InnerWorkings, Inc. Q2 2008 Earnings Call Transcript

Aug.31.08 | About: InnerWorkings, Inc. (INWK)

InnerWorkings, Inc. (NASDAQ:INWK)

Q2 2008 Earnings Call

August 11, 2008 4:30 pm ET

Executives

Joe Busky - Chief Financial Officer

Steve Zuccarini - Chief Executive Officer

Eric Belcher - President and Chief Operating Officer

Analysts

George Sutton - Craig-Hallum Capital

Analyst for James Friedland - Cowen and Company, LLC

Youssef Squali - Jefferies & Co.

Vance Edelson - Morgan Stanley

Franco Turrinelli - William Blair & Co., LLC

Randy Hugen - Piper Jaffray

Michael French - Morgan Joseph & Co., Inc.

Operator

Welcome to the InnerWorkings, Inc. quarterly earnings conference call. (Operator Instructions) At this time I would like to turn the conference over to the Chief Financial Officer, Joe Busky.

Joe Busky

Thank you for joining us on our second quarter earnings call. As Dana said, this is Joe Busky and I am the Chief Financial Officer InnerWorkings. Joining on the call is our Chief Executive Officer Steve Zuccarini and our President and Chief Operating Officer, Eric Belcher.

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

Any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date. Listeners to the call are advised to review our SEC filings most importantly the risk factors contained in our most recent Form 10-K. Please note that this call is intended for investors and analysts and may not be reproduced in the media in whole or in part without our prior consent.

At this time, I will turn the call over to our Chief Executive Officer, Steve Zuccarini, who will recap selected second quarter highlights. Following Steve’s comments, our President and Chief Operating Officer, Eric Belcher, will update you on the Company's sales, operations and acquisition activities including the recent purchases of the New York base Mikam Graphics and the UK based Etrinsic. And then I will of course then spend a few minutes on the financials and finally, Steve will offer closing comments and then we will finish with your questions.

So with that, Steve?

Steve Zuccarini

We reported strong results in the second quarter which included multiple firsts for InnerWorkings. Among these exciting developments was our record revenue which exceeded a $100 million in the quarter for the first time. We also signed nine new enterprise clients during the period, another record first for the Company.

The quarter further included the acquisition of Etrinsic, a UK based provider of print management and marketing services. This acquisition marks InnerWorkings' first entrée into the European market. These exciting firsts underscored a high level of confidence we have in our model and the sustainability of our success. InnerWorkings is well positioned to deliver on our stated goal of becoming a global multibillion dollar business.

At this critical juncture in our development, we will continue to invest in the necessary people, processes and technologies to support our growth initiatives. While InnerWorkings is not immune to current financial dynamics, the current challenging macroeconomic environment has largely enhanced our prospects as customers are increasingly drawn to our high service, low cost model which gains even more traction in this type of marketplace.

Our client relationships remain strong and growing as we continually exceed customer expectation. Today, we have not seen any widespread disruption in our business based on the challenging economic environment. Although this economic downturn is the first encountered by InnerWorkings in its brief history, I have been in the industry for 30 years and have been through numerous business cycles and historically the volume of printed materials has fluctuated in a narrow band that ranges a few percentage points above or below the national GDP regardless of the market environment.

As a result, we do not believe that the printing space will experience an outsize downturn as a result of current market weakness. In fact, we consider this slowdown as an opportunity for InnerWorkings to gain market share and implement investment decisions that will pay significant dividends in the future. The combination of our growing reputation and an economic environment that continues to put the spotlight on cost management remains a driving force for the long-term success of InnerWorkings.

Next, I would like to share with you some key financial takeaways for the quarter. Our second quarter revenue rose 57% to a record $105.3 million, up from $67.3 million in the same quarter last year. Further we have continued to achieve success in driving organic growth during the period. The Company's organic growth rate exceeded 20% again in the second quarter with a combination of new enterprise client wins and further penetration of our existing accounts.

Moreover, we are making significant investments to enhance our platform particularly in the areas of business development and sales management, positioning the Company to produce even more and greater economic and organic growth in the future.

