SourceForge, Inc. F3Q08 (Qtr End 04/30/08) Earnings Call Transcript

| About: SourceForge, Inc. (LNUX)

SourceForge, Inc. (LNUX) F3Q08 Earnings Call May 27, 2008 5:00 PM ET


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

Ali Jenab – President, Chief Executive Officer & Director

Jonathan Sobel – Group President, Media


Clayton Moran – Stanford Group

James Gilman – Cross Research

Analyst for William Morrison - ThinkEquity Partners

Joe Maxa – Dougherty & Company

Jon Hickman - MDB Capital

Douglas Whitman – Whitman Capital, LLC


Welcome to the SourceForge third quarter fiscal 2008 financial results conference call. (Operator Instructions) It is now my pleasure to introduce your host, Patty Morris, Chief Financial Officer for SourceForge.

Patricia Morris

Good afternoon and welcome to SourceForge’s conference call reviewing our third quarter 2008 financial results. Let me remind you that this discussion will include forward-looking statements which will be made 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 not 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 and 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 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 revenue from their target audiences, our ability to realize monetization improvements and decreases or delays in online advertising spending in the current economic environment.

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 10Q for the second quarter of its fiscal year 2008 ended January 31, 2008. These documents are available at the company’s website, and at the SEC website,

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles (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.

The following members of management will be participating on today’s call. Ali Jenab, SourceForge’s President and CEO, Patty Morris, CFO and John Sobel, Group President Media.

With that I’ll turn the call over Ali.

Ali Jenab

I’ll start with the highlights of the third quarter. Year-over-year overall revenue growth came in at 16%. This includes a 29% growth in eCommerce revenue which is our highest ever eCommerce revenue outside of the holiday season. Our media revenue saw a modest growth of 1% year-over-year but we did see a 21% sequential growth and this represents our highest historical revenue quarter for media.

Our balance sheet remains strong. Patty will go into the numbers in more detail at the end of the call. Right now, however, I want to give you an update on where we stand in delivering some of the goals that we set before in previous quarters.

Let me start with our media business. We saw a record level of media revenue to $5.1 million in the third quarter of fiscal 2008. We added 23 new advertisers this quarter including Network Appliance, [Deejay] Technologies and Akamy among others. added more than 55,000 new registered users and more than 10,000 new projects during the quarter. There are currently more than 177,000 registered projects and more than 1.8 million registered users in the community.

In the area of international sales we began to reach out to partners to help us achieve better prices for international inventory. I am happy to announce that we recently added Ad Pepper Media to resell European inventory. They have offices in 12 European countries. Together with Oliver Smith Partners in England and Pensys Media in Australia, this brings our international resellers to three. We continue to explore opportunities to develop relationships covering additional international markets.

Chris Dobbrow joined as VP of Sales adding key leadership and extensive leadership experience to our sales organization. In the past I have talked quite a bit regarding the data center. I am happy to say that we have completed the hardware installation at our new data center. As we mentioned last quarter the data center is the critical foundation to supporting more web traffic and offering more web services.

We have already begun to migrate some of our sites over and all site migration should be completed by the end of this quarter. Early results are very positive and John will talk in more detail about it.

Turning to our eCommerce business, Caroline and her team did a fantastic job. We saw 29% eCommerce revenue growth in Q3 compared to the third quarter of last year. We shipped nearly 100,000 orders in Q3, an 18% increase year-over-year. Our average order size has increased to $67, a 9% increase from the same period last year. Top sellers included the WiFi Detector Shirt, the 8-bit Dynamic Life shirt, Digital Photo frames, ThinkGeek Annoy-a-tron, the Blue Tooth Virtual Keyboard and the Star Wars Light Sabers. ThinkGeek’s April Fools Day page attracted more than 550,000 viewers to our site and was picked up by other websites as well as radio and TV.

Those are the highlights of what we did over this past quarter. Now let’s turn the call over to John for a more detailed discussion of the media business.

