driver at InnerWorkings. We are excited to report the addition of 15 new sales reps hired organically during the first quarter. These additions represent a record in terms of quarterly recruitment of sales executives. Client retention, a hallmark at InnerWorkings, continues to be a major success that we intend to build on in 2008 and beyond.

In the first quarter of ’08, we maintained business with 24 out of our Top 25 customers from the first quarter of ’07, again signifying that our key customer relationships remains strong and stable. Just as important, we are conducting more business with our Fortune 500 accounts. 15 members of the Fortune 500 were InnerWorkings' customers in the first quarter and this is up from 29 in the year earlier period.

Revenue from the Fortune 500 customers increased 70% year-over-year, illustrating our ability to more deeply penetrate existing accounts while gaining business from new Fortune 500 clients. Now, if you step back and take a look at the same 29 Fortune 500 clients from the first quarter of ’07, they are up 43% year-over-year.

I would like to close by quickly revisiting InnerWorkings' position in the marketplace and our ability to continue to grow in times of economic uncertainty. As I know today’s environment remains top of mind for all investors. First, I would like to offer our perspective on the business environment for our services at the present time. Today, we have not seen any slowdown in demand and given the enterprise nature of our business model, we have strong visibility into our full year. Of course, this doesn’t mean that we are immune to potential cutbacks. However, even if the US economy in general, or the print industry in particular, experienced a noteworthy slowdown, InnerWorkings would be well positioned as the high service, low cost provider in the sector as we facilitate a lowest-cost decision for our clients.

Our model has proven its ability to reduce overall print costs, better allocate or reduce employee headcount and reap benefits of technological advancements without allocating significant resources towards non-core activities. Another benefit to our model is that unlike traditional printers burdened with intensive assets and start up costs, our asset like business can launch customer relationships overnight. As economic concerns continue to be prevalent, we expect to see more competitive pricing from our suppliers as the over capacity in the space and the unused equipment create even more leverage for InnerWorkings and our customers. Thus, we are 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 customers.

So to conclude, while 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 in uncertain economic environment.

Before I turn this call over to Eric Belcher, I would like to take a moment to reference the announcement issued on April 30 and congratulate him publicly on his recent promotion to President. I, Nick, the Board and everyone at InnerWorkings have the utmost confidence that Eric will handle the added responsibility of President with the same drive, determination and resourcefulness that makes him such an effective Chief Operating Officer. Eric?

Eric Belcher - President and Chief Operating Officer

Thanks Steve. This is an exciting time in InnerWorkings history and I am proud to be a part of our rapid growth and our continued market leadership. On the call today, I will provide an update on the integration of recent acquisitions, our new enterprise accounts successes, and our sales recruiting efforts. But before diving into those topics, I would like to provide a little more color around the theme of greater market acceptance that Steve touched on earlier.

In recent months, we have seen a notable increase in the broad based acceptance of our business model and recognition of the effectiveness of print management in general. Prospective customers now both understand and are becoming increasingly accepting of our unique print procurement solution. Historically, we have had to dedicate substantial time in the sales process to educating our prospects on the concept of outsourced print management. Today, less energy is spent on explaining our new business model to prospective customers and instead our approach is now a far more established, incredible method as print procurement in the United States.

As a result, we believe this new receptivity will help to compress our sales cycle, assist us in further penetrating the Fortune 1000, and propel us toward a multi-billion dollar opportunity we see in front of us. In addition, today’s challenging economic environment has fostered greater interest in the staffing and personnel component of our overall offering. Given that many companies across America are currently experiencing either hiring freezes or reductions in force, we have seen a new surge of interest in our solution as it pertains to providing experienced, talented resources on our payroll yet on-site at our customers’ locations to support their print procurement needs.

Next an update on the integration of the businesses we have acquired over the past two years. We have been very pleased with the performance of our subsidiaries and how well the integration process has gone. Customer feedback has been exceptional and retention of key personnel continues to be excellent. Our track record of successful acquisitions has been driven by our ability to identify and detract high quality companies with local management teams that are committed to driving success over the long-term.

