Qumu Corporation
Q3 2007 Earnings Call Transcript

Published: 18 Oct 2007

[Operator:]

Thank you for standing by. Welcome to the Rimage Corporation, the thirdquarter earnings conference call. (Operator instructions). At this time I would like to turn theconference to Bernie Aldrich, President and Chief Executive Officer ofRimage. Please go ahead.

[BernieAldrich:]

Good morning and thank you for taking thetime to participate in our third quarter earnings conference call. Joining me today is Rob Wolf, our ChiefFinancial Officer who will review our recent operating results and somedetail. Also, with us are Manny Almeida,our Executive Vice President of Sales and Marketing and Dave Suden, our ChiefTechnology Officer. We will be pleasedto take your questions at the conclusion of our opening remarks. Since regulation FD prohibits us fromproviding any forward-looking statements unless they are simultaneouslyreleased to the public, we have provided financial guidance for the fourthquarter of 2007 in this morning’s release. It is important to understand that this guidance is subject to a numberof risks that could affect our anticipated performance. These risks are set forth in our filings withthe Securities and Exchange Commission which we urge you to review. Turning now to the subject of thisconference call, third quarter sales totalled $33.7 million. An increase of 36% from the $24.8 million inthe year earlier period. Third quarterearnings rose 40% to $6.2 million or 59 cents per diluted share from $4.4million or 43 cents per diluted share in the third quarter of 2006. Before briefly reviewing our third quarterresults I want to mention the new share repurchase authorization that we announcedin this morning’s release. Under the previous buyback program that wasadopted in July we repurchased the entire 500,000 shares that our boardauthorized. Through the newauthorization we can repurchase another 500,000 shares at prevailing marketprices in the open market or in private transactions subject to marketconditions, share price, trading volume and other factors. This program could be discontinued at anytime. Returning to our recent operating result,Rimage’s third quarter performance benefited significantly from increase salesof high-end Producer disk publishing systems. Our higher Producer sales resulted from two factors. One was anticipated, the other was not. The anticipated factor relates to the backlogof Producer systems that we had at the end of this year’s second quarter. As previously announced, we received two significantorders in the second quarter from major national retailers for Producer systemsand related multi-year maintenance contracts and replacement printer ribbons. One of these orders totalled $8 million butthe second was valued at $6.5 million. The large retail orders that we have received for our Producer hardwareover the past two years are an indication that our equipment has become theretail industry standard for the on demand publishing of digital data on CDs,DVDs and blue laser disk. Publishingcustomer photos on disk has been the initial application for most of thesystems sold into the retail market. This is a large market that we believe has considerable room for futuregrowth as do our medical and business service markets which utilize Rimagesystems for a broad range of applications that fulfil content delivery,audiovisual and archiving needs. Now I will turn to the financial guidancecontained in this morning’s release. Atthis time we are not anticipating significant orders from national retailersfor Producer hardware during the fourth quarter. As we have stated many times in the past, theroll out schedules of our retail customers are uneven causing our retail salesto fluctuate between quarters. However,we believe the fourth quarter outlook is positive for our distribution channelas well as for sales of consumable supplies and maintenance services. Given these factors, we are forecastingearnings of $0.27 to $0.32 on revenues of $24 million to $26 million for thefourth quarter of 2007 and in December 31st. sales and earnings at this level would make the final three months of2007 another period of solid operating results for Rimage. Thank you and now Rob Wolf will review ourthird quarter results and some detail.

[Rob Wolf:]