Jonathan Sobel

For the last five quarters our media revenue has ranged between $4 to $5 million. This quarter, while a good one relative to the last few, is barely above that range and so while we are pleased with the current direction and we have many good things to share we are also intently focused on growth. We aspire to move well beyond our current range and in a few moments I will share our plans to do that.

I have been here about seven months and in that time have joined others here to build a foundation for growth. Before I turn to our results and strategy, I would first like to share why we see so much opportunity in this business.

There is now no dispute that open source and open models are for real. Venture funding for open source remains strong and blue chip technologies companies from Yahoo to Google to IBM to Microsoft are increasingly relying upon and distributing open platforms and open technology. All kinds of interesting questions about open business models have yet to be figured out.

But on the levels of who is innovating in technology and information and what approach is leading the open wave, without question, is ascending. Meanwhile within the online industry a shift continues away from general interest portals and strange as it sounds to say this from traditional Internet media companies to those sites that deliver an elite audience and all that the web offers.

Ten years after mass adoption of the web a whole generation of early Internet leaders are being disrupted. For those companies nimble enough to serve audiences in new and open ways the rewards are large. Open source and social media are both examples of peer production. As a leader in peer production this company stands at the intersection of profound changes and unusual opportunities.

With more than 25 million open source users a month on and more than 5 million slashdot readers each month we serve valuable audiences noteworthy not just for their size but for their influence and cohesion. On we serve elite developers and open source consumers. On slashdot, which is itself open source and has deep roots in that community, we serve some of the web’s most engaged readers and authors throughout the whole variety of technology subjects.

Yet, like many emerging companies we have our challenges. An important challenge is the level of engagement on Our largest site, while robust by some measures, could offer more. On the audience mostly uses the site to download open source programs. While we do an extraordinary volume of downloads we currently do not engage individually with many of our users, nor do we do many of the things we could to support our projects. There is much the modern web makes available that we do not yet offer.

Despite, for example, the obvious collaboration and communication involved in writing, evaluating and using open source the site currently functions mostly as a utility and averages less than three pages per visit and four pages per user per month. Slashdot audiences are substantially more interactive, remarkably so as demonstrated by the fact that the average slashdot story yields more than 200 comments per story.

This is an amazing measure of the loyalty and engagement on that site but overall the size of the audience is smaller; about ¼ the size of the audience. In total, traffic from the and slashdot site currently amounts to about 150 million page views per month and has been fairly constant for the past year with SourceForge accounting for about 2/3 of the page views. In the past year we have monetized these sites at combined levels ranging from about $9 RPM interactive revenue per thousand pages to about $11.30 in this most recent quarter which for a site with strong vertical content and limited demographic target such as ours is a solid RPM.

Another way to look it up is to consider annualized revenue per user (RPU). This quarter we have averaged about 32 million users each month and over the past twelve months we have generated about $18.6 million of revenue for that community. Using these figures, the annualized advertising revenue per user across all our sites is about $0.58, which is low by industry standards and can be improved. This measure is partly driven by low page consumption on Together our RPM and RPU describe a large and valuable audience but one that can be much more deeply engaged.

With this landscape in mind I now turn to our plans. First, there are some immediate steps we have taken to incrementally improve our top line. These include international sales representation, strengthening our direct sales force, new advertising products and our data center.

Last quarter we committed to expand our work with international resellers. As Ali mentioned we now have a deal with Ad Pepper Media in Europe to resell our European inventory across all of Western and Eastern Europe. Ad Pepper has a direct sales force in twelve countries. We currently monetize our European inventory by its low rates and if successful the Ad Pepper sales channel should improve the rates we receive for our European inventory.

We have also continued to strengthen our organization and to focus on improving our sales efforts. Chris Dobbrow brings considerable technology experience both online and offline and has joined us as our Chief Sales Executive and he is off to a great start. Andrew Zeiger, our previous Head of Sales is leading our business development efforts. Andrew and our entire sales team deserve recognition for a good quarter.

Additionally we have had good success with our new ad products including about $500,000 in revenues this past quarter for our enhanced downloads page. A targeted, emersive service which commands considerably higher CPM’s than our other offerings.

