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Agilysys, Inc. (NASDAQ:AGYS)

F4Q08 Earnings Call

June 2, 2008 11:00 am ET

Executives

Arthur Rhein - Chairman of the Board, President, Chief Executive Officer

Martin F. Ellis - Chief Financial Officer, Executive Vice President, Treasurer

Analysts

Brian Kinstlinger - Sidoti & Company

Aaron Vermomen - Thomas Weisel Partners

Michael Cougar - Prometheon

Brian Peterson - Raymond James

Operator

Good morning and welcome to the Agilysys fiscal 2008 fourth quarter earnings conference call. For your information, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today’s presentation.

Before we begin, the company would like to remind you that all remarks today may include forward-looking statements based on current expectations that involve risks and uncertainties that could cause the company’s results to differ materially from management’s current expectations. Please refer to the risk factors which can materially affect results outline in Agilysys' corporate filings with the Securities and Exchange Commission and the company’s earnings release.

(Operator Instructions) I would now like to turn the conference over to Mr. Arthur Rhein, Chairman, President, and CEO for Agilysys. Mr. Rhein, the floor is yours, sir.

Arthur Rhein

Thank you. Good morning and thanks for joining us today. Our unaudited results were issued before the market opened and are currently available on our website. With me today as usual is Martin Ellis, Executive Vice President, Treasurer, and Chief Financial Officer.

Before we discuss our financial results and the new segment reporting information we introduced with today’s earnings release, I want to make a few comments on the year we just completed. First, neither my management team nor I are happy with our bottom line. As we move through the first six months of the year, we were busy integrating acquisitions and our pre-existing or organic business was doing pretty well. At the end of Q3, when we updated guidance, we acknowledged our costs were high. Some of them were retained to execute integrations, given the number and speed of the acquisitions we made, and we again acknowledged that our legacy infrastructure costs are high and that we would grow into them as a function of our aggressive growth plans.

This infrastructure was built to support our previous distribution businesses and it’s not quickly nor easily changed or replaced with something more suited to support our new business. As a result, we’ve retained significant corporate overhead cost that would not typically be associated with an IT business of our size.

Given the current uncertain economic environment and the state of capital markets, we announced we reengaged J.P. Morgan to review our strategic growth plans while we performed a detailed review of our business in light of the economy and our financial performance. This review has resulted in a significant cost reduction plan which we are already implementing.

While not understating my disappointment with our bottom line, I want to highlight what we’ve accomplished in terms of repositioning the company. During the past year or so, we’ve acquired and developed capabilities in the hospitality market that gives us a much wider and deeper footprint, moving well beyond our leadership position in gaming and destination resorts.

In our technology sales group, we dramatically diversified the business by adding Sun to our roster and acquired new skills in storage to expand that business with EMC and all of our suppliers. We are now HP and Sun’s largest reseller in the enterprise space and among IBM’s and EMC’s top five.

During the year, we diversified our supplier mix, broadened and deepened our product portfolio, and returned $150 million to shareholders through share repurchases. In no way do I want to imply that we are satisfied. We still have a lot of work to do to macroeconomic tour goals. For now though, given the current economic environment, we’ll be concentrating on running the business more efficiently and effectively and will only entertain additional acquisitions that have important strategic fit.

Turning now to our fourth quarter and full year results, in the fourth quarter, similar to many companies in our industry, we saw increased competitiveness coupled with an unusual and frankly surprising slowdown at the end of March, which is a critical and typically very busy time for us. The end-of-quarter weakness saw a number of major customers delaying purchasing decisions. This, and the fact that we had expected to see positive returns from the investments we made by the end of fiscal 2008 contributed to disappointing EBITDA results for the fourth quarter and the fiscal year.

Revenue in the fourth quarter increased 74.8% compared with last year and full year revenue of $781 million was in line with our lowered expectations.

SG&A expenses for the fourth quarter were 29.2% of revenue, down from 31.7% of revenue in the same quarter a year ago. And SG&A expenses for the full year were 25.5% of revenue, down from 28.1% in fiscal 2007.

In the fourth quarter, we had a loss from continuing operations of $900,000, or $0.04 per share, compared with a loss of $6.6 million, or a loss of $0.21 per share for the fourth quarter last year. For the full year, income from continuing operations was $4.2 million, or $0.15 per share, compared with a loss of $11.6 million, or a loss of $0.38 per share in fiscal 2007.

On the acquisition front, we continued to expand our hospitality and food service offerings during the fourth quarter with the acquisition of Eatec. The addition of Eatec’s standalone software application further differentiates Agilysys as a leading provider of inventory and procurement management solutions. Eatec has been interfaced with Agilysys' point-of-sale offerings to create a complete end-to-end solution for customers in the food service industry.

Also during the fourth fiscal quarter, we acquired Triangle Hospitality Solutions Limited, a small, U.K. based reseller and specialist for InfoGenesis products and services. We saw this as an opportunity to acquire skillful, talented people who were already selling and supporting InfoGenesis solutions in hospitality and stadium and arena markets.

We have consolidated Triangle’s operations with our current European operations, which were acquired with our Visual One acquisition. Together they give us a base on which to continue to expand our presence in Europe and the Middle East.