Further, our incentive-based multi-year earn out approach, de-structuring these partnerships, has served as a tremendous motivator in keeping the management teams of the acquired businesses engaged and focused and has aided in the recruitment of new customers and sales professionals. In fact, each business acquired by InnerWorkings has achieved every possible earn out payment to-date.

The post-acquisition success realized by our new subsidiaries further illustrates our teams' capabilities in jointly selling to new and existing customers. Every business we have acquired was carefully vetted for its ability to grow rapidly when combined within InnerWorkings' technology and resources. A case in point is Corporate Edge, where cooperative selling with InnerWorkings business development team has already generated meaningful incremental business.

As a reminder, we focused our acquisition efforts on companies with talented people and customer relationships that we can help develop, but not manufacturing assets. Further, the earn out structure of these deals lessens our risk of entering into an unhealthy partnership or experiencing traditional issues relating to acquisitive growth. Now having said that, we are highly disciplined in our approach and we will not initiate any deal that does not strictly adhere to our acquisition principle. And, as you may have noticed, we did not make an acquisition during the first quarter. We do, however, remain active in the M&A market and are confident that we will acquire reputable and well-run businesses in 2008 and mirror our values, complement our geographic expansion goals and stand to benefit greatly from our technology and partnerships.

Next, I would like to discuss InnerWorkings' continued expansion in new enterprise client relationships. As you likely noted, in April we signed an enterprise agreement with Group O, one of the largest Hispanic-owned providers of marketing packaging and supply chain services in the nation. Group O is an important channel partner for us and I am pleased to report that we have already signed a Fortune 100 account through this relationship.

We have recently added other well-known brands to our enterprise account roster to name a few. We have recently signed multi-million dollar contracts with AnchorBlue, which is the former Millers outpost retailer, Optimum Nutrition and the veterans of foreign wars. We also recently announced that we have extended our agreement with Xerox.

Moving on now to recruiting. A combination of recent developments has materially improved our recruiting results. These include financial pressures in the traditional print manufacturing industry, the growing prominence of the InnerWorkings' brand and a broader acceptance of the print management channel here in the United States. We believe that our hiring environment is markedly better today than it was 12 or even 6 months ago. Our first quarter results including a record 15 organic hires, bear this out. We firmly believe we are most exciting destination for experienced, talented sales people in the graphic cards industry.

In addition, the quality and potential of these 15 new hires is impressive. These seasoned new additions bring with them exceptional sales backgrounds and experience navigating the executive hallways of corporate America. In some cases, we have been pursuing these talented individuals for some time, but only recently secured their services as they came to fully appreciate our massive market opportunity, the benefits of our compensation structure, and the established credibility of our brand.

Before passing the call back to Nick, I would like to reiterate that InnerWorkings is very pleased with the progress made relating to the integration of our acquisitions, the continued expansion in our enterprise customer base, and our recent sales recruiting results. Continued success on these three fronts provides us with ample confidence that we will achieve our growth objectives set for the year. Nick?

Nick Galassi - Chief Financial Officer

Thanks Eric. I will be talking through some of our financial results for the quarter and providing a bit more detail. As Steve mentioned, our revenue for the fiscal first quarter was 87.2 million. This represents a 48% increase over revenue of 58.9 million in the same quarter of the prior year and is driven by strong gains across both transactional and enterprise clients.

We increased our first quarter enterprise account business by 58% to 55.6 million from 35.2 million in the first quarter of 2007. As Steve mentioned, we added five new enterprise accounts this quarter and continue to increase penetration of our existing enterprise accounts, which helped drive results. For the transactional segment of our business, revenue increased 33% to 31.6 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 64% of total revenue, while transactional sales represented 36%. While we continue to see strong transactional revenues as a result of recent acquisitions, we are pleased with the current mix of enterprise and transactional revenue. The current composition of 64:36 shows progress toward our long-term goal of 70:30.

Gross profit for the quarter was 21.6 million versus 14.4 million in the year ago quarter. Gross margin increased by 30 basis points to 24.7% from 24.4%. Driving this growth was slightly higher margin transactional business and increased early payment discounts.