The final important recent step is our company’s current transition to a more robust data center with new hardware and increased capacities to support our sites. These steps will help us scale. Although it is very early in the move, initial data suggests that simply by supporting more usage these changes will lead to increased traffic.

As an example, in just the past week our download spiked for several days from an average of about twp million to an average of about three million a day, an all-time high for us. Although increased traffic was the result of a short-term spike associated with a surge in demand for several projects it nonetheless represents opportunity arising from this new infrastructure.

All these measures help us run our existing websites better. But to better serve our community and to more fully realize the potential of our unique opportunity more is needed. So in parallel we are working aggressively on longer-term efforts to strengthen our audience’s engagement both on our site and across the web.

Why this focus on engagement? Engagement means more visits, more pages viewed in each visit and more of an ongoing relationship with each user; all of which in turn enhances our value to others and thus our ability to generate value for you, our investors. In plain business terms, among other things more engagement can support higher advertising rates and more advertising inventory. When joined with good design and stronger marketing and sales, engagement leads to higher revenue.

I am going to share some detail about these efforts but here in brief are some of the things we are working on. One, major revisions to’s last layout content and ad positions. Two, a deeper engagement of our community of hosted open source projects including the large amount of activity that we call “Project Web.”

Three, outreach to open source projects across the web that we don’t post including assisting these projects with downloading. Four, improved web services across for open source developers and users. Five, work on our API’s so that our community can begin to contribute directly to and benefit more from our platform.

First, with regard to page layout, content and ad positions. We have begun to redesign major areas of our site. If successful, these changes will increase the appeal of pages to both users and advertisers partly as the result of less clutter. SourceForge has had no fundamental change of this nature for at least several years and we are enthusiastically beginning to work on providing a better experience for all of our constituency.

Second, our hosted open source projects present a fascinating opportunity as well. I mentioned a moment ago that we currently monetize about 150 million page views a month. To SourceForge’s considerable benefit, we also currently host additional project related web pages for our hosted open source projects. This traffic is more than three times the amount of the main site and we currently do not monetize it at all. You can think of all of these pages of having an RPM of zero. These pages are true community pages. Although we host them they have been built by and are maintained solely by our users.

They are at minimum a strong signal of the interest our community has in interacting and open source on the web. In addition to creating loyalty and serving our community they currently provide traffic for our site downloads. We respect the projects efforts and independence, but we also believe over time we can offer tools and services to the project including advertising. In the coming months we are going to explore further enabling, supporting and connecting these efforts and may, where appropriate, jointly monetize the traffic to both the benefit of open source project and SourceForge.

This is not simply a matter of automatically placing ads on other people’s pages and will therefore take time. It will require a real collaboration with projects and strong relationship skills but it represents an opportunity to grow traffic and share revenue if we get it right. This collaboration is the future of social media and we are going to approach the effort with creativity, a sincere desire to help our projects and hard work.

The third effort we call ghosting. It involves reaching out beyond our site and the projects we host to those open source projects on the web that we do not host. For historical reasons SourceForge only distributes and supports hosted projects. While our number of hosted projects continues to grow at a healthy rate, more than 100 per day, open source growth elsewhere on the web is accelerating even faster.

Think for a moment about all of the open source projects elsewhere on the web. Going forward we hope to offer a variety of services including downloads to projects not hosted on our sites and with that a minimum, if adopted, may increase the amount of advertising inventory and our connection to these projects.

Fourth, as we complete moving our media sites to a new data center in the next one to two months we will use a vastly improved infrastructure to build a variety of services on our sites. Things such as recommendation functionality, statistics, communications, video and other open source related features that we intend to bring to our audience.

Again, in those cases where features take hold they will increase inventory, generate user engagement and information and allow us to command higher rates for advertising. In the past few weeks we launched Open ID, our first initiative to begin to reach out across the web. While that feature may not by itself seem significant we are proud of it. It is an example of the maturity, adoption and usefulness of open source on the web. It also represents a good step for us as we begin to innovate and as always “eat our own cooking” by using open source to support our community.