Now I want to comment on our new segment reporting. As you know, following the divestitures of KeyLink’s systems distribution business in 2007, Agilysys is a substantially different company. Our business is now organized into four segments -- our hospitality solutions group, retail solutions group, technology solutions group, and corporate. Beginning with fiscal year 2008, we are reporting our results for each of these segments.

Our hospitality solutions group is a leading provide to the hospitality industry, offering application software and services to our customers. The retail solutions group is a leader in designing solutions that help make retailers more productive and that provide their customers with an enhanced shopping experience. Our solutions help improve operational efficiency, technology utilization, customer satisfaction, and in-store profitability.

The third segment, our technology solutions group, is a leading provider of HP, Sun, IBM, and EMC enterprise IT solutions for the complex needs of customers in a variety of businesses, including enterprise and high availability, infrastructure optimization, and business continuity.

Each of these three segments is managed separately and is supported by various capabilities embedded in the business, including storage and network solutions, professional services, and software services.

Our last segment, corporate, consists of executive management and the board of directors, as well as shared services of finance, IT, human resources, and legal. We have taken this step to provide clearer and more complete information regarding our operations and with that, I’ll turn it over to Martin.

Martin F. Ellis

Thank you, Art and good morning, everyone. Let me begin today by mentioning that there are a number of items that without further explanation make it difficult to compare earnings and earnings per share to the prior year.

For the quarter, we had a net loss including discontinued operations of $807,000, or $0.03 per share. Discontinued operations contributed $151,000, or $0.01 per share of income.

In the fourth quarter a year ago, net income was $200 million, or $6.46 per share, which included income of $207 million, or $6.67 per share from discontinued operations of our former KeyLink systems distribution business.

Loss from continuing operations was $958,000 in the fourth quarter, or $0.04 per share. This was a $7.5 million increase over a loss of $6.6 million, or $0.21 per share a year earlier.

Sales for the fourth quarter increased 75% to $206 million, compared with $118 million in the fourth quarter of fiscal 2007. The base business, or as we have defined it, our organic business, which was the business we owned last March and excludes the acquisitions we’ve made since the announcement of the KeyLink divestiture, declined 2.8% year over year and contributed $115 million of the sales for the quarter.

Revenue from acquisitions accounted for $92 million of the sales, or 44% of the revenue in the quarter.

Fourth quarter revenue from hardware products was $153.8 million, up 75.4% compared with $87.7 million for last fiscal year’s fourth quarter. Software revenue was $20.4 million, up 161.5% from the $7.8 million a year ago. Services revenue was $32.2 million, up 42.5% from $22.6 million a year ago.

As we discussed last quarter, gross margins can vary depending on customer, size of transaction, mix of products, related supplier programs, and services associated with an audit. Also, the increased size of our software business will drive margin variability depending on the timing of software sales. As a result, changes in [customer] and product mix will cause gross margins to vary from quarter to quarter. Gross margin was 24.2% of net sales, or 280 basis points lower than a year earlier. As expected, the margin was impacted by changes in product mix, pricing under our procurement agreement with Arrow, the acquisitions of Innovativ and Stack, which generate lower margins than the company has reported historically in its businesses. Also, weaker selling margins and lower rebates, which are primarily volume driven, contributed to the decline in the quarter.

Selling, general and administrative expenses for the fourth quarter were $60.1 million, or 29.2% of sales, compared with $37.4 million, or 31.7% of sales in the same quarter a year ago. The $22.7 million increase in SG&A was primarily due to incremental operating expenses from the company’s recent acquisitions, which contributed $21.5 million, or 95% of the increase in expenses.

Depreciation and amortization expense for the quarter was $10.4 million, compared with $2.1 million a year ago.

Adjusted EBITDA was $0.3 million for the quarter compared with a loss excluding restructuring credits of $3.4 million a year ago. [Net interest] income for the fourth quarter was essentially flat compared with $0.7 million in the same period last year.

Let me turn to full year results. For the full year, we reported net income of $7.2 million, or $0.25 per share, compared with $232.9 million, or $7.59 per share in the prior year. The full year income from continuing operations of $4.2 million, or $0.15 per share, compares with a loss of $11.6 million in the prior year. Adjusted for the impact of restructuring credits in fiscal 2007, this was an $18 million improvement over the previous year’s loss.

Consolidated sales for the year were $781 million, an increase of $306 million, or 65% from the $475 million reported for fiscal 2007. Gross margin for fiscal 2008 was 23.4% of sales, compared with 25.4 in the prior year. Changes in product mix, pricing under our procurement agreement with Arrow, and margins of our acquisitions all contributed to the lower gross margin.

SG&A expenses were $199 million, compared with $133 million in the prior year. The increase was primarily due to additional SG&A associated with acquisitions. SG&A from the acquisitions was $59 million, or 22.3% of revenue. Organic SG&A was $141 million, or 27.1% of organic revenue.

Adjusted EBITDA was $7.2 million for the fiscal year compared with a loss excluding restructuring credits of $3.8 million in the prior year.

