iPass Inc. Q2 2008 Earnings Call Transcript

iPass Inc. (IPAS)

Q2 2008 Earnings Call

August 7, 2008 5:00 pm ET

Executives

Tim Shanahan – Investor Relations

Ken Denman - Chairman and Chief Executive Officer

Frank Verdecanna - Chief Financial Officer

Analysts

Fred Ziegel - Soleil Securities

Neil Weiner - Foxhill Capital Partners

Don Netter - Dolphin Associates

Kevin Dede - Morgan Joseph

Ed Einbodin - W.M.Smith & Co.

J.D. Abouchar - JRT Capital

Presentation

Operator

Welcome to the second quarter 2008 iPass Incorporated earnings conference call. (Operator Instructions) I will now turn the presentation over to your host for today's call, Tim Shanahan with iPass Investor Relations, please.

Tim Shanahan

Thank you for joining us to discuss our financial and operating results for the second quarter 2008. I am Tim Shanahan and I will be managing the call and introducing the Company's speakers, Ken Denman, Chairman and CEO of iPass, and Frank Verdecanna, Chief Financial Officer.

Before I turn the call over to Ken, I would like to bring the following to your attention. The date of this call is August 7, 2008. Our presentation today contains forward-looking statements about events and circumstances that have not yet occurred. Statements regarding our projected financial results for the third quarter of 2008, statements containing words such as will, expect, believe and should and other statements in the future tense are forward-looking statements.

Actual outcomes and results may differ materially from the expectations contained in these statements due to a number of risks and uncertainties. These risks and uncertainties are set forth in our press release of today as well as in our quarterly report on form 10Q under the section "Factors Effecting Operating Results" in part one, item two of that report filed with the Securities and Exchange Commission on May 9, 2008 and available at www.sec.gov.

iPass undertakes no responsibility to update the information in this conference call under any circumstances. The press release announcing our financial results is available on our website at www.ipass.com in the Pressroom section under Press Releases. The current report on form 8K furnished with respect to our press release is available on our website in the Investor Relations section under SEC filings. In addition, in this earnings call we will provide non-GAAP financial results. The press release on our website includes text and tables that explain our reconciliation of these non-GAAP results to GAAP results.

This earnings call is also being recorded for replay and is being webcast and will be available on our website for one quarter until the next quarter's call.

I will now turn the call over to iPass Chairman and CEO, Ken Denman.

Ken Denman

During our last several calls I have outlined our priorities of revenue growth, cost containment and improved operating margins. The success of the business is based on execution of these three areas. During the second quarter we achieved revenue growth, came in on target in our operating expenses and saw our gross margins come in better than expected.

We are pleased that we hit our near-term targets but we were also encouraged that we remain on track to achieve our longer term vision of leadership in a global market that is growing and in which our customer base will allow us to achieve meaningful profits. During quarter two, we had total revenues of $48.6 million with broadband representing $26.2 million, software and service fees revenues representing $13 million and a mere $9.4 million coming from our legacy dial business.

In addition, we continue to experience strong mobile broadband growth with a 15% increase quarter-over-quarter. Software and service fees also grew 4% over last quarter. When combined, our broadband and software and service fees revenues grew 7% over the first quarter and now represent a full 81% of our total revenues, up from just 61% for the same period last year at 76% for last quarter.

Last quarter we discussed the strength of our business model even during today's sluggish economic conditions. We also outlined several challenges that decreased our gross margins. To recap, these challenges included significantly higher 3G megabyte usage per user in North American, resulting in higher than anticipated network access costs, accelerated usage in certain areas of our higher cost European Wi-Fi footprint, significant more dial erosion in quarter one than expected and the weakened US dollar.

I would like to share with you some of the steps we took during the second quarter to address these issues and stabilize our gross margins. First, we renegotiated our largest mobile data provider agreement in the US resulting in significantly better pricing. We also renegotiated several higher cost Wi-Fi provider agreements in several regions. We continue to shift customers to Enterprise flat-rate pricing.

Bundling of our securities services and management software with this new pricing model adds significant value to our software, security and unified mobility offering and growth in our high margin software and service fee revenues. As a result of these steps our gross margins for the quarter came in better than expected at 57%, above the range we provided last quarter at 55% to 56%. And we expect gross margins in the range of 57% to 59% through the rest of 2008 and then continued improvement in 209.

Enterprise flat-rate pricing continues to be a growth driver at iPass as new and existing customers see the value and the versatility of this model. 80% of new mobility deals were signed under this model. At a time when cost control is clearly a focus of our Enterprise customers, flat-rate pricing makes good sense for them and for iPass. Customer gain the cost predictability, management simplicity and broadband availability to mobilize their business. iPass gains more balanced and predictable revenues as this pricing model helps us deploy to more users within an enterprise, minimize seasonal revenue fluctuations and insulate us against dial erosion.

Some of the world's most successful companies continue to see the value of our unified mobility services. During the quarter we added eight new Forbes Global 2000 customers bringing our total to 435 of these coveted accounts. And even in today's challenging economic environment, we booked nearly $21 million in new business during the second quarter. That's in line with the $20 million to $25 million we booked in every quarter for the last two years.

Continues strong bookings give us confidence that we will continue to add new customers and continue to grow revenues. We had nearly 1.1 million users during the quarter through our approximately 3,500 Enterprise customers. We continue to experience very low rates of churn. We have a strong balance sheet of cash and short-term investments of $70 million.

With that I will turn the call over to Frank Verdecanna, our chief financial officer.