General and administrative expenses increased to 12.5% of revenue in the current quarter compared to 10.6% during the same quarter of the prior year. This increase was largely due to the addition of personnel brought on through acquisitions, most notably through the acquisition of Corporate Edge. As we have discussed in the past, larger acquisitions can reduce operating margins in the first couple of quarters that we own them. We also added personnel through organic hiring as we continue to build our infrastructure to support our current growth trajectory.

Operating income in the quarter showed strong growth rising 53% to 5.8 million from 3.8 million in the prior year quarter. Operating margin was 6.6% during the quarter as compared to 6.4% in the same quarter last year. 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.

Stock-based compensation increased from $260,000 in the first quarter of 2007 to $575,000 in the first quarter of 2008 due to our January 2008 equity grants. If we exclude the non-cash stock-based compensation incurred during both quarters, our operating margin increased from 6.9% in the first quarter of ’07 to 7.3% in the first quarter of ’08. This demonstrates that while the business continues to experience significant top line growth, we also remain focused on improving our operating leverage while at the same time we continue to invest in the infrastructure and acquired businesses.

Income before taxes exhibited continued strength during the quarter. First quarter income before taxes was 6.4 million, which was a 47% increase from the first quarter of 2007.

Now let’s focus on the bottom-line. Net income increased 45% year-over-year to 3.9 million during the first quarter. As a percentage of revenue, net income was roughly inline with the same period last year at 4.4%. Our fully diluted GAAP EPS during the first quarter was $0.08 as compared to $0.05 during the first quarter of ’07.

Turning to the balance sheet, which remains strong. During the quarter, we generated $1.8 million in cash flow from operations. We ended the quarter with $44.6 million of cash and marketable securities. A strong cash position combined with no debt, and low requirement for capital position us to continue to follow our upward growth trends.

Next I want to devote a few minutes to discuss the second press release issued this afternoon that announced the sale of a portion of our Echo Global Logistics asset, the expansion of our revolving line of credit and a new share buyback program. Let me begin the discussion with comments around the partial sale of our equity in Echo.

We are pleased to report that our initial $125,000 investment in 2 million shares of Echo common stock made in February 2005 has rapidly appreciated in value as Echo starts down its path of becoming a publicly traded company. On May 7, 2008 we sold 500,000 shares of Echo stock at $10 per share to an affiliate of the Nazarian family, effectively adding another $5 million to the cash numbers I previously discussed. The Nazarians have been long-term investors in both InnerWorkings and Echo. We retained 1.5 million Echo Global sales. Echo filed a Form S-1 on April 30, 2008.

Moving on now, in April, we engaged JP Morgan to arrange a syndicate of lenders for a new $75 million three-year revolving credit facility, increasing the size of our revolving credit facility from the previous 20 million. I am pleased to announce that we have received commitments from a group of lenders for the targeted $75 million and expect to close on the new larger revolving credit facility by the end of May.

The stock buyback program we announced today authorizes the company to repurchase up to $50 million of its outstanding shares with the exact volume and timing depending on market conditions. This share repurchase program is consistent with our strategy of providing value to our shareholders while maintaining sufficient flexibility to invest in future growth opportunities.

Today’s announcement highlights the increasing financial strength of InnerWorkings. The borrowing power of the new credit facility combined with the proceeds from the sale of a portion of our Echo equity position will provide us with ample liquidity to fund strategic initiatives including acquisitions and the buyback of shares of our common stock on an opportunistic basis.

I will conclude with a look at the rest of 2008. We are reiterating the guidance initially provided in February. While Q1 is seasonally not our strongest, we performed inline with our internal budgets. Thus we continue to anticipate revenues in the range of 450 to 490 million with resulting GAAP EPS on a fully diluted basis in the range of $0.50 to $0.54. As Eric noted our acquisitions funnel remains exciting and it's worth reiterating that our guidance philosophy included the anticipated impact of small tuck-in acquisitions as they remain at low risk and opportunistic way to grow our sales force, geographic locations, and client relationships.