The unexpectedly soft IT spending environment in our fiscal fourth quarter contributed to disappointing EBITDA results for the fiscal year. We also expected to see positive returns from many of the investments we’ve made through the course of fiscal 2008. Let me briefly review a number of these initiatives and the results that had a material impact on our reported results in this fiscal year.

Given the nature of our business, all our investments are effectively expensed on the income statement. Investments and losses during the fiscal year included the following: a loss of $3.9 million in our organic professional services operation of our technology solutions group; investments of $3.3 million in our technology solutions group to expand market coverage; an investment of $2.3 million in our hospitality solutions group to develop a new property management application called Guest 360; a loss of $1.2 million in our China operations of our technology solutions group; and acquisition related expenses of $2.5 million. Excluding these items, EBITDA would have been approximately $20 million.

Before we turn to the balance sheet, let me review our new inclusion of segment reporting for the fiscal year.

Following the divestiture of KeyLink, we evaluated our businesses and developed a structure to reflect the company’s strategic direction as a leading IT solution provider. As a result, the company has been organized into four business segments -- our hospitality solutions group, retail solutions group, technology solutions, and corporate. Included in our results today are segment results for the full fiscal year and going forward, we will report our segments quarterly.

Since announcing the divestiture of KeyLink, we have aggressively expanded our hospitality solutions business, or HSG, and acquired four businesses -- Visual One, InfoGenesis, Eatec, and recently Triangle. In fiscal 2008, HSG had annual revenue of $86 million compared with $38 million in fiscal 2007. Of the $48 million increase in revenue, approximately $41 million came from the acquisitions of Visual One, InfoGenesis, and Eatec. Organic growth was 17.9%.

Pro forma for the timing of acquisitions, HSG had revenue of approximately $110 million and gross margins of approximately 55%. Depreciation and amortization was $4.9 million in fiscal 2008, compared with $1.2 million in fiscal 2007.

In fiscal 2008, $4.1 million of the total depreciation and amortization figure came from acquisitions. Adjusted EBITDA was $9.5 million, or 11.1% of sales in fiscal 2008, compared with $6.7 million, or 17.7% of sales in fiscal 2007. The deterioration in adjusted EBITDA margin was largely attributable to our InfoGenesis acquisition, which did not meet our expectations for the year and was also less profitable than the existing HSG business last year.

The decrease in margin was also the result of one-time costs related to the integration of InfoGenesis and making InfoGenesis software PCI compliant, consistent with our existing software. InfoGenesis is now fully integrated into HSG.

Also, HSG expensed $2.3 million in development costs for our new property management application, Guest 360, which is planned to be launched in the fall of 2008.

In fiscal 2008, our retail solutions group, or RSG, recorded annual revenue of $138.1 million, compared with $92.8 million in fiscal 2007. All the growth for RSG was organic during fiscal 2008 and gross margins in this business are approximately 20%.

Depreciation and amortization was $0.4 million in fiscal 2008 compared with $0.5 million in the prior year. Adjusted EBITDA was $8 million, or 5.8% of sales in fiscal 2008, compared with $3.1 million, or 3.3% of sales a year ago.

Our technology solutions group, or TSG, is a leading provider of HP, IBM, Sun, and EMC solutions for the complex enterprise IT needs of our customers in a variety of industries.

In fiscal 2008, TSG recorded annual revenue of $557 million, an increase of $214 million or 62.3% compared with $344 million in fiscal 2007. A total of $222 million, or 39.7% of revenue was the result of the company’s acquisitions of Innovativ and Stack.

North American organic revenue growth was 1.4% and China revenue decreased 50% from the prior year.

Pro forma for the timing of acquisitions, TSG has revenue of approximately $620 million and has gross margins of approximately 19%. Depreciation and amortization was $14.6 million in fiscal 2008, compared with $2.1 million in the prior year. The increase in depreciation and amortization relates to amortization of acquisition related intangibles.

Adjusted EBITDA was $27.8 million, or 5% of sales in fiscal 2008, compared with $17.7 million, or 5.2% of sales in fiscal 2007. During 2008, TSG made $3.3 million of incremental investments to build out a storage networking and service solutions capacity and capabilities. In addition, TSG incurred losses of $1.2 million in its China operations and $3.9 million in its organic professional services operations.

Adjusting for the loss-making investments, TSG margin would have been 6.5% in fiscal 2008.

The company’s corporate segment consists of its executive management team, shared services of finance, IT, human resources, and legal. Depreciation and amortization was $3.9 million in fiscal 2008, down from $4.9 million in the prior year. The decrease in depreciation and amortization was attributable to the divestiture of KeyLink.

Adjusted EBITDA was a loss of $38.1 million in 2008 compared with a loss of $28.7 million in fiscal 2007. 2007 included large credits totaling $6.5 million, primarily related to reversing a prior restructuring charge, true-ups of bad debt expense, and the reversal of previously accrued open price receivers.

Corporate cost reductions of $6.1 million subsequent to the divestiture of KeyLink were more than offset by higher costs, including $2.7 million in facilities expense, $4.2 million in stock and benefits compensation, and $1.8 million in acquisition related expenses.