Our engineers built and launched the feature quickly but with high quality. Look for much more like this in the coming months.

Last, work continues on opening our API so that the developers from outside the company can work directly with our data and our sites. With an open API developers can offer tools and services for our entire community, something our users are naturally inclined to do. As you would expect from an open source company some of the most interesting things that happen won’t be driven top down by us, but rather will be guided by our users. This is a longer term initiative and the API will be in play by the end of the calendar year.

All of these efforts can be summed up by the concept of increasing engagement and interaction with users and building upon our natural position as a hub for peer production. Both and slashdot are fortunate to support engaged, scaled communities and our future lays in embracing and supporting these communities to everyone’s benefit including yours as the company’s owners. Of course, everyone on the web wants to increase engagement but while we believe we have real opportunity we take the challenge seriously.

I also want to mention that in addition to the efforts described above we are systematically reaching out to leading open source projects, blue chip companies with open source initiatives and the many friends of open technology with whom we share a common goal; a list that adds up today to the hundreds and we believe it is only going to grow. We don’t yet know all the things they want and need that we can help with but we want to work with them and we are focused intently on relationships and enabling others’ success.

On the modern web that is the strongest foundation for value creation. The obvious business question is how long will it take for the work we are doing to move us beyond the current revenue range. This is of course an estimate and it depends heavily on our ability to build features as planned and in the adoption of them; something that is always hard to predict.

Our best estimate is that we will begin to see gains from these efforts by the end of the calendar year. The work we are doing on our sites is going to take some time. Currently our advertising deals range in size from several thousand dollars to nearly half-million dollars a quarter and as is typical in online advertising orders can be cancelled on short notice. So a swing in even one deal moves us from a relatively inferior to a relatively superior position when judged against our past quarters.

In the fourth quarter we have renewed some of our largest deals from the third quarter but during the summer months technology advertising generally slows and this year there is additional evidence of additional softness. Our guidance for this upcoming quarter reflects that.

We continue to reach out to new advertisers, strengthen our sales and marketing efforts and in parallel rebuild our sites all with the expectation that skillful navigation of a leadership role in peer production and social media will confer long-term benefits. The world online changes quickly and we take nothing for granted so we are working fast and with intent to capture the opportunity. If there is an opportunity we are fortunate and eager to go after it.

Thank you. I look forward to questions and now pass the call to Patty.

Patricia Morris

As reported in our press release net loss on a GAAP basis for the third quarter was $0.01 per share. On a non-GAAP basis we were break-even for the quarter in line with the break-even guidance we provided on the last conference call.

Third quarter revenue from continuing operations for the company as a whole increased 15% year-over-year to $11.8 million. Media revenue for the third quarter increased 1% year-over-year to $5.12 million from $5.07 million for the same period last year. The $6.7 million of eCommerce revenue we generated in the third quarter was above our guidance and grew by 29% from $5.2 million for the same period last year.

Gross margin from continuing operations for the third quarter of fiscal 2008 was 38% compared to 48% in the same period last year. The decrease resulted primarily from media gross margin which decreased to 63% from 77% from the same period last year and were impacted by depreciation and operating costs associated with our new data center as well as amortization of internally developed software.

eCommerce gross margin for the third quarter of fiscal 2008 decreased to 18% from 20% in the same period last year and were impacted by higher shipping costs. For the third quarter operating expenses from continuing operations excluding the impact of corporate and facilities related allocations formerly absorbed by the software division increased to $5.1 million from $4.3 million for the same period last year or a 20% increase. The increase is the result of increased sales, marketing and engineering headcount costs as well as higher discretionary marketing costs and research and development costs as we capitalize a lower portion of internally developed software.

The third quarter of fiscal 2008 GAAP loss from continuing operations was $400,000 or $0.01 loss per share and $100,000 profit or break-even on a non-GAAP basis. For the third quarter of fiscal 2007 GAAP income from continuing operations was $1.8 million or $0.03 per share and $2.1 million or $0.03 per share on a non-GAAP basis. The current quarter loss includes a $300,000 impairment on short-term investments.