Benefits from the investment are already materializing as evidenced by the signing of nine new enterprise clients this quarter. Enterprise client growth remains strong and continues to exhibit excellent momentum. Overall, enterprise revenues increase 59% quarter-over-quarter to $68.1 million with a customer base of a 130 enterprise accounts versus a 105 this time last year.

Moving on to our transactional business, transactional revenue increased 53% quarter-over-quarter and we serviced over 3,100 customers in the second quarter of 2008 versus roughly 2,200 in the year earlier period. I would like to close by quickly revisiting InnerWorkings position in the marketplace and our ability to continue to grow in times of economic uncertainty.

Today, as I had said previously that we have seen very little disruption in our sales engine and client relationships. Given the enterprise nature of our business model, we have continued visibility into our full year and do not anticipate a widespread slowdown occurring in 2008. As economic concerns continue to be prevalent, we expect to see more competitive pricing from our suppliers as continued over capacity in the space and unused equipment create even more leverage for InnerWorkings.

Should the economic climate deteriorate from current levels, InnerWorkings niche as an asset light, high service, low cost provider in the sector focus on the facilitation of the lowest cost decision for our clients, better positions the Company to whether challenging headwinds and expand our market share. In fact, we continue to see our service offerings resonating better than ever with our customers and prospects.

So to conclude while customers continue to seek ways to extend their existing budget as they come under financial pressure, our ability to sell and service new clients as well as expand current client relationships are enhanced in any uncertain economic environment.

Now, I would like to turn the call over to Eric Belcher, our President and Chief Operating Officer.

Eric Belcher

Thanks Steve. I will be providing an update on both our sales and acquisition activities including our recent purchases of New York based Mikam Graphics and UK based Etrinsic. As Steve mentioned, nine new enterprise accounts were signed during the quarter. Given our goal of signing four to six new enterprise accounts each period, our second quarter total of nine far surpassed our objective and was a Company record.

We expect the revenue associated with these new relationships to begin ramping in 2008 and then meaningfully contribute in 2009. Let us talk about a couple of these enterprise wins. During the quarter, we signed agreements with retailer Modell's Sporting Goods as well as the international marketer, Absolute Spirit Company. Both relationships have the potential to generate eight-figure revenues on our annual basis for the Company. Our prospects from bringing new large profitable enterprise relationships throughout the remainder of 2008 are very encouraging. In fact, looking at the top 50 prospects in our sales pipeline that we are currently in various advance stages of discussions with, the total combined annual print spend associated with these companies exceeds $1 billion.

There is no question that our enterprise solution will remain a critical factor in our future success considering that we had just a handful of enterprise clients a few years ago and we are now up to a 130 such relationships. We are building substantial momentum while gaining critical expertise in our offering. We are certainly learning from our achievements and constantly refining our sales approach and implementation efforts in these engagements. Our success in fostering and maintaining enterprise relationships is a clear sign of the global brand we are building and provides us with continued confidence in our model and our long-term financial future.

Now, let us discuss our sales force recruiting and client retention results. As you know, continuously recruiting top quality sales talent to our organization is an important component of our growth strategy and we are pleased to report the addition of 25 new sales reps brought on board during the second quarter. Using our historical experience as a guide, we expect the majority of these professionals to achieve new levels of success in their careers now that they have joined InnerWorkings as they are now able to sell every product and service across all categories in the print and the print related industry and to do so, as the low cost, high service provider at all times.

Client retention will be a trademark that InnerWorkings continues to be a major success that we intend to build on for the remainder of the year and beyond. In the second quarter of 2008, we maintained business with 24 of our top 25 customers from the second quarter of 2007 signifying that our key customer relationships remain healthy and stable. So, in summary our new enterprise wins, our sales prospects and our recruiting results have never been stronger as we continue to build toward becoming a multibillion dollar company.