Let me now turn to the balance sheet at March 31st and treasury activities for the quarter. Cash flow from continuing operations in the statement of cash flows includes divestiture related charges. Excluding taxes and transaction expenses associated with the divestiture of KeyLink, the company generated approximately $9.5 million in cash flow from operations for the fiscal year.

Cash and cash equivalents were $71 million, compared with $605 million at March 31, 2007. The decrease in cash was due to acquisitions, the repurchase of common stock, and taxes payable on the gain and sale of KeyLink systems distribution business.

The company has aggressively invested the majority of the divestiture proceeds in strategic acquisitions and recapitalizing the business. To date, we have paid $236 million net of cash for acquisitions, $128 million in taxes on the gain on sale of KeyLink, and $150 million for the repurchase of common shares.

As of March 31, 2008, accounts receivable were $179 million, an increase of 61% or $68 million, compared with the $111 million at March 31, 2007. The increase in receivables was due to the overall increase in sales and the impact of acquisitions.

Accounts payable of $98.6 million increased 17% from $84 million at March 31, 2007. A portion of accounts payable, or $14.6 million, is now reflected in our floor plan financing, which we initiated in late February and is recorded under financing activities on the cash flow statement.

Our DSOs and DPO remain largely consistent with the prior year.

Inventory was $19.3 million at March 31st, compared with $10 million at March 31, 2007. Included in inventory is $4.6 million in bill and hold inventory, which we discussed in last quarter’s earnings release.

Networking capital remains in line with the company’s goal of keeping working capital at under 5% of sales.

Before we turn to business outlook and guidance, let me briefly review our recent share repurchases during the fiscal year. Including the share repurchases in the [self-tender] offer last September, we have returned $150 million to shareholders and have repurchased 9 million shares, or approximately 29% of our previously outstanding basic shares. As a result of these repurchases, we currently have approximately 22.7 million shares outstanding.

Now let me turn to guidance for the fiscal -- for fiscal 2009. As we discussed earlier, given the lower expected fiscal 2008 results and the current uncertain economic environment, we have conducted a detailed review of our business to identify opportunities to improve profitability. We have begun to take action and expect to have essentially all of the expenses identified and eliminated by June 30, 2008. As part of the company’s cost reduction effort, we plan to eliminate approximately $17 million in SG&A expenses resulting in pro forma, full-year increase in adjusted EBITDA of approximately $14 million.

Based on the timing of executing these initiatives, we expect to realize an improvement in EBITDA of approximately $10.5 million in fiscal 2009.

Fiscal 2009 revenue is expected to be $860 million to $900 million. Full year gross margin is expected to be approximately 24.5% to 25% for the year.

We expect SG&A expenses to be approximately $210 million to $213 million in fiscal 2009, excluding restructuring charges.

We expect stock compensation expense of approximately $5.4 million and depreciation and amortization of approximately $27 million.

We plan continued investments in our hospitality solutions group launch of Guest 360, which will cost approximately $4.1 million, of which 3.1 is forecast to be expensed.

Adjusted EBITDA is expected to be $27 million to $40 million for fiscal 2009.

Given the significant intangible amortization associated with recent acquisitions, and based on the estimated $23.5 million weighted average diluted shares outstanding, earnings from continuing operations is expected to be in the range of $0.05 to $0.35 per share.

Capital expenditures are estimated to be $8 million to $10 million for the year.

The wide range in our guidance reflects the current uncertainty around macroeconomic environment and we will revise our guidance as the year unfolds and corporate IT spending becomes clearer.

That concludes our review for the quarter and the outlook for the year and the longer term. With that, let me open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question we have comes from Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

Good afternoon. Good morning. I have a bunch of questions, so I’m going to ask some and then I’ll get back in the queue. The first one, I took your ending cash flow position from cash flow from operations and I subtracted the last three quarters and I got a cash flow outflow of $26 million for the fourth quarter. Maybe you can highlight the factors leading to that and what you are expecting for fiscal 2009 in terms of cash flow.

Martin F. Ellis

Brian, I’m not able to reconcile exactly to your cash flow for the fourth quarter. I’m not sure if you picked up in the financing section the fact that we’d implemented a flooring plan and that under flooring plan, part of accounts payable is now reflected in financing versus cash flow from operations and that was a $14.5 million impact in the quarter.

Brian Kinstlinger - Sidoti & Company

Right, so -- sorry, go on.

Martin F. Ellis

As it relates to the full fiscal year for FY09, obviously cash flow will be positively impacted by performance and given the wide range on guidance for the top line and EBITDA, we expect cash flow to be in the range of $15 million to $20 million for the year.

Brian Kinstlinger - Sidoti & Company

That’s operating cash flow, right?

Martin F. Ellis

Yes, cash flow from operations.

Brian Kinstlinger - Sidoti & Company

Great. Can you give us a sense of what your cash position is today? You had that earn-out payment and I’m not sure what the floor planning liability is but when you pay that out, so maybe give us a sense of where you are today and when the floor planning payment is going to be made.

Martin F. Ellis

The floor planning, let me just spend a minute on the floor planning. The floor planning is effectively a structure to assign our payables to IGF or IBM global finance and as opposed to paying Arrow. We have put in place this floor planning agreement, which will be permanent, and so this isn’t something that’s going to be settled in the short-term. It’s an ongoing financing relationship that we will use to fund our payables and purchases of product, so that payment of $14 million is not going to in and of itself go away. It will expand over time as the business grows.