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

Steve Zuccarini - Chief Executive Officer

Thank you, Nick. We are extremely pleased with our first quarter results. Given our enhanced sales and recruiting performance and the ever-wider acceptance of the InnerWorkings brand and approach, we feel very positive on both our short-term and long-term prospects in this 170 billion US printing market. Today, InnerWorkings has not been impacted by a slowdown in the US economy of print sector, and if anything we see signs that we will benefit from corporate America’s need to better control its cost. Our stock buyback program and partial sale of equity in Echo Global Logistics will provide value to our shareholders and the capital we invest in future growth opportunities. The investments we have made and will continue to make in the business are reaping outstanding rewards and position us to continue to drive strong growth in the future.

Aaron, I would like to now open it up for questions please.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). We will go first to George Sutton from Craig-Hallum.

George Sutton

Hi guys. Congratulations on the nice results.

Nick Galassi

Thanks George.

George Sutton

The five enterprise customers that’s a big number and I just want to understand where those enterprise customers are coming from. Are they coming from the direct channel or just transitions from your transactional business?

Nick Galassi

George, we only had one of those five’s that came over this quarter from transactional. The other four are brand new enterprise clients.

George Sutton

Okay, superb. And can you discuss the reason behind my question on enterprise is, as we see the slowdown in the economy I would assume larger companies are starting to look at this as an option and can you just discuss the health of the current enterprise pipeline and may be relate it to three to six to nine months ago?

Eric Belcher

George, this is Eric, I will answer that. The pipeline is stronger than it's been probably in our company’s history at the moment, and I think the reason that you hinted at there, which is that companies who may have not appreciated the savings opportunity or the staffing solution as much a year or two ago, are now finding renewed interest dealing with cost pressures within their organizations. So the enterprise pipeline right now is very strong.

George Sutton

Eric, question on acquisitions, I guess, relative to the buyback, at least you will now have a decision to make as to which of the two to fund more aggressively. Can you just discuss the trade-offs you are looking at there and what the acquisition pipeline looks like?

Eric Belcher

Well, we are not discussing any trade-offs between the stock buyback in any acquisition opportunities that we may see. Obviously, as Nick and Steve mentioned with the additional credit facility, we don’t see a scenario where we are going to be in a situation where we are going to have to make a decision in one respect and not in another.

Nick Galassi

George, may be I will build on that a little bit. The share repurchase program is consistent with our overall strategy really of providing value to our shareholders while maintaining sufficient flexibility to invest in future growth opportunities that Eric mentioned. The company is as financially strong today as it ever has been and the management and the Board believe our shares are undervalued. So, if you refer to our balance sheet, you look at it. It's one of the most conservative in the industry and we have got total flexibility to manage this business and pull any growth lever that we need to.

George Sutton

Okay. Lastly for me. Could you discuss the Xerox renewal and what that might mean? How that might be different than the earlier work you were doing with them?

Nick Galassi

When we talk about channel partners, in many cases, we really cannot disclose particular client relationships, but I think it's important to note that we are effectively leveraging all of these relationships including Xerox really to greatly expand the number of feet on the street. We have got a lot more people other than the 232 InnerWorkings sales people that are selling our value proposition and pitching the InnerWorkings model, which is helping us diversify our customer base. I think the Xerox renewal is a strong message that they believe this model is resonating in corporate America and they wanted to continue the relationship that we started 18 months ago.

George Sutton

I understand. Thanks guys.

Nick Galassi

Great.

Operator

We will go next to Franco Turrinelli with William Blair & Company.

Franco Turrinelli

Good afternoon gentlemen.

Nick Galassi

Hi Franco.

Franco Turrinelli

Particularly congratulations to GSB fellow alum, Eric, congratulations.

Eric Belcher

Thank you, Franco.

Franco Turrinelli

Hey, I have a number of questions for you, so I will try to move through these quickly. First and I guess this is a little bit for Eric, you commented Eric I think that or maybe it was Steve that you had seen an acceleration in potential enterprise customer additions as you moved into the second quarter. Is this really the external environment causing it or is it more your internal efforts?