Frank Verdecanna

Total revenues for the second quarter ending June 30, 2008, were $48.6 million versus $48.1 million last quarter, a 1% increase in the quarter and within our projections of $47 million to $50 million.

Our total broadband revenues in the second quarter were $26.2 million versus $24.1 million in Q1, a 9% increase. Mobile broadband revenues came in at $19.5 million in Q2 compared with $17 million last quarter, a 15% increase. Fixed broadband revenues were $6.7 million in Q2 compared to $7.1 million in Q1, a slight decrease over last quarter primarily the result of a cautious retail sector which slowed deployment and the loss of a few legacy teleworker accounts.

Software and service fee revenues in the second quarter were $13 million versus $12.5 million last quarter, a 4% increase. Dial revenues in Q2 were $9.4 million versus $11.5 million in Q1, an 18% rate of decline. Our combined broadband and software and service fee revenues in Q2 were $39.2 million or 81% of our total revenues with dial representing the remaining 19%.

US revenues accounted for 64% of total revenues and international revenues accounted for the remaining 36%. Network access costs were $20.9 million in the second quarter or 43.1% of total revenues versus $20.5 million or 42.6% of total revenues in the last quarter. Our gross margin was 56.9% in the second quarter compared with 57.4% last quarter and above the range we provided of between 55% and 56%.

Now let us review our operating income and operating expenses. During Q2 our combined non-stock compensation expenses for network operations, research and development, sales and marketing, and general and administrative expenses was $27.8 million compared to $27.4 million in Q1. We had a GAAP operating loss of $2.3 million in the second quarter compared to a loss of $2.2 million last quarter.

We had a non-GAAP operating loss of $123,000 in the second quarter versus non-GAAP operating income of $200,000 in Q1. Now I would like to review our net income and earnings per share both on a GAAP and a non-GAAP basis. We had a GAAP net loss of $1.4 million or $0.02 per diluted share versus a net loss of $1.4 million or $0.02 per diluted share in Q1. We had non-GAAP net income of $722,000 or $0.01 per diluted share compared to $1 million last quarter or $0.02 per diluted share. During the second quarter we repurchased approximately 229,000 shares of our common stock for a total purchase price of $500,000 at an average cost of $2.18 per share.

We currently have approximately $26.3 million remaining under a $30 million stock repurchase plan approved by the board of directors in February of this year. As we stated previously, we anticipate using cash flow from operations to fund any repurchase activities. We ended the second quarter with $70 million in cash and investments and no debt. During the quarter we had cash flow from operations of approximately $700,000.

Now I would like to review our projections for the third quarter of 2008. The following statements are based on information available to iPass today. These statements are forward-looking and actual results may differ materially.

For the quarter ending September 30, 2008, we anticipate revenues of approximately $47 million to $50 million. We expect our gross margins will be between 57% and 59% in Q3. We anticipate fully diluted GAAP loss per share to be between a $0.01 and $0.04 per share. We expect fully diluted non-GAAP earnings per share to be between $0.00 and $0.03 per share.

Now I would like to turn the call back over to Ken.

Ken Denman

In the second quarter we responded to a softening gross margin trend as I said we would. We believe the 57% gross margin for the quarter represents a flattening of the downward trend we had experienced over several quarters as we navigated the continued product mix change and we believe we have established the floor of a 57% to 59% range for the balance of the year.

We expect to see margins further improve in 2009 as dial erosion simply no longer has the magnitude to have an impact on the overall gross margin number as before. We delivered this result by renegotiating 3G mobile data and Wi-Fi deals where necessary, as those product lines continue to grow, and generally managing our margin profile with an increasing packaging and bundling of our solutions at a solid price point or solid points and margins.

We continue to grow even at a modest pace nominally but if you look under the covers, you will see that had dial erosion in the quarter of more than $2 million so if you normalize for this erosion, and by the way dial revenues are down to an absolute run-rate of $9 million so you will have less impact as time goes on, you get to a much higher absolute quarterly growth rate. We think you should keep an eye on this fact as it speaks to the higher underlying growth potential in the business for the future.

During our last earnings call in May of this year, as we reflected on the Q1 dial erosion we experienced and the absolute size of the dial bucket being as low as $11.5 million in that quarter, I opined that this had to be coming to an end. So I mentioned our belief that quarterly revenue hit of $2 million like we saw in quarter one, with a corresponding margin loss, was less likely going forward.

Well, we saw another $2 million revenue hit in quarter two. Fortunately we more than offset that hit once again with growth in other areas of the business, which kept us in the middle of our projections range. And we avoided the corresponding gross margin hit that one might expect as I described earlier.

That said, at this stage in our transition gross margins are very important to shareholder value and we are very focused on the steps to improve our gross margins from the floor that we believe we have established. I will reiterate a few closing comments from the last call as they absolutely still apply. We have been able to continue to grow the topline and we need to do better. The products mix is one we talked a lot about and worked hard to manage as we fight to deliver more leverage from the business. We have grown and we continue to grow the business.

There was a real question as to whether this was possible in the face of declining dial revenues. We have restructured our operations by taking millions of dollars per quarter out of our operating costs while still demonstrating that we can close business and grow revenues.

So we have been able to deliver an operating model that should allow the business to be nicely profitable at certain levels of gross margin attainment. Topline is working and we will see this more clearly if we look past the dial business, which is down below 19% of the total business. Operating expense is where we think it needs to be and we can scale the business off of these levels of expense.