Brian Kinstlinger - Sidoti & Company

Okay. In your comments, you guys mention that you will not be as acquisitive. I’m curious what your new EBITDA goals are now [for] fiscal 2010 and you’ve already made another small acquisition. Do you expect that door to be closed for the year? Just give us a sense?

Martin F. Ellis

Brian, guidance as it relates today is obviously guidance for the base business. If you look at the pro forma EBITDA margin for the full year under the cost savings, we are moving up pretty high up that EBITDA margin scale, if we get to the high end of our guidance.

Right now, we are focused on integrating acquisitions and improving profitability and given some of the uncertainty on the macroeconomic environment on the macro front, it’s our objective to see how things shake out first before we aggressively pursue any acquisitions, unless something of true interest and strategic nature comes up in the next short-term.

Longer term, those goals that we outlined are still our long-term financial goals. It’s just that in the short-term, we are not aggressively pursuing any acquisitions, given the uncertainty in the macroeconomic environment.

Brian Kinstlinger - Sidoti & Company

Can you say --

Arthur Rhein

Brian, I think it’s important to note that the management team is paid on those three-year goals and we continue to be.

Brian Kinstlinger - Sidoti & Company

And then -- that’s helpful. And then so you still expect by fiscal 2010 to reach that 6% or is that more of a longer term goal now?

Martin F. Ellis

Those are still our goals. If you go back to our original guidance on those long-term goals, that was a run-rate goal that by the time we exited fiscal 2010, we would have a $1.5 billion business on a pro forma basis with a run-rate EBITDA of -- EBITDA margin of 6%. Obviously we’ve still got two years between now and then and nobody has a crystal ball as to exactly how the macroeconomic environment changes, but our expectation is that we will work through this over the next quarters and the market will return to some sense of normalcy later in the year ahead or maybe next year.

Brian Kinstlinger - Sidoti & Company

But how much cash and/or debt will you need to use to get to those objectives?

Martin F. Ellis

Well obviously that will be a function of the nature of the acquisition that we make. Generally speaking, the nature of the acquisitions will be a blend of what you’ve seen thus far and if you look at the multiples on our acquisitions on the one hand on the hospitality side and on the other hand on the technology solutions side, you can probably come up with a reasonable estimate of what acquiring approximately $0.5 billion in revenues would require in terms of an acquisition multiple. You know, $0.5 billion at an EBITDA margin of 6% or 6%-plus, at on average eight or nine times EBITDA if you look at the blend of acquisitions that we’ve made in the past, that requires financing of approximately $250 million. That’s probably a reasonable ballpark given that we don’t have anything specific at this point.

Brian Kinstlinger - Sidoti & Company

And I forgot, did you give us -- did you say what your cash position is today?

Martin F. Ellis

I did not. Currently it’s in the $40 million range, mid-40s.

Brian Kinstlinger - Sidoti & Company

I’m going to ask two more questions and then I’m going to get back in the queue. First of all, in the 4Q expenses on the SG&A side, how much of that, of the inflated number was rebate related versus what you kind of alluded to as one-time or non-recurring?

Martin F. Ellis

You’re talking about gross margin?

Brian Kinstlinger - Sidoti & Company

No, I’m talking about the SG&A number in the fourth quarter. I mean, your SG&A went up $5 million but your revenue quarter to quarter is down almost $50 million, so I’m curious -- what was going on in the SG&A line and in terms rebates and anything else?

Martin F. Ellis

The rebates that we earn are recorded in gross margin, so our rebates are reflected in gross margin. SG&A would then be a function of obviously facilities, largely people related costs, and then year-end true-ups on various accruals. In the fiscal year, we had to obviously in the fourth quarter, we had a significant contribution from new acquisitions in the way of SG&A and then we had true-ups on year-end compensation related items and other year-end closing entries. I don’t think that there’s anything specific that would get you to -- or anything material that’s going to get you to reconcile back to the number that you were referring.

Arthur Rhein

Brian, in regard to your question earlier in terms of our three-year goals, we are certainly mindful that with the current uncertainty in the economy, you layer on the credit market and what we are terming the disconnect in multiples, where Martin was talking about our historic multiples versus what the market will support today versus what may be expectations of sellers, and then compounded by our multiple in terms of our current stock price, there’s no question we see a reason to -- how shall I say -- pause in terms of our acquisition strategy. We will be very interested but we are only going to be aware of something or only entertain something that really is of strategic importance to us. We’ve determined that for the next period of time, we really have to concentrate on running the business certainly more efficiently, and that’s where our efforts are going.

So again, I think it’s important to note that we haven’t adjusted our three-year plan. Again, as I mentioned, our team is continuing to be rewarded or incentivized towards that plan but we are certainly mindful of what’s going on in the economy, as I say, as it relates to the multiples and the credit market and we’ve got to see how this thing works itself through in the next couple, four quarters, depending on how long it’s going to take.

Brian Kinstlinger - Sidoti & Company

Great. Thank you. I’m going to -- I’ve got a handful more but I’ll let some other guys ask some questions first. Thanks.