Now, let us turn our attention to our M&A activity. Before discussing our recent acquisitions in our pipeline moving forward, we would like to reiterate our acquisition philosophy as we believe the investment community would benefit from a better understanding of our M&A approach in our results today. We are in the process of building substantial global organization comprised of the most talented professionals in the print management community and it has been our experience that much of this talent resides with individuals affiliated with smaller regional print distribution companies.

Therefore our M&A activities serve as a key complement to our broader recruiting efforts. We have now seen time and time again that when we combine our resources, credibility, scale and knowledge of the enterprise sales process with healthy, reputable, smaller, well-run businesses, we are able to create a powerful new force in the marketplace. The organizational and financial discipline we employ before striking these partnerships is the backbone of our successful M&A track record. We only acquire companies who share our philosophy regarding the need for data and technology in the print procurement space and in keeping with our belief that M&A and our world of professional services is primarily a recruiting activity, we only partner with companies willing to engage in multi-year earn-out programs, multi-year employment agreements for key personnel and long-term non-competes.

Our results to date have been nothing short of outstanding. Let me share a few highlights. Our acquisition multiples have averaged less than six times EBITDA with the upfront cash payment averaging just 50% to 60% of the purchase price due to revenue and cost synergies, our average actual realized multiples to date have been approximately four times EBITDA. Of the 120 sales people brought on board through acquisitions over the past 2 ½ years, all but two remain with InnerWorkings today. All 11 available earn-out hurdles have been met or exceeded.

Every business that we have owned for more than six months has been 100% integrated into our technology platform with the average conversion time at just over three months. Forty-four redundant positions have been eliminated and 14 of our current top 50 enterprise account prospects have been sourced by sales professionals that came to us through an acquisition. Our approach has been and will continue to be structured and disciplined. We remain without [peer/fear] as an active and reputable buyer in the global print distribution marketplace.

Let me site a few of the more recent examples of our M&A activity. As you know, we expanded our reach into the UK market during the quarter with our acquisition of Etrinsic. While the relationship is still new, we are extremely pleased with the results to date and remain very confident that this is and will continue to be a great partnership. We have already been able to grow several of our long-standing US based client relationships by supporting their print needs in the UK through our new partnership and Etrinsic has already demonstrated its ability to accelerate its growth in the UK by landing a meaningful new client contract in June.

Today, we announced the acquisition of Mikam Graphics based in New York City. We have been in discussions with Mikam since November of 2007 and we could not be more excited about the prospects for this partnership. The company which was founded in 1987 is a leading print management firm with particular expertise in catalogues and direct mail. It is a very well respected company that has long standing relationships with a number of blue chip customers across the country including leading publishers in the New York market.

Mikam generated approximately $30 million in revenue in 2007 and has 17 employees including six sales professionals. In addition to Mikam Graphics and Etrinsic, we made two small tuck-in acquisitions in the quarter. These two new partnerships which had combined revenues of approximately $19 million in 2007 add to our pool of talented sales professionals and give us deeper domain expertise in the packaging and display category. All of these recent acquisitions fall within our historical ranges with respect to evaluation and payment structure.

We welcome our new employees into our organization and we look forward to growing together over many years to come. Our pipeline of qualified M&A prospects remains extremely strong and we are involved in a number of discussions at the moment. Before turning the call over to Joe for a deeper dive on the financials, I want to take a moment to publicly welcome him to InnerWorkings team. Joe assumed the role of CFO effective July 16 as we successfully completed the transition as part of our long-term succession planning.

Joe brings nearly 20 years of domestic and international finance, operating and business experience InnerWorkings, enhancing our ability to drive the next phase of our growth strategy, that of becoming a multi-billion dollar global business. I, Steve, the Board and everyone at InnerWorkings have the outmost confidence that Joe would excel in his role as CFO.

Joe Busky

First of all before I get into the financials, I would like to say I am honored to be assuming the CFO responsibilities at this exciting time in InnerWorkings’ history. The management team here has laid a very strong foundation and I will focus on supporting the Company's multifaceted growth strategy. I look forward to working with Steve, Eric and the rest of the management team to achieve the Company's long-term goals. With that being said, I will now take you through some of the quarterly financial results.