We have a clear but manageable challenge on the network access cost side. We absolutely believe we know how to adjust this and in fact the specific initiatives we executed on have already paid dividends as we posted a flat gross margin result quarter-over-quarter despite another $2 million hit to the high margin dial bucket. This demonstrates that other product lines are delivering improved levels of performance on the margin side.

As we said, we believe we walked back towards our second half '08 target gross margins of 56% to 59%. In fact, we will tighten that range to 57% to 59% given the Q2 performance and everything we know at the moment.

Our model can deliver growth and profit and we know that shareholders expect exactly that. Our goal is to be at or above 60% gross margin in 2009.

We believe there are two keys to unlocking shareholder value in the near term. The first is to continue our growth on the topline. A few years ago we were seeing an erosion of revenues in our legacy dial business, but we responded with new revenue streams and new revenue growth remain one of our areas of focus.

The second is gross margins. Let me reiterate a comment I made in my opening remarks. We recognize that gross margins are very important to shareholder value and we are very focused on steps to improve them. As we expand our gross margins, we will be able to get more operating leverage as we grow the topline. We already have taken steps to reduce our operating expenses.

In the first quarter we were disappointed with our gross margins. We identified the four factors that hurt us in this area and we launched initiatives to address each one of those.

Q2's performance represents a reason to believe we have turned the corner on gross margins, despite the withering hit we had to endure from our product mix transition. I want you to understand that our team continues to approach increasing shareholder value with a strong sense of urgency and a continuing sense of urgency.

With that, I will turn the call back to our operator for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Fred Ziegel - Soleil Securities. Pl

Fred Ziegel - Soleil Securities

I look at the on and off net users, it looks like we saw a fairly significant, how do I say this, slowdown in the rate of decline. Is there something behind that?

Ken Denman

The rate of decline of the dial users?

Fred Ziegel - Soleil Securities

Network users. They were down only 10,000 in the quarter.

Ken Denman

Your observation is correct. That decline does seem to be coming to a slow just if you look at the numbers and I think that is one of the smallest declines we have had for many, many…

Fred Ziegel - Soleil Securities

For a while.

Ken Denman

…many quarters. And so I think it is a function of the continued solid growth in broadband users first and foremost so that is clicking along very nicely. Dial user erosion continues so the delta really is the broadband usage clicking quarter-over-quarter nicely, yet sort of kind of 30,000 to 40,000 to 50,000.

I think if you look at the numbers and you look at the trend, what you are sort of seeing is sort of what I am expecting and hoping for, which is that we see that bottom out and actually begin to start to tick up so that could certainly happen. If you plot out the trends over the last several quarters, the lines would sort of bring you to that conclusion.

So I think it is a very good signal. It is also reflected in our total iPassConnect software users number. Absolutely the on/off net number is continuing to grow but as we see the mitigation of the reduction on-net users, we are going to see the total iPassConnect software user numbers really begin to take off and grow again.

So those two phenomena are absolutely under these numbers and I think it is really a function of broadband being solid, dial beginning to moderate just a tiny, tiny bit because it is such a smaller bucket now. The dial erosion continues but the total bucket of users is so small that we are starting to see fewer user loss.

Fred Ziegel - Soleil Securities

Okay. Second question, how much of the software and service revenue that you report is bundled into EFR? And my question really is should not we start to see the broadband, I am sorry the software and service revenue line grow more, again to what the broadband revenue line is doing because right now it is about two to one in favor of broadband.

Ken Denman

Fred, what you are seeing is the growth in the software and service fee line is really driven by the growth in additional Enterprise flat-rate users and they are not going to, it is not going to be the same level of growth as you would see in mobile broadband because the price points per user per month fee is much less for, on the software and service fee side than it is for the monthly broadband.

Fred Ziegel - Soleil Securities

Right, well in terms of gross dollars, but in terms of rates of growth should not they be more similar than what they have been or no?

Ken Denman

I think the growth rates in users are you are seeing actually the off-net users even grow faster than the broadband users and that is because you are seeing dial users convert over to off-net users. But as far as the actual ARPU dollar fee growth each quarter we would expect to see that less than the broadband fees so in the end I would say we saw 4% sequential software and service fee growth and that is kind of in the range that you would expect to see with the mobile broadband growing 15% sequentially.

Fred Ziegel - Soleil Securities

Okay. Two last quick questions, one on the platform side, where are we in terms of releasing iPass for iPhone and Blackberry? That is one question and secondly, are you doing anything on the consumer version? I do not see or hear too much about it. It is obviously available but what are your thoughts there?

Ken Denman

Okay, two answers to the two questions, Fred. First of all, I have been playing with data or prototype versions of both the iPhone and Blackberry clients in my office here within the last week, week and a half with some of our team that are working on those so we are kind of right before an official beta and in fact we may well use the consumer offering as sort of a second phased beta. That may be a place where we actually release it first to get more broad feedback. There is a little more tolerance over there on the consumer side than there is on our Enterprise side where we really have to be bullet proof most of the time before we put something into the market.

So we are close and I am looking at the back end of this year, back half of this year so think fourth quarter.

As regards to the second question and iPassConnect, we look at iPassConnect as a really good experiment for us and it is a live experiment, it is a commercial site to be sure but we are learning an awful lot. We are not spending a lot of dollars on customer acquisition and promotion and marketing, intentionally.

We have a critical mass of users. We are not going to go into numbers but we have had some decent uptick there given that we have not advertised really at all. All we have done is do a press release and then put it on our website. But we have that as a great laboratory to demonstrate that we can a, quickly scale up a platform to serve the consumer space. We can get feedback from that marketplace. We can test pricing. We can demonstrate that we can generate an acceptable margin in that space and that equips us to be prepared when we find the right partner who gives us the right go-to-market or distribution and e-store presence and branding. When we find that right partner or partners, then we will go to market with them with a shared investment model and not one that is going to tip our economics in the near term.