Operator

The next question we have comes from Matt Sheerin with Thomas Weisel.

Aaron Vermomen - Thomas Weisel Partners

Good morning. This is Aaron [Vermonen] in for Matt. So I had a few questions also. So just to start on the cost reduction that you guys were talking about that you expect to be completed by the end of the first quarter, is that primarily in the corporate part of the business or are you planning to cut costs across other parts of the business, or maybe in a few of the acquired companies?

Arthur Rhein

Well, we are certainly looking at the areas where we think we have under-performing assets, if you will. And we are going to be -- well, we have looked and we are going to be making adjustments in a number of the businesses. As yet, we have not really made public those cuts that we are going to be making. They are broad-based and we certainly will be able to talk more about them as we execute them.

Aaron Vermomen - Thomas Weisel Partners

Okay, so we should expect an update on that, I guess.

Martin F. Ellis

Yeah, at the end of the -- when we report results for the June quarter, we will be able to share more of the specifics around what we’ve planned and what we’ve executed on.

Aaron Vermomen - Thomas Weisel Partners

Okay, and do those reductions assume the demand environment stays at this current weakness or if things deteriorate further, should we expect to see anymore reductions? Or if they stay at this level, should we also expect to see anymore reductions?

Arthur Rhein

Well, as you can see in the -- both in the range of our guidance and where that guidance is, we’ve really assumed what I consider to be a conservative number but appropriately conservative number in terms of growth for the year, and the savings are truly based on cost reductions as opposed to looking for growth in our gross margin. So although we will have some of that, we hope, again you have a good sense of where we’ve targeted the business.

As we go through the year, we certainly will be looking at whether we are up or down relative to those numbers and certainly consider adjusting the business accordingly.

Aaron Vermomen - Thomas Weisel Partners

Okay, that’s helpful. And just moving to the -- your comments about deals being pushed out and just weakness in IT spending, have you seen any of those -- have you seen those deals close? Are you seeing any improvement in the current quarter?

Martin F. Ellis

On the acquisition front, and then if the question was acquisition related deals versus --

Aaron Vermomen - Thomas Weisel Partners

Deals -- I’m referring to deals from your customers, because you mentioned there were push-outs of hardware purchases.

Arthur Rhein

No, I think that we’re seeing -- it’s still a bit early in the quarter. You know, typically most things happen in the last month of every quarter, so it is a bit early. But I would say that we haven’t seen a -- what I would call a gross deterioration in the market. We certainly were a bit surprised by the lack of end-of-quarter bump that we normally get. We are concerned about this quarter but activity through -- so far through the quarter is pretty normal. We’ll just have to see where we wind up.

Aaron Vermomen - Thomas Weisel Partners

Okay, that’s helpful. And also, just on -- you mentioned you saw organic growth of 1.4% year over year, but could you describe how the acquired businesses performed year over year on a -- I guess on a pro forma basis, if you --

Arthur Rhein

Well, from an overall basis, I think that our businesses performed generally within our level of expectations. You know, some of them will be a bit better, some will be a bit worse than our original plans.

In the case of one of our acquisitions, InfoGenesis, we altered our integration plan and certainly the normal disruptions that you experience, which are those that result from a company being in the mode of selling, and then going through an acquisition process, we then altered, as I said, our integration plan and that caused additional disruption, so sales and margin were less than we originally had planned. But again, given the changes we made, fairly consistent with our adjusted expectations.

So again, you’ve got some that will be a little better, some that will be a little worse. There’s no question that when we look at our technical technology sales group, a figure that you may be interested in is that for the first nine months of the year, we were up about 17%. In the last quarter, we were down year over year about 10%. That’s a dramatic swing and that certainly surprised us, along with many folks in the industry. You may not have been able to glean it from the reports of some of the manufacturers but when you look at the reports by the two major enterprise distributors, which are Arrow and Avnet, and you look at hardware, particularly servers in North America, it was a very, very difficult quarter, particularly with certain product lines. And there’s no question that again, we did not expect that. We were surprised at that, as I suspect were a lot of folks.

Aaron Vermomen - Thomas Weisel Partners

Okay, that’s definitely helpful. And I just have a few housekeeping questions and then I’ll jump back in the queue, just to give some others the opportunity to ask questions. So in the other income line, it was pretty high this quarter, related to the Magirus sale, but what should we expect going forward? Should we expect a return to a normal range of plus or minus $1 million or $2 million a quarter?

Martin F. Ellis

I think going forward, you should expect there to be a loss on the other income line, at least for this fiscal year. When Magirus sold off a large part of their business, as you know, last year and they are going through a restructuring of that business and as a result, we will report losses against their business for at least this fiscal year.

Aaron Vermomen - Thomas Weisel Partners

Okay, and just one question on the expectation for shares for FY09, it looks like you guys are anticipating purchasing another million shares. Would you expect that to happen earlier in the year, later in the year?