As Steve mentioned, our revenue for the fiscal second quarter was a record $105.3 million. This represents a 57% increase of the revenue of $67.3 million in the same quarter of the prior year and was driven by strong gains across both transactional and enterprise clients. We increased our second quarter enterprise account business by 59% or $68.1 million from $42.9 million in the second quarter of 2007. As has been said, we added nine new enterprise accounts for the quarter and continued to further penetrate our existing enterprise accounts which help drive results.

For the transactional segment of our business, revenue increased 53% to $37.3 million as compared to the same period in the prior year and this was largely driven by a better account penetration and the broadening of our sales force. For the quarter, enterprise sales represented 65% of total revenue and transactional sales represented 35%. While we continue to see strong transactional revenue as a result of recent acquisitions, we are pleased with the current mix of enterprise and transactional revenues. Looking to gross profit, gross profit for the quarter was $25.8 million versus $17.2 million in the year ago quarter.

Gross margin percentage was 24.5% during the period which was consistent with the quarter earlier period but a 110 basis lower than our gross margin of 25.6% reported in second quarter of 2007. While lower from a year over year perspective, InnerWorkings gross margin remains inline with our long term guidance of 24% to 26% and further we believe recent results are a near term mix occurrence driven by the recent acquisitions we have discussed.

General and administrative expenses increased to 13.6% of revenue in the current quarter compared to 10.3% during the same quarter of the prior year and the reason for this is two fold. First, we increased our reserve for bad debt by $1.5 million during the period. This was implemented in recognition of the financial difficulties currently experienced by a single InnerWorkings customer. With this addition, we are fully confident that the Company retains adequate reserve to address any potential issues that may emerged in the future. Second, we have made extensive investment in our corporate infrastructure with particular emphasis on our sales management, sales support and technology groups as we position the Company to continue on our strong growth trajectory.

Operating income is $5.1 million as compared to $5.6 million in the prior year quarter. Operating margin was 4.9% during the quarter as compared to 8.3% in the same quarter last year. This change is primarily due to the previously noted increase in bad debt expense and investments made in our corporate infrastructure. Now focusing on the bottom line, I want to repeat the financial dynamics for the quarter. Net income increased 60% year-over-year to $6.1 million during the second quarter. As the percentage of revenue, net income increased to 5.8% as compared to 5.7% in the same quarter last year.

Our fully diluted EPS during the second quarter was $0.12 as compared to $0.08 during the second quarter of 2007 but I want to go even further and add more transparency to this EPS results and I will take a moment to walk you through the specific components of the quarter's EPS. As I said, our fully diluted EPS during the second quarter was $0.12 per share. This total includes a contribution of $0.05 from a sale of a portion of our Echo Global Holdings during the period, offset by the expense of $0.02 for bad debt for the one customer I just mentioned.

This gets you to net adjusted EPS of $0.09 per share. In addition though, we invested $0.01 per share in infrastructure and have increased stock-based compensation, have increased intangible amortization and have less interest income year-over-year. All of those three have an impact of about $0.01 per share. So, adjusting for all of the items I just mentioned, our apples to apples Q2 earnings per share is $0.11 per share as compared to $0.08 last year.

Now, I want to turn to the balance sheet which remained strong. During the quarter, we generated $9.3 million in cash flow from operations. This represents a significant increase from $1.8 million report in cash flow from operations in Q2 2007 highlighting the strong cash flow being generated at InnerWorkings. We ended the quarter with $34.5 million of cash and marketable securities. So our strong cash positions coupled with our low requirements for capital positions us to continue to follow our upward growth trajectory.

I will conclude the discussion regarding the sale of a portion of our Echo Global Logistics asset and our new share of buyback program. Let me start there with comments about the partial sale of our equity in Echo Global Logistics. On May 7, the Company sold 25% of its holdings in Echo Global Logistics for $5 million in cash. Clearly, we are extremely pleased with this sale as it represents a significant gain on InnerWorkings February 2005 total Echo investment of $125,000. On April 30 of this year, Echo filed a registration statement on Form 1 for its initial public offering and we fully expect to monetize another portion of our remaining 1.5 million shares of Echo stock during this calendar year.