So that is really our strategy there. We have a platform. It has been developed with some great teamwork inside the business. It is very low cost and we are right now working on trying to find the partner or partners who have the brand that will allow us to go to market and establish a great amount of scale very quickly as opposed to trying to pay for that scale on our own nickel, which given our visceral focus on the Enterprise, the tight financials and the comeback that we are sort of experiencing here and driving here, we just we do not want to take on too many things all at once, so that is where we are at. I think that is a great platform and we are going to get to it but I want to get to that with a partner.

Operator

Your next question comes from Neil Weiner - Foxhill Capital Partners.

Neil Weiner - Foxhill Capital Partners

One, on regards to gross margin, can you walk me through how the gross margin can improve higher than 57% to 59% through the second half if you renegotiated with your US partner and Wi-Fi partners in Europe and why it is taking so long or why will it take so long for that to ramp up?

And that is the first question. The second question, can you tell us how much in new bookings came from your partners around the globe versus direct sales?

Frank Verdecanna

Certainly, I will start with the breakup of the indirect versus indirect. So as far as the new bookings go, I think it was pretty close to our existing revenue streams, which are about 60% direct and about 40% indirect.

And with respect to gross margins, we did indicate that we expected to be between 57% and 59% for the remainder of the year. We feel confident in those numbers because of the renegotiations we have had to date but also the expected renegotiations we can continue to do every quarter.

So it is not necessarily efforts in one quarter that changes the game. It is the ongoing efforts that we do really every quarter to renegotiate different agreements around the globe. So that has been an ongoing practice.

In the last quarter we did significantly change our mobile data pricing with that renegotiation with our largest mobile data provider and that is why you saw a pretty significant benefit within the quarter, being able to maintain our gross margin while losing $2.1 million of dial revenues at very high margins.

Ken Denman

I would also add, Neil that that renegotiation in quarter two, while it was very important and well executed and we continue to do various renegotiations around the world, on a regular basis that is kind of the underlying piece of our model. It is just that some deals are bigger than others.

But that, the particular mobile data deal that we renegotiated, we did not have that deal for the full quarter so I will leave it at that, but I will just say that we did not actually get a full quarter's benefit in Q2 from that renegotiation.

Neil Weiner - Foxhill Capital Partners

Are you finding that with the flat-rate pricing that the margin is not as large as you thought it was going to be with flat-rate pricing given usage? And two, how should we think about, in terms of going forward, say in '09 where gross margins can be given the driving down of network costs?

Frank Verdecanna

As far as the Enterprise flat-rate user versus usage base customers, what we are finding is a higher margin for the Enterprise flat-rate customers and again the real driver behind that is under the Enterprise flat-rate pricing, we are monetizing the off-net users on a per user per month basis.

On the usage base customers we are not monetizing the off-net user, so that is one of the significant drivers of why the margins are higher under Enterprise flat-rate and also we are charging a bit of a premium for the unlimited nature of that pricing model.

Ken Denman

And on the other part of your question regarding '09, we are targeting the 60% level that given where we are, we want to shoot for something that is realistic from this point and right now 60% feels realistic. And certainly we are going to try to drive that higher but right now we want to work on getting back 60%, so that is where we are focused. That is what we are focusing on for '09.

Neil Weiner - Foxhill Capital Partners

Do you feel that you have any pricing ability to increase price on flat-rate pricing out there?

Frank Verdecanna

I think over the last year we have shown that we do have the ability to increase pricing. In fact in July we did another price increase for our usage based customers on the broadband side for Europe destination with the exception of the UK. So we continually have opportunities where we do need to increase pricing to get to the right margin level for certain products and services. We have not yet increased pricing on the flat-rate side but I would say that is something that we look at and it is always a possibility.

Ken Denman

And I would say that from an execution standpoint, the way that works easiest is, and you do not always take the easiest road if you need to do something else, but the way it works easiest is to do that, that increase on a prospective basis as you go and sign new customers to change our list price, if you will. That is the easiest way.

Implicit in Enterprise price flat-rate pricing is some sense that that pricing is going to remain the same over the course of that contract. Even though we still have the right to increase the price, we leave that right in most of our deals. We are able to keep that right in there, but it is sort of an implicit promise that prices are not going to move.

But again, most customers do get it that if the underlying cost infrastructure changes, that is what our providers are charging us, if for some reason those costs went up or if the currency markets went against us in a big way, we have shown our ability to go back to our customers and talk with them about the necessity to change prices and we have been able to get it done.

Neil Weiner - Foxhill Capital Partners

So you have been able to get price increase since the euro strengthened against the dollar, the European flat-rate pricing?

Frank Verdecanna

Yes, well, not on the usage basis.

Ken Denman

We have only done it on the usage base side so far because of the reasons that I have just talked about. But I am not saying that we never would. I guess what I am implying is that if we needed to, we absolutely needed to and we felt it was the right thing to do, we would go there. So far we have been focused on the usage based customers as a way to really push them over to Enterprise flat-rate, give them more incentive to go there and that has been a pretty good model for us.

I am much more controversial if you go through the Enterprise flat-rate folks and try to get something done there but we are not contractually precluded from going there and if we really felt we needed to, we would. We have not felt the need to go there yet.

Operator

Your next question comes from Don Netter - Dolphin.

Don Netter - Dolphin Associates

Listen, when are you going to file your 10Q?