Martin F. Ellis

No, I think what you are picking up, Aaron, is that currently we have 22.7 million shares outstanding. The fully diluted share count for fiscal 2008 or for the quarter reflects a weighted average outstanding of shares based on the timing of which we repurchased them, so if you take current shares outstanding of 22.7 and then readjust it upwards based on estimated dilution to 23.5, that was the number that we used for guidance. But in our guidance, there’s no implied additional retirement of shares this year.

Aaron Vermomen - Thomas Weisel Partners

Okay. All right, thank you.

Operator

The next question we have comes from Michael [Cougar] with [Prometheon].

Michael Cougar - Prometheon

Good morning, gentlemen. I was wondering if you could comment a little bit on the work that J.P. Morgan is doing for you. I understand from your comments that the results of some of their work has resulted in cost-cutting targets, but I was a little confused because I would kind of think that they would be retained for M&A type of activity, so if you can just give me some detail there.

Arthur Rhein

Well first off, our cost-cutting initiatives really had very little, if anything, to do with our reengagement with JPM. JPM has been our investment advisors for some time and as we announced, we’ve re-engaged with them to take a look at our growth plans and our growth strategy. Again, at the risk of repeating myself, when you look at the macroeconomic environment that we find ourselves in, let alone what occurred in the fourth -- our fourth quarter, but more importantly again, if you look at the economy, if you look at the credit market, and what we’ve now termed or we are recognizing is the disconnect in multiples. Again, that’s between what companies were paid a couple of years ago versus where we are today, let along where it may go in the next six, nine months. And then you look at our valuation, what we’ve acknowledged as what we believe is the disconnect in the value of our stock versus the underlying value of the company and candidly, when our shareholders look at that, obviously our stock looks like a wonderful value and that’s why we in fact did execute the repurchases.

So we’ve asked JPM for a very broad look at the market and how these factors will affect us in the coming year or two or three, and subject to that we’ll be obviously continuing to reevaluate our plans in light of what they have to say and in light of the factors I’ve just mentioned.

Michael Cougar - Prometheon

Okay, thanks for that. I was wondering if you could comment on where you are seeing private market transaction multiples and the relevant sectors take place versus the current valuation of the shares.

Arthur Rhein

Rather, Michael, than provide you a specific number, what I can tell you is we have had conversations over the course of the past several months with companies and several have withdrawn from the market because they did not receive offers that were anywhere near in line with their valuation, if you will. So I suspect that again, we are just acknowledging what has been this disconnect.

Michael Cougar - Prometheon

Okay, thanks for that.

Martin F. Ellis

I would add a comment to that. You know, I think certainly companies that were considering liquidity options late last year were doing that on the back of some very high multiples that came to market in the summer of last year, and probably had inflated expectations based on those multiples. And given that the market changed, they hadn’t reset their expectations and as a result, we are looking at very recent transactions in the rearview mirror thinking that those still held in the current environment.

I don’t know that there’s anything specific that we can offer on multiples outside of the fact that one or two of the transactions that took place in the summer and late summer of last year were at multiples which were quite high compared to historical multiples.

Michael Cougar - Prometheon

Okay.

Operator

The next question we have comes from Brian Alexander with Raymond James.

Brian Peterson - Raymond James

Good afternoon. This is Brian Peterson in for Brian Alexander. If I look at your full-year revenue guidance, and I exclude what you guys have already announced for acquisitions, it looks like you are forecasting revenue growth to be flat organically year over year. And I know you talked about negative 10% organic growth in the fourth quarter, which is a big step down. Is that how we should be thinking about the TSG segment, or should we be seeing some deceleration in organic growth in the other segments? Just wondering how we should be thinking about this revenue by segment.

Martin F. Ellis

We haven’t provided guidance by segment but let me talk generally about revenue guidance for the year. The low-end of the range of 860 implies limited growth of the overall business. And that’s a function of some of the uncertainty in the macroeconomic environment at this time. Our broad expectations are that the hospitality business will have higher growth than the technology solutions business, given the uncertainty in the IT spending environment today.

Brian Peterson - Raymond James

Okay, and can you also talk about maybe gross margins? It seems like you are forecasting them to be up 135 bps year over year. Just trying to put that together with your comments on the growth environment and the rebates.

Arthur Rhein

I think that’s just a function of where we will see, as we’ve modeled, where we are going to see the growth and the difference in product and customer mix.

Martin F. Ellis

And also, we will report for this upcoming fiscal year our acquisitions for a full year and we acquired late in the year the Eatec acquisition, which did not contribute to our overall gross margin and so that will push it up a little. And we have a slight change in mix at some of our businesses towards services. But the acquisitions are a key driver of the increase in the gross margin.

Brian Peterson - Raymond James

Thank you very much.

Operator

The next question we have comes from Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

Thanks for taking my additional questions. Martin, if the growth rates slow a little bit more on the technology solutions business, where could the gross margin based on the rebates go? I mean, what could happen to the rebates?

Arthur Rhein

Well, right now, although the rebate programs are fairly consistent in terms of what we are being rewarded to do, the rebate targets are a bit high and that’s what we experienced in the -- well, in our fourth quarter. So candidly, those conversations are going on now, so that we will be working with our suppliers to frankly negotiate some of these rebate levels. And at this time, it’s really difficult for us to project what we will accomplish or where we will come out with our suppliers as it relates to some of those rebate programs.