In addition to the sale of Echo Global shares, we remain active in the deployment of capital with a goal of enhancing shareholder value. Since initiating our share buyback plan in May, the Company has purchased approximately 581,000 shares of stock for $7.5 million and an average price of $12.95 per share. This program reflects our strong confidence in the Company's near and long-term prospects. We remain committed to utilizing this lever, perhaps even at an accelerated pace to increase shareholder value and boost investors long-term return on investor capital.

Our growing cash flow from operations, our newly secured line of credit and proceed from sale of Echo stock will provide us with ample liquidity to fund strategic initiatives including any acquisitions and the repurchase of shares of our common stock on opportunistic basis. As we are now reporting results at the mid point of the year, I think it makes sense to revisit our 2008 annual guidance expectations.

Given the underlying strength of our core business and client relationships, we continue to feel confident in our top line guidance. We are reaffirming 2008 guidance of $450 million to $490 million. Annual earnings per share guidance is now projected to range between $0.50 and $0.54 per share with an anticipated $0.03 to $0.05 per share earnings contributed from a further sale of InnerWorkings stock in Echo Global Logistics during the remainder of 2008.

Operating earnings per share result are estimated to range from $0.25 to $0.28 per share for the remainder of the year which will reflect our investment in infrastructure necessary to support the rapid revenue growth we continue to experience. So, relative to the guidance that we have established for 2008, our amortization expense is revised to be higher than previously expected due to higher level of intangible asset on our balance sheet as a result of the acquisitions we have made this year.

And our stock-base compensation expense is revised to be higher than anticipated due to new grants issued in 2008. Further, the allocation of cash to the share repurchase program has reduced the Company's cash position and will result in less interest income than we originally projected. These factors were not anticipated when we introduce 2008 guidance back in December of 2007 and they are expected to account for roughly $0.03 per share of the revision in our forecast.

In addition, we intend to continue to invest in our support structure in areas such as sales management, sales support and technology. These investments will position us to continue to grow in the future and represent approximately a $0.01 to $0.03 per share impact to our guidance for the second half of the year. I want to reinforce our confidence and commitment to InnerWorkings long term future. The platform for growth that we are constructing is consistent with our articulated strategy and very critical for our long-term success.

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

Steve Zuccarini

First, let me say that I look forward to partnering with Joe as we work toward delivering on our stated goal of establishing a global multibillion dollar business. With that said, Nick Galassi has been an integral part of our growth and success with InnerWorkings. We cannot thank him enough for all his hard work in getting us to an exciting stage in our development and we wish him the very best in his future endeavors. I want to close the call by reiterating the significant first we achieved during the second quarter.

These included record revenue, a record number of nine new enterprise wins and a continued focus on investing into business which led to our first on entrée into Europe with the acquisition of UK based Etrinsic. Our sustained execution positioned InnerWorkings to continue on our growth trajectory and as we move forward in the next stages of our global growth, I want to reemphasize that the investments we have made to date and will continue to make in the areas of sales management, sales support and infrastructure will allow us to gain more market share and to be a stronger more successful company when we emerged from this challenging economic environment.

I would like to open it up for questions please.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from George Sutton - Craig-Hallum.

George Sutton - Craig-Hallum Capital

With respect to the sales management and sales structure cost that you are incurring, can you just talk what that means for 2009? Why are we accelerating some of these expenses now?

Steve Zuccarini

Well, these expenses are expenses we believe necessary in order to continue on our strategy of becoming a multi-billion dollar company. There are expenses associated with handling the influx of audit volume we are seeing right now in our procurement department. We brought a lawyer in house because of the volume of customer contracts that we are negotiating at the moment. So, these are expenses that we believe are necessary for the long term maximization of shareholder value and we will continue to make investments as we see fit, as most important for us is to take advantage of this massive market opportunity that we have in front of us right now.