Ken Denman

Monday.

Don Netter - Dolphin Associates

Monday. Can you tell us what the percentage of withhold loads were from the election?

Ken Denman

Don, that information will be on the 10Q on Monday. Our standard practice, which we are going to maintain, if we include that information in the Q following the annual meeting and so in two business days everyone in the market will see that information at the same time.

Don Netter - Dolphin Associates

Given I guess the continuing significant lack of profitability and the share price where it is, can you tell the owners of the company specifically what the board is doing to address both of these issues?

Ken Denman

First of all I would say that the board continues to consider all strategic alternatives as they have been doing. The board is very aware of where we are as a stock price. They are aware of our initiatives, our programs and our business plans and business cases. They are considering all those things and in the normal process that a board should be undertaking, they are doing good, strategic reviews on a regular and ongoing basis, good strategic reviews of all our alternatives.

We obviously as a board feel the stock price undervalues the company so that should be very clear. I am sure you feel the same way and we are also focused on, as a management team, on driving those things, those items under the direction of the board, that will have the most impact on shareholder value from this perspective of driving fundamentals that will ultimately be reflected in the stock price we hope and believe, which will help shareholders whether that in the stock price or if we are responding to a bid from somebody who might come and express an interest in the company.

And as we have said before on almost every call, of course the board will consider any credible offers that come to the board regarding the company. The board will meet its fiduciary obligations.

Don Netter - Dolphin Associates

Has the company been working with a banker?

Ken Denman

The Board has been doing their work, as I said, and we are going to leave it at that.

Don Netter - Dolphin Associates

What is the EBITDA for the second quarter?

Frank Verdecanna

For the second quarter we are at about a million dollars.

Don Netter - Dolphin Associates

A million dollars? What was it in the first quarter?

Frank Verdecanna

First quarter was $1.5 million.

Don Netter - Dolphin Associates

What would you say the projection is, because you talked about dial-up getting to a level that is not going to have such a big impact on the company going forward, what would you say the projected EBITDA is for the remainder of the year?

Frank Verdecanna

Don, we have not actually given out any projections for that. Our feeling is that we do expect growth on the topline in the back half of the year and we do expect to have stabilized gross margin and manage the [off back] so I would say we would expect improvement there but not give an exact number.

Don Netter - Dolphin Associates

Well, I mean on one hand you talked about dial-up being less impactful and a lot of clarification coming through on the topline, controlling expenses. I would think that one of the themes that we have been concerned about is the ability for the company to give annual guidance of revenue and EBITDA and I would think that we as owners of the company just like to understand when you guys will be in a position to do that, and given the fact that dial-up is reaching a fairly low level.

Ken Denman

Well, I think that we will certainly take your comments under advisement. I also point out that while we, dial's at a fairly low level, dial erosion's still clicking along at a pretty good clip on a quarterly basis and while we would love to be able to sort of gauge that number specifically, we are not doing it yet.

The good news is from my perspective that at these rates dial will not be a factor in three quarters and so I think we get out to three or four quarters, dial's off the radar screen at least from the current rate of decline and while we will miss the margin there, I think it will be good news in terms of giving clarity and visibility, increased clarity and visibility of the business.

So I think it will be a good time to review annual guidance at that point but I would say this, as we look at quarter three, we got typical seasonality that we see in Europe, our fastest growing market, which causes us to say well, this will be a decent quarter but it is probably a flattish quarter, which is kind of reflected in our guidance and that is just I think good conservatism at this point given what we have seen historically around the third quarter. We just do not know what August, how it is going to play out.

And the fourth quarter steps up pretty nicely for a great bounceback based on everything we have seen, based on the continued good bookings and Europe being a bigger part of the business. Once people do come back from the holidays and Americans are traveling to Europe, we think we are going to see a pretty strong Q4.

So that is where we are at. We are still very shy, very cautious around dial erosion because of our inability to predict it at any high degree of precision but again the good news is that it is almost gone and we like the way the rest of the backend of the year steps up. And as Frank says, we think that we will see increasing EBITDA as a result through the backend of the year.

And Don, as always, thank you for your good questions and we will take the next question.

Operator

Your next question comes from of Kevin Dede- Morgan Joseph.

Kevin Dede - Morgan Joseph

Well, to all you folks, Frank, Tim, congrats on returning to sequential growth.

Frank Verdecanna

Thank you sir.

Ken Denman

Thanks Kevin.

Kevin Dede - Morgan Joseph

I was hoping you would not mind taking a little time, Ken, to just sort of peel the onion back a little bit on the Enterprise market as you see it in light of I guess what Cisco was saying and what you think the impact is on your ability to, I mean obviously you have kept your bookings pretty consistent here over the past two years quarter-to-quarter. I am just wondering what you see going forward due to the environment.

Ken Denman

So there is no doubt about it. We have seen the things that John Chambers talked about. We have seen it in terms of slowness of decision making and some deal slippage. So you can read that to say we actually, while we have done pretty well, we have done well with our bookings. We have been consistent in the ranges that we have talked about. We had actually hoped for higher levels of bookings and the good news is that the levels that we have accomplished, while lower than we expected, certainly stayed within the ranges of previous accomplishments.

Given that this is kind of a recurring revenue model where we have a 99-plus percent resign, that is what is allowing us to return to sequential growth.