Thanks, Bernie. First, I will run through a few highlightsabout our third quarter sales. Recurringrevenues including sales of printer ribbons and cartridges, parts, blank CD,DVD media and maintenance contracts increased 28% in the third quarter of 2007and accounted for 43% of sales compared to 45% in the third quarter of2006. International sales increased 28%in the third quarter and accounted for 27% of total sales compared to 29% inthe third quarter of 2006. Sales from our European operation whichgenerated the majority of our international sales increased 28% in the thirdquarter while sales in Asian markets increased 24%. Currency affects increased worldwide sales by2% in the third quarter of 2007. Rimage’s gross margin was 49% in the thirdquarter compared to 45% in this year’s second quarter and unchanged from thethird quarter of 2006. Our third quartergross margin benefited from the increased sales of high-end Producer publishingsystems that we posted during this period. Reflecting our outlook, the absence ofsignificant retail related Producer equipment sales in the fourth quarter, ourgross margin for the final three months of 2007 was expected to be in the mid40% range. Moving down the P&L third quarterR&D expense came to $1.6 million up from $1.4 million in this year’s secondquarter and $1.5 million in the third quarter of 2006. This sequential quarterly and year-over-yearincreases in R&D reflect the impact of several product developmentinitiatives. R&D spending in the fourth quarter of2007 is forecasted to be at or near third quarter level. Selling, general and administrative expensewhich include stock compensation expense total of $6.2 million down modestlyfrom $6.3 million in the second quarter but up from $5 million in the thirdquarter of 2006. The year-over-year increase in SG&Aresulted primarily from further strengthening of Rimage’s sales and marketingorganization. We believe fourth quarterSG&A expense should be at or near the third quarter level. A third quarter income tax is thepercentage of pre-tax income was a normalized 35% compared to 31% in thirdquarter of 2006 when our tax rate benefited from a tax adjustment related totax exempt interest income as well as the reduction in the reserve for prioryears income taxes. For this year’sfourth quarter, we believe our income tax as a percentage of pre-tax incomewill be at or near the third quarter rate. Turning now to our balance sheet, Rimage iscontinuing to generate significant cash flows from internal operations. Cash and investments totalled $84.9 millionat the end of third quarter of 2007 compared to $86.9 million at the end ofthis year’s second quarter and $77.4 million at December 31, 2006. During this years third quarter,approximately $12 million of cash was used to purchase $500,000.00 Rimage sharesunder the completed stock buyback program authorized in July 2007. Stockholder’s equity came to $98.8 million atSeptember 30, 2007compared to $104.1 million at June 30, 2007 and $95.5 million at December 31, 2006. Now I would like to turn to call back overto Bernard Aldrich.

[BernieAldrich:]

I have to apologize as I was explaining ourresults for the third quarter. Iinadvertently missed one page of my comments. So just to refresh, I was explaining why our results exceeded theexpectations that had gotten into the retail orders that we have received orthe one order was at 8 million, the other was at 6.5 million and out of this14.5 million in retail orders, we recognized revenues for approximately $3.8million in the second quarter and $8.4 million in the third quarter related tothe system hardware and consumable supply components of both orders. The maintenance component of these orderswill be recognized over a multi-year period which started in this year’s thirdquarter. This amount was factored intoour previously issued financial guidance for the third quarter but we did notanticipate and what was not factored into our guidance was the strongly aboveplan performance of our distribution channel during the third quarter. Sales generated through Rimage’s US distributionchannel rebounded strongly in the third quarter growing by a stronger thananticipated 35% from the second quarter level. Producer revenues accounted for the majority of the total third quarterchannel sales. Our robust channel salesof high-end Producer systems pushed our gross margin to 49% from 45% in thisyear’s second quarter. One additionalfactor that benefited our third quarter sales results was solidly higher salesof consumable supply reflecting the growth of Rimage’s installed base of diskpublishing systems in retail other applications. As a result of these factors we were able tofar exceed our third quarter guidance. Again, I apologize for missing that buthopefully it is clear and I guess we are open at this time for questions.

[Operator:]

Ladies and gentleman at this time we willbegin the question and answer session. (Operatorintructions) Our first question comes from Chuck Murphywith Sidoti & Company. Please goahead.

[ChuckMurphy:]

Good morning guys.

[BernieAldrich:]

Good morning Chuck.

[ChuckMurphy:]

A few questions for you, first can you gothrough the sales for the Producer, desktop and consumables?

[BernieAldrich:]

What were you just looking at percentages,Chuck?

[ChuckMurphy:]

Yes, percentages or an absolute number.

[BernieAldrich:]

Percentages, if you look at third quarterof 2007, our Producer which includes our professional or just lab equipmentwere at 49% of revenues, desktop equipment was at 8% and then our recurringrevenue is at 43%.

[ChuckMurphy:]

Alright and correct me if I am wrong herebut it sounds like your tone has improved significantly since lastquarter. You know it sounds like a bigpart of that is the distribution and I am wondering what changed, why do yousound more positive?

[BernieAldrich:]

I do not know if our tone has changed. I think sometimes perhaps we have always beencautious and conservative in our guidance, perhaps sometimes more so than thenecessary but if you recall we do not operate on with backlogs here. We have to go out everyday. We have to go out and make our sales. The retail sector, while has significantlylarger opportunities even that one we have orders that is not always guaranteedthat the rollouts will continue as scheduled. There is a lot of other factors that enter in. There is a fair amount of uncertainty of whatwas going on both in the European and Asian markets and so I think we and againI should emphasize we also have strong performance out of our European andAsian markets as well in this quarter. This is one of those times where everythingkind of seemed to come together. We areconfident of what we see out there in the future. This is a digital world that we playinto. Our technology, our hardware andour software fits very well. Really, ifyou look at our business services and so often we talk about retail, we talkabout medical, we also have this whole component of business services whichencompasses our channel which covers verything from service bureaus to thegeneral office, to broadcasting, to education, to government, the religious andlegal and professional markets. It is abroad range of markets we are serving and the demand for the ability to archiveand distribute the information continues to be there and I think we saw a lotof that come together this quarter.