Turning to the balance sheet we finished the third fiscal quarter with cash investments balance of $56.6 million, a decrease of $2 million from the prior fiscal quarter. Our guidance for Q4 reflects the continued sales and marketing and engineering investments we have made over the past couple of quarters including the full quarter impact of these investments.

We expect our fourth quarter FY08 earnings per share on a non-GAAP basis to be around $0.01 loss, plus or minus a penny, excluding stock based compensation expense. We expect overall revenue to be between $10.5 and $11.5 million. We expect media revenue to be between $4.5 million and $5 million. We expect eCommerce 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

To reiterate what I said at the top of the call we had a good quarter, we are delivering on the objectives we promised we would deliver on. We are driving short-term efforts to improve monetization and increased engagement with SourceForge’s community and we are making the right moves to position the company for the intermediate and long-term future.

We will now take questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from Clayton Moran – Stanford Group.

Clayton Moran – Stanford Group

The media guidance for the fourth quarter implies it will be a down quarter at least at the mid-point year-over-year down about 3%. The growth rate has obviously been very low and this past quarter it has been about flat. So is that extra going to decline…is that due to cyclical impact only or is there something else going on there? Then two other questions.

Can you update us given all the operational initiatives and what sounds like some good changes, can you update us on your view of using display ad networks at this point? Also update us on the exploration or potential stock buyback that was mentioned in the last quarter?

Ali Jenab

Let me start out with the guidance regarding the fourth quarter. In the last couple of years we have had a challenging July time frame and at this point sitting in May I can’t tell you I have any solid evidence of how July is going to play out.

So we are definitely taking that into account plus all the other factors that we see in the marketplace. Your own report showed a couple of weeks ago…we want to be sure we are cautious when we are giving guidance for the quarter. Until we play out July we really don’t know how it is going to be so John and I and Patty talked and felt like we had better take all those factors into effect before we give a guidance for the quarter.

We also are cautious on the ThinkGeek side of it too the same way because if you look at it sequentially we are guiding a little bit lower than we achieved in Q3 for the ThinkGeek side of the house.

As far as the display ad networks as we mentioned we added Ad Pepper to do sales in Europe for us and we have really worked on a partnership with Google and I can say right now we are very happy with the partnership we have with Google and we keep focusing on improving that relationship. We have not done anything other than that. John do you want to comment on anything else as far as ad networks are concerned because we are really focused on direct sales, international monetization and then the Google partnership we have in place?

Jonathan Sobel

Ad networks are a subject of considerable interest and in some cases controversy. Some people for philosophical reasons believe they shouldn’t have ad networks participating with our audience. We are taking a very thoughtful and long-term approach to working with the networks. They are getting better and better and we believe that our future lays in having exceptionally high quality site that is with some degree of distinctiveness and uniqueness. So there is going to be a place for us to work with ad networks and we are quite comfortable doing it. What we want to do is get good at what we can do that they cant do and benefit from what they are good at.

As Ali pointed out our work with Google and Ad Pepper are examples of that. You’ll see more of that in the future.

Ali Jenab

Your last question regarding the stock buyback, we have shared the letter that we received from one of our shareholders with the board. The board really evaluated what we need to do as far as creating shareholder value. They are very committed to generating shareholder value. That is an ongoing evaluation that the board is going through and it is really a board decision at the end of the day what they are going to do and at this point we really have not been able to announce publicly on that matter.

Clayton Moran – Stanford Group

Are you still holding cash to potentially use in strategic acquisitions?

Ali Jenab

We on a regular basis evaluate that and frankly there is a lot of stuff going on in the market and we have been looking at quite a few things but there is just nothing imminent even on that front. But our balance enacted always looking at what potentially could [inaudible] rates what we do in here in terms of acquisitions versus is return to share, the value back as opposed to share buyback is the right thing to do. So those are the balance enacts that the board always evaluates and we view it on a regular basis. Once we make a decision on either front we will be actually making a public release on that.


Your next question comes from James Gilman – Cross Research.