George Sutton - Craig-Hallum Capital

Joe, do you expect anything unusual this year with respect to seasonality should 2008 back half look any different than it did in 2007?

Joe Busky

George, we do not expect any changes in seasonality that we have seen in the past, it should be pretty consistent.

George Sutton - Craig-Hallum Capital

Steve, you, I notice are continuing not to see much impact from the economic environment. What do you think you have seen in terms of the sale cycle? Does that change at all? Obviously nine enterprise customers is a great number but are you seeing

any slowdown on the sale cycle side from the economy?

Steve Zuccarini

George, there has been no slowdown. We are still seeing on a large enterprise deals that roughly average six month cycle. We have done some as quickly as two months, 60 days but on the average we are still seeing six months. To answer your question though, there has been, we have not seen the reverse. We have not seen people going out to eight or nine months with these large enterprise deals. We have got more feet on the street, we have got more talented business development people out there calling on the Fortune 1,000 and I think you are starting to see some of the fruits of their labor.

George Sutton - Craig-Hallum Capital

Can you give us the Fortune 500 customer number?

Steve Zuccarini

Sure, we are up to 51 total, George. That is up from 29 a year ago, same period. Just to give you an idea, the Fortune 500 same store sale, the exact 29 from the year ago in the first half to the 29 this year. We are up over 20% in volume with the same customers.

Operator

Your next question comes from Analyst for James Friedland - Cowen and Company.

Analyst for James Friedland - Cowen and Company, LLC

I was wondering if you could give us a little more detail on the macro environment. Has there been any pockets of weakness, in particular how has promotional products held up and also, is there any evidence that the direct mail segments has benefited it all from the downturn considering that segment has done well historically? Thanks.

Eric Belcher

We have not seen any pockets of weakness neither promotional products or direct mail or any of the other product categories that we are providing our clients with. At the end of the day, these are not discretionary spends. Oftentimes these marketing budgets are linked directly to the revenues, the new client acquisition and revenue generation from our clients and so, the business is holding up quite well and related to a question that George just asked, the market environment actually, we believe that accelerating the pace of our sales cycle in that Corporate America is more decisive, more willing to act, make decisions to change their supply chain in the name of taking cost out of their business, excess cost out of their business and there is not question in our mind that part of the reason why we saw a spike in new enterprise wins for this quarter with nine new wins is related to this current market environment.

Analyst for James Friedland - Cowen and Company, LLC

Could you give us the absolute amount of stock-base comp and amortization intangibles in the quarter?

Joe Busky

Yes, the stock-base comp is roughly $700,000 in the quarter and the other piece; I am going to have to get back on that one.

Analyst for James Friedland - Cowen and Company, LLC

As far as the new contracts, Etrinsic contributed one of the nine, is that correct?

Steve Zuccarini

That is actually not correct. We did not include Etrinsic's win in the nine so if you were to add that then of course we did ten new enterprise wins for the quarter.

Analyst for James Friedland - Cowen and Company, LLC

Okay and just considering the strength of the enterprise add to this quarter and what the pipeline looks like, should we maybe, are you thinking about more than four to six in the back half or is that still the general guidance?

Steve Zuccarini

We will keep that as our general guidance but we will also say that we feel that we are very optimistic about our business model and its reception in the marketplace.

Joe Busky

By the way, that intangible amortization, it is just over $0.5 million for the quarter.

Operator

Your next question comes from Youssef Squali - Jefferies & Co.

Youssef Squali - Jefferies & Co.

. Couple of questions, just to be clear, your prior EPS guidance of $0.50 to $0.54 did not account for the sale of the Echo shares. Does your new guidance include more Echo share sales? I think you spoke to that earlier in your comments.

Joe Busky

Just to reiterate, the original guidance of $0.50 to $0.54 did not contemplate any sale of Echo shares. The second half guidance that we have given of $0.25 to $0.28 does not include any additional sale of Echo shares but as we said, we do expect to monetize some of this investment in the remainder of the year and that is going to be in that $0.03 to $0.06 range. That is over and above the $0.25 to $0.28.