Steve Zuccarini

Franco that was my comment. We are seeing it on multiple fronts. We are seeing the external environment causing a much more openness to the approach. I think we have talked to you that we built up our business development sales organization. We have got more feet in the street in the sea level suite and I just think that April is a great indicator of the enthusiasm and the excitement that we are seeing in the market to the point where we have gotten off to the best quarterly start on nailing enterprise deals than we ever have in the history of the company.

Eric Belcher

And Franco, this is Eric. Just one additional thought on that note. This concept that we introduced in the call regarding the greater acceptance of our business model, first let's revisit that for a minute, I will give you a specific example in the marketplace of how we see that playing out. Two years ago when corporations issued RFPs for print procurement, the RFP would only contemplate a relationship between the enduser and a printer, a manufacturer. Now, in recent RFPs that we are seeing, the first question of the RFP is, "Are you a print management firm or are you a manufacturer?" It’s a subtle topic, but it gives a sense of what we feel is a tailwind coming here behind the concept of print management in the United States right now.

Franco Turrinelli

Great. Hey Nick, I think this one is probably for you. I think that you had previously – well in fact you reiterated that you do have some expectation of acquisitions contributing to the guidance, but obviously as you commented you have not made any acquisitions today, but you did reiterate the guidance. I am kind of curious if you are still planning on achieving your original acquisition targets or is this really kind of offset by the strength of the business and strength of new hirers kind of filling in from some lower acquisition activity?

Nick Galassi

Yeah, Franco this acquisition as we have always discussed in the past is an opportunistic way for us to hire/acquire an experienced group of sales executives in a geographic area we don’t have a high concentration. So, whether we do that, for example in the first quarter by going out and setting a record for hiring 15 organic sales executives or in the quarters to come in 2008 by picking off some small tuck-in acquisitions, it continues to stay a strong part of our growth lever. So, the guidance does included we are continued to be focused on M&A, it’s a big part of our growth and we will look to do more as we progress to 2008.

Franco Turrinelli

I guess, well Nick, I mean is it fair to say that 15 new hires in the quarter and five new enterprise customers take some pressure away from the acquisition side of the strategy?

Steve Zuccarini

Franco, this is Steve. We, as we have talked in the past, don’t worry about the pressure of everyone of the growth levers because we have talked to you in the past that we pull on all five every quarter in different ways. So I guess to assume that because we have got great traction on the organic selling side that we won’t continue to look for acquisition. We don’t want to say that because we see that again as a wonderful way of recruiting experienced sales executives and great customer relationships.

Franco Turrinelli

Alright. One last one and then I will get back into queue for some follow-ups. Nick, I really want to understand this sort of seasonality a little bit better and we did have it right, but I want to make sure that I am understanding it here. As I remember correctly, I think you have previously commented on the fact that Corporate Edge is quite a bit more seasonal than your traditional business. Is that right?

Nick Galassi

Yeah, that’s correct. Yes, so Corporate Edge as we have discussed in the past is predominantly selling in the promotional products at specialty industry. Print in general is more heavily weighted to the back half of the fiscal year. Promotional product is even more so. So, when you look at the Corporate Edge acquisition, the revenue that they generated for InnerWorkings in the first quarter was right inline with the revenue that they generated in just one month, December 2007. So as a result, they produced a pretty low number in Q1 and what that did as we have discussed regarding our G&A is it adds some pressure to our operating margins in the first quarter.

What’s important to note I think that even with the pressure from Corporate Edge, we still improved our EBITDA margins 30 basis points from Q1 of ’07 to Q1 of ’08 and that also includes an addition to Corporate Edge and their seasonality that includes an increase of stock-based compensation as well. If you were to look at our EBITDA margins, exclusive of the non-cash stock-based comp, it’s up 50 basis points quarter-over-quarter. We have talked about this ultimately in the past to continue to, we want to continue to drive our bottom-line growth at a more rapid rate than top line. We feel as though 20 to 40 basis point improvement in EBITDA is our target and in this quarter excluding of the non-cash charge we achieved 50 basis points. So internally, we feel as though we did an excellent job in managing kind of the overhead of the business.