James Gilman – Cross Research

A question would be going into the next quarter should we see a rebound in interest income or would that be negatively impacted by the current interest rate environment?

The interest income line is lower than last quarter and if I heard you correctly you mentioned that was due to a one-time negative impact write down on some of your cash/cash equivalents.

Patricia Morris

Correct, so your question is what would we expect to see next quarter? Generally we don’t expect to see but of course any further adjustments like that one-time that I mentioned but with interest rates being lower naturally we may see some impact on the interest income line based on what we currently have our cash invested in.

Ali Jenab

There are two things that impacted that. One is there has been a lot of turbulence in the markets out there as far as cash management is concerned. We went really conservative early in the quarter and we moved to treasury. So it is something…U.S. Treasuries basically to try to take a conservative position because I didn’t want to take a risk of what is happening to our cash. That actually has a lower yield.

On top of that one of the positions that we had in Cheney which was I think about $970,000 position on Cheney, it was $1.2 million and we got $230,000 back so it was $970,000 that was basically written down with about the $300,000 that impacted that line this past quarter. We think rest of it should be good at this point but those are the two things that impacted that particular line during the quarter and we tried to highlight that on our press release.

Now going into this quarter hopefully we won’t have a one-time piece but because we are sitting in treasury that is going to have a lower yield than we have seen in the past.

James Gilman – Cross Research

During the call you mentioned about rebuilding websites. Should we look at increased costs? What costs are we looking at here to do that?

Patricia Morris

From a financial perspective we are definitely looking at the addition of a couple of engineers in terms of the site rebuild but we are primarily using the existing team to cover that. I already had mentioned in past calls and I alluded to earlier in my section that we have the increased operating costs associated with the data center and so that is part of the backbone for this website improvement as well.

Jonathan Sobel

Five or six years ago if a company such as ours said we’re going to rebuild some websites that implied a much more substantial commitment of capital and people than is necessary today. We have some very capable people here and what Patty said I think is very useful guidance as far as the financial implications of this. The good news is we feel very good about the team that we have. This is not a start-over effort. It is much more taking very committed, capable people and putting them to work on things that they love to do.

James Gilman – Cross Research

Moving on to SourceForge marketplace. How is that doing during the quarter? Can you give us some color there?

Ali Jenab

With the marketplace what we are seeing is clearly there is very positive passion as far as the people that are coming in to list services and so on. Frankly we are still massaging it and John is looking at it closely to figure out the revenue side of the house. We’re clearly not seeing the transaction the way we have seen structure in the way we’d like to be seeing it right now. So are we a rep share model? Is that a way to look at it? Should we go to a listing model? Should we go to an advertising supported model only? So we are going to keep massaging and try to figure out a way. We think that interaction and activity around the site is positive, very positive, and we are just trying to look at the different alternatives to try to figure out how to modify the marketplace.

James Gilman – Cross Research

The last question is in reference to maybe ad sharing with the projects. Did I hear that correctly? Have you already done some initial research in talking to the projects and folks responsible for those projects and what they’re looking for and what they want from you?

Jonathan Sobel

We have a full-time person whose job is to reach out and talk with our projects and we have some anecdotal insight from time to time people talk with us about assisting them with fundraising for their projects and things like that. We are just beginning to systematically zoom in on this. I would say it is early in our process but it is a very high priority for us so we are going to devote some people to this with a very high level of commitment in the next couple of months starting right now.


Your next question comes from Analyst for William Morrison - ThinkEquity Partners.

Analyst for William Morrison - ThinkEquity Partners

About the new Ad Pepper relationship, I was wondering if you could talk a little bit about and characterize how much of the traffic is now from Western and Eastern Europe, how you have been monetizing the traffic in the past, what has the RPM been there versus the global RPM which you talked a little bit about and comparing that relationship to your relationship with William Smith. What RPM lift do you think might be possible there?

In terms of the monetizing the projects, how much of the development do you think, how many is it something in the 80/20 rule? How many projects do you have to reach out to in order to get 50% or even 80% of the traffic?