We actually are feeling very, very good about the back half of this year for example on the bookings side, Kevin, I am happy to report. We think that we certainly do not believe that we fall south of where we are or where we have been from a bookings perspective and we think we have a good chance to walk up a bit. That is based on our pipeline, the fact that our backend pipeline has actually grown and the probability, if you look at the weighted probability of that backend pipeline and the corresponding dollar amount, we see growth in our sort of…we have committed levels, we have various levels of achievement that we model off of and our committed and best case numbers are increasing, or certainly they have increased for the back half of the year since quarter one.

So that all bodes well for us. So we do see that paying but we seem to muscling through. My hope is that it is because we are a mission critical service and as people have become less afraid or maybe gotten more immune to the overall economic doldrum then the fallout from the subprime and people being paralyzed, they have recognized that they need to kind of get back to business.

But, so that is where we are at. We are actually, I can express some encouragement and a little bit of optimism on the bookings side based on what I am seeing for the back half of the year.

Kevin Dede - Morgan Joseph

Now your Forbes 2000 list increased pretty nicely from the 417 level at the end of the year to 435. Can you give us some insight on some of the names that you have won there if they have allowed you at all to talk to them? And making the point being a mission critical solution?

Ken Denman

I do not have the list of names that have actually authorized us to mention their names so I apologize for that. That is something that I should have pulled and I did not.

Having said that, the thing that I want to kind of highlight in that group of names that you know that we are beginning to book in the Forbes Global 2000, and this goes back to a question that I think Fred might have asked, we are actually seeing a pretty high percentage of those Forbes Global 2000 come through our channel partners. So we are seeing some really good traction with some of those names you know, the Forbes Global 2000, out of channel partners.

And the nice thing about that is they can often close faster than direct deals because some of our partners have MSAs. They already have contracting vehicles or agreements with those large customers so the deals tend to move much more quickly through a contracting process if we are not in an RFP.

That has been one of the things that we have really enjoyed about seeing strong partners and I will just mention one that we feel great about and has done a lot of good work with us and that is Orange Business Services, both in Europe and in the United States. They have really adapted to our FlexConnect model and to our Enterprise teaming program and we are really making great hay with them.

I feel good. They have ramped as fast as any partner that we have ever connected with and so we are seeing that on both sides of the pond.

Kevin Dede - Morgan Joseph

And most of that growth is driving your mobile broadband growth. You said that was up what 15% sequentially to what $19.6 million?

Ken Denman

Correct. Frank said $19.5 million and it was up 15%.

Frank Verdecanna

It is almost all mobile office.

Kevin Dede - Morgan Joseph

Just from a technology perspective, a lot of chatter on the new laptop models including the Gobi and Ericsson module and I was just wondering if you thought that might be reflected in IT managers decisions for use and whether or not there is any way to tether that with iPass.

Ken Denman

Well absolutely, Kevin. In my role in particular, iPass, as well as John Charter's, our chief operating officer and Barbara Nelson, our chief technical officer, one of the things that I do on the road with customers a lot is talk about, listen to them about their needs, what they are seeing, what their paying points are and I spend a ton of my time talking with them about their vision for where we are going and what we are doing.

And that is part of our value proposition is to talk about and then deliver what the market needs almost before they really need it.

And so I have begun maybe a year ago talking about the 3G mobile data space and how that was going to evolve. And one of the key evolutions in the 3G mobile data space is that we are going to actually move away from the mobile data cards, which we are subsidizing right now.

But we think that market, the mobile data cards become irrelevant over time because just as the Banius became the Centrino of chipset and we moved away from PCMCIA cards for a Wi-Fi, we are going to move away from these cards including USB cards. They will eventually be embedded at a chipset level. That is what Qualcomm is working on with Gobi and Intel with the ultramobile PC chipset.

And this is really, really good news for iPass because what it does is it tends to make the OEMs less tied to a particular carrier, less interested in being linked to any particular carrier for connectivity for that device and it puts services like iPass in a much better position to be the service provider for service activation, authentication and etcetera.

And what we will do and what we already are doing, we already have the APIs from Qualcomm for the Gobi for instance, just as we are already working Intel and others on the Wi-Max side. We are already working on integrating our client at a software level with these new chipsets and drivers such that they will be seamless connectivity. You will not need a card and again, our value proposition in Enterprise is you will want to work with iPass because we will be able to activate or authenticate to almost any network whether it is 3G, Wi-Fi or Wi-Max and that is a very, very, very powerful proposition because IT managers do not have to sort of focus on buying mobile data cards or buying service from multiple carriers.

And if you think about how the IT manager works and lives, typically within a large Global 2000 IT shop, there are many cards and many carriers that they need to support to keep their user base happy. If iPass is the one that delivers that service, they integrate the iPass platform and we are providing them the 3G service, the Wi-Fi service, the Wi-Max service, we have really made their lives much, much easier.

So that is a fundamental value proposition for iPass going forward and that is why we like our positioning going forward. We think it actually gets stronger because of these fundamental technology changes that are taking place.

Kevin Dede - Morgan Joseph

I appreciate the commentary, Ken, greatly. I guess what I am still sort of hunting for is whether or not you are getting feedback from clients or potential clients on their choice of using that technology at this point or is it still maybe a little too early to tell.

Ken Denman

Everybody, well I will put it this way. This a classic cycle that I have seen many times and what I was trying to, where I started off with that conversation was when I go into IT organizations at this stage of a technology cycle, I might spend, in an hour-long visit, I might spend 30 to 35 minutes on what is coming and what is new if it is genuinely of interest to them after I listen to them for a bit.

And what I am seeing is that I am spending the kind of 30 minutes on the mobile data side with them very interested, asking me a lot of questions about that the Gobi chipset and other things that you just described.