Franco Turrinelli

I don’t suppose you want to tell me what the margin improvement would have been excluding stock-based comp and excluding Corporate Edge, but obviously would have been higher, right?

Nick Galassi

Yeah absolutely. It’s certainly another 20 – at least 20 basis points.

Franco Turrinelli

Great. Congratulations. Thank you.

Nick Galassi

Thank you.

Operator

We will move now to Jim Friedland with Cowen & Company.

Jim Friedland

Thanks. Just one question on the various verticals that your partners are in. Are you seeing any weakness or restrain from particular verticals and also what’s your exposure to some of the tougher verticals like housing and finance, what are you seeing in retail, et cetera? Thanks.

Steve. Zuccarini

Thanks Jim. This is Steve Zuccarini. The verticals that we work with our channel partners and we have mentioned them before, management consulting, ad agencies, private equity firms, marketing services firms. We have not seen any push or cut backs in those areas. We have very low exposure to the financial and the housing markets across our customer base right now. So from both the channel partner standpoint and from the vertical standpoint, we are in really good shape from an exposure.

Jim Friedland

Okay, great. All my other questions have been answered. So that’s good, thanks.

Steve Zuccarini

Thank you, Jim.

Operator

Next, Youssef Squali with Jefferies.

Youssef Squali

Thank you very much. Nick, a couple of quick ones for you. One is really just a clarification on the organic growth number. I think Steve you talked about 45% of growth was organic. So does that mean a 45% or 48% is 22%, that’s your organic growth year-on-year?

Nick Galassi

That’s correct, yes.

Youssef Squali

So, how do I reconcile that number with the 29% Fortune 500, which I think grew same store at about a 43% year-on-year?

Nick Galassi

Youssef, as we have talked about again with the acquisition of Corporate Edge, one of the primary reasons that we completed that acquisition was because it gave us 20 Fortune 500 relationships, which we are very excited about at that time. So, when Steve talks about our growth and the Fortune 500 penetration, a portion of that comes from the Corporate Edge acquisition. As you know, the way we define organic growth is we exclude any revenue generated from a business that’s going to play within the last 12 months, so that would exclude Corporate Edge.

Youssef Squali

I see, okay. And then I guess on the G&A of 12 to 12.5% of revenues I think you did a good job explaining the reasons for it this quarter as we look at it in Q2, Q3 and I guess for the remainder of the year. Is it fair to assume that it should – this is kind of high watermark, we should be going down from here as the Corporate Edge business starts beefing up again?

Nick Galassi

Absolutely. I mean, seasonally if you look at 2007, our lowest EBITDA percentage was in the first quarter and that is fairly consistent of what we would expect as we progress through 2008. Again, quite a bit of our expenses in this business are variable, but we do have an overhead component and as we continue to drive top line revenue we gain incremental leverage on that overhead.

Youssef Squali

And so, you've kind of taken this one step further and looking at your long-term margins, are we still looking at a – I think historically you said about low teens so call it 11 to 13% long-term EBITDA margins, is that still the case?

Nick Galassi

Yes, we continue kind of target 12% and again I think we get there kind of in that 20 to 40 basis points on an annual basis.

Youssef Squali

All right. Two quick other ones and then I will move on here. Can you just provide – why did you guys decide to sell the stake in Echo? I mean the company filed an S-1 if there is going to be a liquidity event within next several months, why sell now?

Steve Zuccarini

Youssef, this is Steve Zuccarini. The Board received over a month and a half ago an unsolicited offer for the shares. So we formed a special committee of Independent Directors to review the transaction. We brought in outside advisors and we agreed and completed a sale of the 25% of our investment. I mean, your question, why sell now? Our core business is not holding or speculating on stocks. We have better uses for our cash and we are pleased with that 25% shares that we got a 160 times return on that investment and we still own 1.5 million shares. So, as you know this environment, we don’t know if an IPO is going to happen this year, we don’t know if it’s going to happen next year, and we think this is a better use of us selling those shares and putting it to work for our shareholders.