Jonathan Sobel

With regard to European sales we don’t break out geography specific RPM’s but I can quite clearly tell you as you would expect European inventory in general for us monetizes less well than domestic inventory. We currently use Google around the world and so to some degree the Ad Pepper relationship may displace that. Our expectation is that the CPM’s that we get through a direct sales force selling directly in Europe to European clients should be higher than what we are getting from an automated Ad network. We will have to see exactly how that plays out but that is the approach we are taking to that relationship.

With regard to Project Web I very much appreciate the question. There is indeed a power law distribution to the way Project Web works. A relatively small number of projects make up a disproportionately high percentage of the traffic and so we are taking essentially a three-part approach to reaching out to Project Web. First, we are going to have business development people and business development means a lot of different things in a lot of different industries. For us that is going to be relationship people who work directly with the people at the larger projects to see what ways they are most interest in, if they are, in monetizing their traffic and working with us on some approaches there.

The second thing we’re going to do is explore automated solutions for the medium and smaller sized projects where it is not really feasible or desirable to reach out in every case to a person.

The third thing we’re going to explore and this is a little further out is providing through widgets or some form of templates when people sign up for new projects some built in options for them. I emphasize the flexible and open nature of this because we’re going to have to see what the different kinds of projects want. So that is the approach we’re taking.


Your next question comes from Joe Maxa – Dougherty & Company.

Joe Maxa – Dougherty & Company

Most have been answered but I was curious Ali what drove the sequential growth in Q3 in the media segment. Was it more just a couple of large deals like you’ve had in the past Q3?

Ali Jenab

It was a couple of things. One is John and his team did a great job of innovating the products so we had a new action on the download page that was pretty effective and drove a pretty good level of revenue for us. We had a good mix of large deals and small deals but in general we have been growing the sales team and I think having the larger footprint out there the sales team has done a better job of monetizing the site although you look at it year-over-year you could say it was 1% growth.

But if you look at the fourth quarter and overall market climate right now with what is happening in the advertising space I think we did a pretty good job of getting to the $5.1 million level. We are hoping that momentum will continue. We just want to make sure we are adequately cautious when it comes to the July timeframe because sitting here I can’t predict what will happen two months down the road.

Joe Maxa – Dougherty & Company

Your comfort level in getting beyond the $5 million range sounded like it was going to be towards the end of the calendar year so are we looking at Q3 of the next fiscal year where we have a bump in the seasonality?

Ali Jenab

I think John feels by Q2 of next fiscal year, which is our end of the year quarter we should be able to see the changes to that.

Jonathan Sobel

To be absolutely clear, end of calendar year 2008 beginning of calendar year 2009 our fiscal Q2 2009 is when we are aiming for this to start yielding some recognizable benefits in our revenue.

Joe Maxa – Dougherty & Company

I missed the interest income expectations that you have talked about before. Patty what would you be guiding to for this coming quarter?

Patricia Morris

We don’t guide that as an individual line item for the interest line item.

Joe Maxa – Dougherty & Company

Or ballpark, I know you had $640,000. I know in Q2 it is $220,000 and I know in Q3 I know there is a $300,000 impact.

Ali Jenab

I would say it would be half of that. Half of the 640 because this last quarter some of the interest was early loaded in the quarter because it was at high rates. We moved to the treasury cap rate so in the $300-$320,000 range.


Your next question comes from Jon Hickman - MDB Capital.

Jon Hickman - MDB Capital

Could you explain to me about building the new pages versus what you have done in the past? I thought you had done a lot of work to improve the SourceForge site so it was more searchable and more user friendly, etc. What do you mean by rebuilding or building new sites?

Jonathan Sobel

I appreciate the question because websites are constantly evolving. At an architectural level we have had pretty much the status quo for the past 3-4 years as far as how our websites work. So we have added some features, things like the search that you referenced.

But as far as the inclusion of all the things you see on, for example, something like Facebook on both the feature level and more deeply at the level of how the websites work and how quickly they can be changed we are making an effort to do that now because if we do that right we will be able to much more quickly iterate what is on our website and connect our website to other parts of the web.