Youssef Squali - Jefferies & Co.

I think you also talked about how organic growth was north of 20% this quarter, could you clarify or could you just split that between enterprise and transactional? Was enterprise faster than that or transaction was faster?

Steve Zuccarini

The enterprise revenue growth was faster. It was 59% and the transactional revenue for the quarter was 53%.

Youssef Squali - Jefferies & Co.

Right, but on an organic basis?

Steve Zuccarini

Oh, on organic basis, it was stronger on the enterprise side and we roughly had about 24% organic growth this quarter.

Youssef Squali - Jefferies & Co.

Okay, so 24% is an aggregate with enterprise growing slightly faster than transaction.

Steve Zuccarini

Yes, sir.

Youssef Squali - Jefferies & Co.

Steve, since the IPO we have been talking about seeing EBITDA margins in the double digits maybe, you said 11% to 12% over time, I think if I back into the numbers and again, not adjusting for all the stuff that Joe talks about but I get to about 6.5% or so percent. That is going to be lowest we have seen in a while. Is that low double digit EBITDA margin still your goal over time and I guess, how quickly do you think we can get there considering that a lot of these acquisitions you are making tends to be diluted in the meantime and to what you just announced, you are going to be spending a bunch more on this operational investments?

Joe Busky

With the one-time hits that I mentioned, the increase in the AR reserve and the infrastructure build, it is likely we are not going to increase our EBITDA margin versus 2007 but we do fully expect that once we get into 2009, we would be back on track with what has been discussed previously.

Youssef Squali - Jefferies & Co.

We would get; obviously, we should not plan on getting to a low double digit as early as 2009, is that fair?

Joe Busky

Yes, that is fair. That is fair. Not as long as we see the growth opportunities in the marketplace that we do. Again, we are going to continue to build this Company over the long term to maximize shareholder value and if investments are required to ensure that we become a multibillion dollar company pioneering this new print management space not just in the US but around the globe, we are going to make those investments and do the right thing for our shareholders.

Operator

Your next question comes from Vance Edelson - Morgan Stanley.

Vance Edelson - Morgan Stanley

With the increase spending on infrastructure, can you just comment, Steve, on the scalability of the IT systems? Would you characterize them as highly scalable or over time or are we going to see step functions in infrastructure spending as the back office gets expanded? How do you think about that?

Steve Zuccarini

In our technology front, again we believe our technology can scale to four to five times the size of our business right now with no significant CapEx expenditure as we have talked about, we spend less than 1% of top line revenue on CapEx and primarily all in the IT infrastructure. So, from that standpoint, you are not going to see huge spending. We are putting spending into our developers and into the folks that are continuing to drive some of the new and exciting portals and changes that we are taking to the business but again, primarily infrastructure is going to be in sales, sales management, sales support and procurement.

Vance Edelson - Morgan Stanley

Joe had mentioned the better account penetration. I think the last quarter, Steve; you had said that penetration within the largest customers is only around 15%. Any update on progress getting deeper penetration of those larger customers? How would you describe that process?

Steve Zuccarini

I think the process continues to improve. We still have a huge upside potential. To your point, we are probably less than roughly 20% of the total universe of our enterprise customers. But just to give you an idea, same store sales on our enterprise, first half of last year to first half of this year, 20% growth on the same 105 enterprise customers that we had a year ago in the first half.

Vance Edelson - Morgan Stanley

Lastly, on the revenue guidance range, the 450 to the 490 that is looking a bit wide for this point in the year. Any more color on what might move you to the high end or the low end? Are you incrementally more or less confident or is the middle of the range still looking most likely?

Joe Busky

Yes, I would, I am the new CFO here. I would definitely steer us more toward the low to mid-range of that 450 to 490, maybe I am being cautious but I think low to mid is probably where I would place my bets on them.

Operator

Your next question comes from Franco Turrinelli - William Blair.