Youssef Squali

Okay. So you are being opportunistic, it makes sense. Nick, stock-based comp for ’08 and depreciation for ’08, any help there would be appreciated.

Nick Galassi

Yeah, the stock-based comp expense for the quarter, again we did a number of equity grants to our top, call it 25 or 30 key management personnel in January of 2008. As a result, you are going to see an increase in stock-based comp, it should be approximately 650,000 k on a quarterly basis and I believe the depreciation and amortization as it showed up in the first quarter should be pretty consistent as we go through each quarter of 2008 borrowing another large acquisition, which would obviously add to the amortization component. And amortization for the quarter was about $725,000 -- depreciation and amortization was about 725,000.

Youssef Squali

All right. Okay, great. Thank you very much.

Nick Galassi

Thank you.

Steve Zuccarini

Thanks Youssef.

Operator

Next we will hear from Vance Edelson with Morgan Stanley.

Vance Edelson

Hi, thanks for taking the questions. Just looking at the 15 members of the Fortune 500 that you now serve, what do you have to make sure your penetration is of their prints spend, in other words, is there a lot of room for growth even with existing customers? Thanks.

Nick Galassi

Yeah, there is huge opportunity for growth. Vance, before the Corporate Edge acquisition, we had forecasted less than 20% market penetration of the existing business that they have. With the Corporate Edge acquisition that number has actually dropped, because Corporate Edge is selling the promotional products at specialty side of the business to those accounts, but we had no carryover of any of those accounts from a print outsourcing solution. So again, but the number is probably down in 15% and there is huge upside potential for us for further market penetration.

Vance Edelson

Okay, great. And just quickly on the size of the industry, I think you mentioned a 170 billion, it sounds like that’s a little bit higher than what I remember from not too long ago. Can you just give us your feel for the rate of industry growth?

Nick Galassi

Yeah, Vance and let me clarify that. 170 billion is the entire industry. If you really carve out that top 25 to 30 billion where the long run, where there is maybe only two to three printers that are capable of running Time Magazine or the JCPenney Christmas Book and then you pull out that 10 to 15 billion in the VistaPrint, FedEx, Kinko's area, our target market is probably in that 110 to 130 billion. The market is growing at GDP rates with the recession this year, instead of 5 to $7 billion growth rate we are predicting that it's probably going to be down in the 0.5 to 1 to 1 to 1.5% growth. So, there will be some slowing in the overall market this year.

Vance Edelson

Okay. That’s helpful. Thanks.

Nick Galassi

Thank you.

Operator

Randy Hugen from Piper Jaffray has our next question.

Randy Hugen

Thanks. So overall it seems like the economic slowdown is having a positive impact on the business. The transactional revenue meet expectation in the first quarter. Are you seeing any impacts from the slowdown there?

Nick Galassi

Randy, this is Nick. Yeah, transactional revenues was right inline. Again, the enterprise revenue outpaced transactional largely because we did not complete any acquisitions in the first quarter. And as you know pretty typically the companies that we acquire are predominantly are transactional in nature. But yeah, the transactional revenue growth continues to be strong. A majority of our 230 sales executives sell on a transactional basis and as we continue to develop and improve our pricing and our offering to those customers, we continue to see increased revenue.

Randy Hugen

Okay, thanks. And then just a couple of housekeeping questions here. What was the share counts for the first quarter?

Nick Galassi

On a fully diluted basis, it’s about 51.3 million.

Randy Hugen

Okay. And then what were selling commissions?

Nick Galassi

The commission expense in the first quarter was 4.7% of revenues. So, a little bit over 4 million.

Randy Hugen

Alright. Thanks a lot.

Nick Galassi

Thank you.

Steve Zuccarini

Thank you.

Operator

Ladies and gentlemen that is all the time we have allotted for the question and answer session today. That does conclude our conference. We do thank you for joining us.

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Source: InnerWorkings, Inc. Q1 2008 Earnings Call Transcript
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