Now, it’s important to note, some of the rebate programs are volume-oriented but not all, so some are tied to growth and some are tied to penetration of certain markets. So again, they vary.

Brian Kinstlinger - Sidoti & Company

Do you expect to be GAAP profitable in the last three quarters of the year once all the cuts are completed, or is that going to be a seasonal -- does that depend on seasonality, whether you are GAAP profitable or not? Does that make sense?

Martin F. Ellis

Well, from a GAAP standpoint, the biggest contributor to operating income, the biggest drag to operating income from reporting GAAP profit is our depreciation and amortization, which for this year, for the fiscal ’09 is expected to be pretty significant at about $27 million.

Depending on how the year shakes out, the GAAP profit or operating income is somewhere between -- about break-even and positive and a large portion of that will be a function of the third quarter, given some of the seasonality in that quarter. But Brian, it depends really on growth rates in the overall business for the year but as I say, at the low-end of our guidance, you are looking at approximately break-even operating income, given the depreciation and amortization that we forecast of $27 million for the year.

Brian Kinstlinger - Sidoti & Company

Okay, and suppose the market remains status quo from where we were at the end of March to right now, is that reflected in your range? Because that sounds like then you are seeing more weakness than you might expect for the full year -- is that accurate or is that an inaccurate way to look at it?

Martin F. Ellis

I think we’ve captured the current market environment in the low-end of our range, and the high-end of our range is under the broad base of expectations that some people think spending may come back later in the fiscal year, as well as as we look at some of our businesses, what prospects might be if spending strengthens. So we’ve captured I think the macroeconomic environment, the current macroeconomic environment in our guidance. If things change, then we’ll have to revisit that.

Arthur Rhein

I think, Brian, to share with you some of the things we’ve been thinking about, right now is a very difficult time to plan the business, and therein lies the degree of the range we’ve been talking about. It appears as though people are pausing. In other words, we’re seeing projects delayed. We are not seeing projects being taken off the boards yet, so right now we are in this interim period where we are between customers saying well, we’ve delayed this a quarter or we are going to delay it X number of weeks or into the next quarter because we want to see how the climate will be.

Some of the companies are reducing the transactions -- in other words, where they were planning on X millions of dollars, today it might be half that or two-thirds of that or a third of that. So right now is a very awkward time, and maybe awkward is a poor choice of words but it just is difficult for us to plan the business beyond what we’ve done, which I think has really been quite an aggressive cost-savings program, if you will, that we are implementing.

But as we go through the year, we’re just going to have to get a sense of this quarter by quarter and see how things start to shake out. It’s just not clear whether these programs, these projects, if you will, are going to be mothballed or in fact just reduced or if the economy comes back in another quarter or two, reinstated to full bore. So it’s just tough to call right now.

Brian Kinstlinger - Sidoti & Company

Fair enough. Were taxes impacted by your gain, or was that net of taxes in the other income line? I know that’s a maintenance question but I’m just curious.

Martin F. Ellis

By our gain on?

Brian Kinstlinger - Sidoti & Company

On the -- on Magirus’ selling what they sold. You had that gain of $11 million. Would taxes have been the same without that gain for the fourth quarter?

Martin F. Ellis

Well, taxes would have been the same. The effective tax rate may have been different.

Brian Kinstlinger - Sidoti & Company

Okay, that’s fair. And then, in terms of restructuring, what kind of dollar amount might you think you will spend on restructuring and how much of that is related to J.P. Morgan? Is that included in there? If not, what are you -- what kind of money are you spending on that?

Martin F. Ellis

We are not in a position to disclose fee structure with J.P. Morgan, but as far as restructuring is concerned, Brian, I’d rather defer that until the end of this quarter when we report Q1 and I’m in a position to give you something a little bit more precise.

Brian Kinstlinger - Sidoti & Company

Fair enough. Last question is related to Magirus -- what are your present plans with that asset? And I saw your asset went up significantly in the quarter. Is that a result of that gain? Or why else would that investment go up in the quarter on the balance sheet?

Martin F. Ellis

The asset went up based on the gains. That’s their gain on sale of part of their business.

Brian Kinstlinger - Sidoti & Company

And your status of ownership? I mean, you’ve talked about this before on the call. What are your plans?

Arthur Rhein

Well, we currently or continue to own about 20%, just under 20% of the business. To be fair, it was a strategic investment when we were in the distribution business. I would certainly acknowledge that it’s a bit less of a strategic investment today but our relationship remains very strong with the management of that company and at this time, there’s really nothing that we foresee changing in the relationship.

Brian Kinstlinger - Sidoti & Company

Okay. Thank you for your time.

Operator

(Operator Instructions) Mr. Rhein, Mr. Ellis, gentlemen, I’m showing no further questions at this time.

Arthur Rhein

Thank you. In closing, I’ll remark that I guess we’ve all just acknowledged that it’s not entirely clear to any of us whether IT spending will be pushed into the second half of the year or perhaps even into next year. Either way, it makes for challenging times. By aggressively taking action to reduce expenses at this time, we believe we are improving our position to take advantage of the longer opportunities that we think the market will hold for us.

So again, thank you for listening today.

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