Franco Turrinelli - William Blair & Co., LLC

The investments that you are making certainly all make sense. I guess what maybe I have not really sort of tuned into is what changed in your outlook for the business that has required the increase in investment.

Steve Zuccarini

Well, Franco, I think what has changed is we see ourselves poised for substantial long-term growth and we have consciously made as a management team and as a board to not attempt to maximize this quarter's percent margin on an EBITDA basis but instead to ensure that we are doing all the things necessary to build for a long term successful profitable business maximizing shareholder value.

So, I did mention earlier before, your next question Franco is what specifically then are you talking about? We have added to our procurement department staffs to help support the volume of audits that we have in place right now. We have added to our sales management team. We are up to over 250 sales representatives and we believe with better leadership in place to help support them in their efforts that return will pay off handsomely for our investors over time.

So, throughout our organization, we have made as a management team a conscious decision to ensure that we are building our company for the future growth that we see available to us for a well-managed, well-run, well-resourced business.

Operator

Your next question comes from Randy Hugen - Piper Jaffray.

Randy Hugen - Piper Jaffray

Shall we expect to see gross margins stay here or could they trend higher in the second half like it did last year?

Joe Busky

We still expect our margins to be in that 24% to 26% range and yes, I think you should expect as you have seen in the past with the seasonality of the business to see those margins uptick in the second half.

Randy Hugen - Piper Jaffray

Alright, thanks and then getting back to the infrastructure investments. Should we expect those to continue at about the same level as in Q2 and how far in the future that is going to continue? Could we see a step function down sometime in 2009?

Joe Busky

Randy, in the second half of this year, we do expect that relative to the original guidance we put out, there is going to be another investment of $0.01 to $0.03 in this infrastructure build. And as for, I think you may have mentioned 2009, I am not sure we are prepared to talk about anything at 2009 at this point but for the second half, it will be an incremental $0.01 to $0.03 relative to the original guidance we put out at the beginning of the year.

Randy Hugen - Piper Jaffray

Okay, fair enough and then could we get the share account and selling commissions for the quarter?

Joe Busky

Yes, the share account is $50,000,375 and the sales commission is $5.1 million.

Operator

Your next question comes from Michael French - Morgan Joseph.

Michael French - Morgan Joseph & Co., Inc.

A question on the bad debt, you mentioned that the reserve was for one customer. How are the rest of them looking? Are there any other accounts that might be moving in that direction?

Joe Busky

Michael, I have been here three weeks and I now fully realized that the balance sheet here is very clean. With the exception of this one customer, there is not a lot of risk on this balance sheet particularly in the AR area, it is very squeaky clean. So I do not see any other issues like this popping.

Michael French - Morgan Joseph & Co., Inc.

Okay, thank you and on the most recent acquisitions, I assume the answer is no since you did not, but are you going to provide any metrics like the margins they did in the case of Mikam, they had $30 million run rate, but is the margin structure similar to yours or..?

Steve Zuccarini

Well, as was mentioned earlier on the call, the margin structure of most of the companies that we partnered with through our M&A activities tend to be slightly decretive on a percentage basis. But beyond that, we do not provide additional detail regarding the P&Ls of these organizations. We do expect over time to enhance their abilities on the marketplace whether it be by helping them source better, helping them land larger enterprise deals. We mentioned some of the opportunities to reduce redundant functions and things of that nature but that dynamic kicks in over time, not immediately.

Michael French - Morgan Joseph & Co., Inc.

Okay, the last one for me on the nine or ten new enterprise accounts depending on how you account them, do they contribute much to the quarter or does they come in more towards the backend and we should expect more impact in the third quarter?

Steve Zuccarini

Yes, third quarter or fourth quarter in 2009, the short answer is they did not contribute substantially to the Q2 results. After landing them under contract, there is an implementation phase and then there is a lag between bookings, in other words, in order received and when a product is actually shipped which is when we recognize revenue. So, your expectation should be that the revenue and profitability associated with these enterprise wins will show up later in the year and in 2009 and beyond.

Operator

That is all the time that we have allotted for questions today. We would like to thank you for your participation in today's conference.

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