So even though they are not buying yet, that tells me that they are preparing to buy. They are preparing, they are getting ready, they are getting informed and they think there is something there so they are doing a lot of testing with people like myself when they get a chance to chip away at me.

So I think the market is getting ready to buy and as you know, that those chipsets will become a reality later this year and into next year. My sense of this, my belief is that there will be heavy buying in this space.

Kevin Dede - Morgan Joseph

Okay. Very good. Frank, last question for you please, sir, on OpEx, you slid a little bit under the bar that we were expecting and I was obviously impressed you could hold costs down. I am just wondering what you think happens going forward here.

Frank Verdecanna

I think we stay in this range, Kevin. I think we have done a real good job of taking costs down in the business and I think we are at a level where I think we can scale this business, grow the topline without really growing the expense base.

Kevin Dede - Morgan Joseph

How about on the marketing side? That is one line that was up a little bit. I am thinking obviously you need to spend money to make it. What is your thinking there?

Frank Verdecanna

We have been really pushing for the last I would say 12 to 18 months on investing in the channel and that does enable us to do less marketing and less investment in additional on direct sales force, so I do believe we will be able to keep the sales and marketing line relatively stable and still increase the bookings.

Operator

Your next question comes from Ed Einbodin - W.M. Smith & Company.

Ed Einbodin - W.M.Smith & Co.

I was just wondering on sort of a high level, can you guys talk about some of the positives and negatives or I guess better than expectations or less than expectations that you may have seen in the channel partners and what they have come?

Ken Denman

In terms of positives, we have seen a couple of our more recent partners really get traction sooner. I think part of the reason for that is that John Charters and the team around the world have been a, supporting those particular partners very well. Our field sales team is really, we always had that mindset in Europe. I think we are getting it more and more in the US with recent changes that we have made where they are taking on the model of territory managers and really understanding that they can gain greater leverage by driving and supporting channel partners as opposed to sort of driving direct business on their own. So they are acting like general managers. And so that has been an evolution and John is doing a great job of leading that process.

But we are seeing, we have seen a couple of channel partners come up to speed much faster than in the past and I think that is just increased focus and execution. That has been a real positive.

If there is any negatives, I would just say that we have had some leadership changes that are ultimately going to be very, very positive in North America but we have restructured our North America sales force and whenever you go through personnel changes, especially at the VP level and the key VP levels and the key leader of worldwide sales, it takes a little bit of time as they do their investigation, their interrogation and put new models and new people in place.

So we have lost a little bit of time. We still performed I would say at an acceptable level but I actually think that now that that team is in place, they own the plans that they have put in place, they own the model, and I see a lot of enthusiasm from that team. I am expecting much better things in the back half of the year heading into '09 out of North America than we have seen in the first half.

So maybe a little off in [lightness] or softness in North America in the first half but we have made the personnel changes to change that dynamic.

Ed Einbodin - W.M.Smith & Co.

Okay, great. I appreciate the color and maybe, I do not know if I missed it or not, but can you guys talk about maybe a percentage of overall agreements if you will that come up per quarter that are negotiable or not?

Frank Verdecanna

On the buy or sell side, Ed?

Ed Einbodin - W.M.Smith & Co.

The buy side.

Frank Verdecanna

On the buy side we are definitely renegotiating a significant amount of agreements each quarter. Our typical buy-side agreement is between one and two years so you figure we have 500 network service providers so we are negotiating a significant amount of them each quarter.

There really is not any seasonality to that. It is pretty much a consistent clip of renegotiations each quarter.

Operator

Your last question comes from J.D. Abouchar - JRT Capital.

J.D. Abouchar - JRT Capital

First question is on sort of the channel direct versus indirect. Is there any difference ultimately in margins between the two?

Frank Verdecanna

The margin is relatively, our pricing different by channel partner depending on the level of volume and commitment they give to us so I would say in general the channel partner margins are probably a little bit less because they do take on some of the support function.

J.D. Abouchar - JRT Capital

And then when you talk about bookings on the just ballpark of $20 million a quarter, is that typically, we should look at that as two years worth of revenues or how should we quantify that?

Frank Verdecanna

That is a good way. Our typical agreement is between two and three years. I think the average right now is about 27 months so you can think of that $20 million over the next 27 months.

J.D. Abouchar - JRT Capital

And then just thinking about the on-net versus the off-net user, because the off-net is growing faster right now because we still have the dial erosion, margin profile, the typical user, how are they different and ultimately do we convert off-net to on-net or are they really separate and distinct markets for you?

Ken Denman

I will take on the first one which is on-net versus off-net, are they the same or they are typically different users. I would say that the on-net user is the user obviously that is touching or hitting our commercial fabric, our commercial venues around the world.

The off-net user is often more the Enterprise flat-rate user who is maybe a windshield warrior or even just a day extender. That is they tend to be hitting our network on their campus LAN or at their home wireless LAN or maybe some free networks that they see as they move around the town that they work and live in.

But their company sees the value of our service so they deployed it more broadly than the road warriors who we formerly tended to get our solution deployed to.

And we are getting, even though it is a smaller ARPU, we are getting a price per seat per month for those folks at some level. Now we are not monetizing all the off-net users yet, but we are increasing our penetration of that group from a monetization standpoint.

Obviously the on-net users you could think of probably as more like the road warriors and those windshield warriors who have learned to kind of find our venues as a way to get connected and then the off-net is maybe your typical windshield warriors or 'slash' day extenders.

So that is how I segment those two.

J.D. Abouchar - JRT Capital

Is there a conversion opportunity ultimately as broadband and wireless becomes more prevalent? Is that sort of the long-term game plan or are they truly distinct markets?