In general there has been this whole move from what people call a destination mindset. Five to six years ago the whole idea was get people to your site, have them read stuff on your site and that is what you really need to focus on. Of course, in recent years it has been much more activity around opening up platforms and getting people to and from your site and relating to them across the web.

To do that, which is not incredibly difficult if you have people who know what they are doing, you have got to have the infrastructure in place that supports those features. Once you do you can change the features very quickly. So that is what we are shooting for here. We have a very active audience. They will experiment and try all kinds of things. In just the last month we put together what is called an AB testing platform which allows you to systematically measure what is working and what isn’t. A large number of things like that, all of which are fairly well mapped out, are going to be the focus for the next three to six months.

Jon Hickman - MDB Capital

So it is going to become much more of a community oriented site.

Jonathan Sobel

Yes. Hopefully a much more vibrant, active site and if you think for a moment about how developers work and how they might talk to each other or want information on who the other developers are, what projects are successful and then move that whole set of ideas over to evaluators and users of open source all the features that we are used to using on other kinds of websites are the things we are talking about bringing onto ours.


Your next question comes from Douglas Whitman – Whitman Capital, LLC.

Douglas Whitman – Whitman Capital, LLC

My first question was on the eCommerce side and congratulations for another quarter of over-achieving on it. Consistently the company has talked about on the eCommerce side that it is not economically sensitive. So I am a little confused given the lack of economic sensitivity and the low average sales price why the flat to down guidance for the current quarter that we are in?

Jonathan Sobel

We guided 20% year-over-year growth. Sequential. So last quarter we guided $6.5 million. The fact it did better than expected, we came in at close to $6.7 million. We just want to make sure to not expect that we are going to continuously overdo what everybody else is doing.

We are growing faster than all-in eCommerce businesses are growing and we want to make sure we are cautious and that business sees a little bit of slowdown in the July timeframe historically also because it is summertime and all that. So there is not as much activity. So because of those two factors we want to be sure we give a reasonable guidance that we can achieve.

Douglas Whitman – Whitman Capital, LLC

When I look on the other side of the business and John maybe you could pipe in here, I’m a bit confused. Your customers are not having economic problems. They are continuing to advertise just on your site and other sites. John you mentioned that you had signed a bunch of renewals already so you had some reasonable visibility. When I look through your list of customers that is one of the strong spots within technology growth. Plus you are bringing on some contribution from international and the downloads and other things you are doing. So I’m confused why we are talking about down guidance on that.

Jonathan Sobel

A couple of observations and I’ll try to sequence this very logically. First and foremost I think it is important to emphasize and I hope this came across. We all look forward to a day where right now we’re talking about; lets say we hit the mid-point of guidance at 475 versus 5.1. You can argue that it is all in the same zone.

That is the point about a big deal. If a big deal comes in and it is 5.2 or 5.3 I would make the same point and we try to be very measured about this. We wouldn’t want you to say oh that by itself is the key signal. In general we want to move completely beyond the range that we are in and the potential theme of my comments is we are working very hard to do that and it is going to take us a little while but that is definitely the goal.

Now with regard to the specific points you ask, media in general is slower in summer across industries even in strong spending cycles. We have gone back and looked at comparable companies as well as our own history and July is just very hard to know. I believe there was one July several years ago that was very good for this company but last July things were quite slow.

We have heard and seen a number of anecdotal incidents including some of our own customers who have said they are pulling back slightly because of current conditions. Factoring that all in is why I’m essentially telling you is we think we’ll be in the same rough range. It is hard to know exactly so we want to be conservative and with everything going on right now we don’t want to set expectations that we fail to meet.

Douglas Whitman – Whitman Capital, LLC

Probably one other comment would be basically the shareholders letter that you talked about also talked about enhancing shareholder value and we’ve seen very clear examples with CNet this quarter who has some of the same issues that this company has been facing. So I would certainly hope that the board becomes a little more interested in shareholder value and considers some future alternatives.


This does conclude the question-and-answer session.

Ali Jenab

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

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