Ken Denman

I think they are, the conversion or the convergence opportunity is around the handheld form factor because we believe there is going to be a symbionic, increasing symbionic relationship between handheld and the notebooks and laptop computers that those people still carry with them, because they tend to do content creation and they cannot just solely live with a handheld.

So they will get some of their work done on handheld, so we see both of those segments having handhelds whether they are Windows Mobile 6.0-based handheld, Symbian handheld, based handhelds, REMs or who am I leaving out? Apple iPhone.

And that is why we are working so hard on the handheld space because if we can monetize that, which is to say that becomes absolutely a paid service to get that additional client for the handheld, it becomes sort of an Enterprise flat-rate plus model and it is an opportunity for us to get incremental revenue from both of those segments to have another client on another device that they can use the same credentials on to connect to the Wi-Fi infrastructure.

And of course all those handhelds are going to be dual mode either 3G and Wi-Fi or 3G and Wi-Max.

J.D. Abouchar - JRT Capital

And how would that work because I envision your on-net user typically 99% laptop. Maybe that is a misperception on my side so would I have both devices enabled, does the pricing go up? Is there maybe pricing goes down because I use my laptop less and my handheld more or how does that convergence work to our favor as opposed to possibly detrimentally?

Ken Denman

Our vision on that is that pricing goes up so in order to enable a second device that you can use with the same credentials, or even if you use it with another set of credentials, you have got to pay something incrementally.

And obviously the packaging would be for Enterprise flat-rate plus we give you that great deal for adding X number of handhelds in addition to the laptops that you are paying for.

So that is the first thought, and actually the model that we see in the market place is that people are using handheld to do that quick look at what they have coming in by way of email, voicemail or if they have got a good enough device to do a minimal level of Web browsing.

If they have to do any sort of significant data download or upload or any content creation, then they will go to their laptop. But the intermittent gratification or the immediate gratification or intermittent use of handhelds will become increasingly prevalent. They will not replace notebooks. That is why I mentioned this symbionic relationship and we are thinking a lot about how we can make sure that if you have that one account with iPass but the client on two devices, how can we make that very, very user friendly.

And so there is some interesting things that we can do, but that is how we see the market unfolding. Increasingly even the road warriors that carry laptops and notebooks are going to use a handheld on a regular basis but we want to make sure we are thinking about how we make the use of those two devices even more powerful.

J.D. Abouchar - JRT Capital

Final question is on the current data cards, you subsidize the card, which a normal carrier would try to pro-forma that out and call it a customer acquisition cost or something along those lines. Roughly, talk about that, how are you expensing that? Is that built into the gross margins or just is it amortized and is it a significant cost and can it become a significant cost if we get our subscriber growth going?

Frank Verdecanna

Sure. Today, J.D., for a two-year agreement we do fully subsidize the cards and we do have that built into our pricing model as far as the margin that we are targeting so we do build in the amortization costs.

It winds up on the network operations line on our income statement and it has been between $300,000 and $500,000 the last few quarters.

J.D. Abouchar - JRT Capital

Okay and that is…but are you expensing or are you amortizing that over the 24 months of the contract?

Frank Verdecanna

We are amortizing it for all customers that we have a track record with. If it is a new customer that we do not have a track record with and we do not know their usage patterns, we do expense it sometimes or if they are for trials, but for existing customers that we have a profit margin on, we do amortize those over the life of the agreement.

Ken Denman

In closing I would just touch a couple of quick points. First of all I feel good about our customer acquisitions and the fact that they continue at a solid clip. As I said earlier, we actually are cautiously optimistic about the backend of the year, despite the softness in the economy. We are seeing some pretty good things in our crawl charts around our pipeline and in probability of close.

So we will definitely be looking forward to hopefully even stronger performance the back half of this year and heading into next year. My goal of course is to break that $25 million gate that we have sort of been gated at here for a couple of years. And we think it is possible. We think the team around the world is gelling and our North America team is really beginning to pick up steam again.

Q3 is typically a seasonally weak quarter for us due to the European holidays' impact on mobile broadband and obviously broadband is a very mobile traveler-centric thought. But Q4 looks to be shaping up well or I should say, not just but, but I should say 'and' Q4 looks to be shaping up well. So the back half of the year should be solid, seasonality aside.

I would encourage you to review our underlying revenue growth rates of 7% sequential revenue growth and 34% year-over-year growth for the business, excluding dial. So if you take dial out of the numbers, you can go to our press release and go to the financial highlights and just do the math. Pull dial out of the topline and look at the growth rates of what is left and again, 7% sequentially and 34% year-over-year is a pretty darn good. It is a pretty darn good business and we feel great about the team is ability to backfill these revenues and we are seeing, as we saw this quarter, margins beginning to improve in our other lines of business and that is what gives us a lot of optimism about our opportunity to deliver profitability, greater levels of profitability as we head into '09.

Gross margins are a key focus and I am sort of beating that horse to death on this call but we really are all over it. We understand the importance of it. We always have. It is just that sometimes you have got to get pulled through the knothole as you go through the cycles of some of your new products being very early in their life. But we have a good history of introducing products and taking them from negative or low margin to higher margin and I believe we are demonstrating once again that we can get that done.

But we see clear opportunity to continue to improve here and we are going to be absolutely [inaudible] focused on that.

So I am not only seeing light at the end of the tunnel and in close I think I am beginning to feel a few rays of sunshine on my face so we will look very much forward to talking to you the next couple of quarters about our results.

Have a good evening.

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