[ChuckMurphy:]

Do you think it is a matter of maybe youwere not as aggressive going into the quarter as you should have been or wasthere a change in customer sentiment?

[BernieAldrich:]

No, I do not think. I think it is also, you know people can holdback buying for so long. I think we haveseen to the first six months in the year there was definitely a degree ofcaution exhibited by our channel. Ithink that there is still some of that there. Perhaps like I said, I think when times are high you have to go out andwork all the harder. I think the sales arethere, we just have to go about it. Maybe we attack with a little bit more intensity today but I do notthink our partner base has not reallychanged and the applications in markets we are serving continues to be thosethat we historically address.

[ChuckMurphy:]

Can you give update on the movie on demandkiost. What we are thinking about thereas far as time frame on a rollout or consumable sales?

[DavidSuden:]

You are probably referring to the recentannouncement of our qflicks partnership.

[ChuckMurphy:]

That is correct

[DavidSuden:]

That is something that we are prettyexcited and enthusiastic about but we do not expect it to happen quickly. We are at the very, very early stages of thatmarket developing. There is still needsto be a significant amount of content made available. There has to be certain infrastructure built thatcan deliver that content to retail sales points and we are in the very earlydays of developing. So we do not reallyanticipate any immediate impact from that. That is more of a long-term opportunity.

[ChuckMurphy:]

And would you say that is more ‘09 or couldsee something by the end of ‘08.

[DavidSuden:]

I am guessing the most we would see in ‘08are some evaluations kinds of opportunities.

[ChuckMurphy:]

Okay, all right and my final question waswith regard to the medical business. Last quarter you said that some of the products were still going throughqualifications. Is that done with, is that business improved?

[DavidSuden:]

We are still going through qualificationsparticularly some of the new professional series line and that has someimpact. But that market still remainsone of our high profile markets and one that we continue to address. We justrecently added a new medical sales person in Europewho comes from that market and we will continue to focus heavily on that marketonce we have here.

[ChuckMurphy:]

All right, that does it for me. Thanks.

[Operator:]

Our next question comes from Greg McKinleywith Dorothy and Company.

[GregMcKinley:]

Thank you. Guys I was wondering if you could talk a little bit about yourperception of inventory levels in the dealer channel. I know in the first half of the year you hadindicated that maybe in hindsight there was some inventory that had been soldinto the channel late in ‘06 that was preventing a new product to be deliveredinto it in early ‘07. Can you give ussome color around how you see that inventory position today and maybe also helpus understand have there been any changes around the way you interact with youdealers to prevent that from recurring.

[Manuel Almeida:]

Good morning Greg, let me answer thatquestion for you. I will answer the lastquestion first. Yes, there has been asignificant change in the way we interact with out distributors. In fact, today we have assigned staff frominside of Rimage to each of our distributors that constantly track theirinventory level making sure that inventories are kept at the appropriate levelto service our customers, our resellers and our value-added resellers. So it is an important change andfocus. We went from very much focusingon sell in to very much focusing on sell through and it is beginning to pay offconsiderable dividends. So what we seeout in the market is very much adjusted inventories compared to the beginningof this year. There is no over inventorysituation currently at the distributor level and sell through continues toincrease quarter to quarter. So it is animportant change in focus.

[GregMcKinley:]

Yes. Could you comment around the recovery that you saw in the quarter? Was there anything specific you saw by end ofmarket that caused that or was it broad based? I mean was it business services, health care, government, anything thatstood out there or are there any large transactions that occurred thatcontributed to it?

[Manuel Almeida:]

There were no single large transactionsthat occurred in the quarter. However,the third quarter is always at least partially driven by the governmentbusiness because it is the end of fiscal year day of business. Certainly, there is uptake in GSA business inthe September time frame because it is the end of the fiscal year. That was there, but it was there a yearago. The part that we saw some strongcome back and is our business services area. You have to keep in mind that we make largecapital equipment. It could be as highas a $39,000.00 piece of equipment. So itis a fairly major capital decision to some of the IT departments. It takes time. We tend to work on a pipeline that can beanywhere from three months and nine months long. Obviously, you hope to emerge it all, butsometimes it takes longer than you anticipate. When that happens, of course, it affects the quarter. What we saw is it is all beginning to comeback together and couple that with a really strong renewed focus on the enduser. The customer that is making thefinancial decision to purchase the product and on sell through in general, itpaid off for us in the quarter.

[GregMcKinley:]

Yes, okay. Can you talk about a little bit about how you are evaluating, investingin the business from SG&A and R&D standpoint? Certainly that is the quarter we had somenice revenue successes after that lead time on the sale cycle but we have seenSG&A and overall operating expenses grow rather dramatically in reaching quartersand at times revenue growth has been solid and other times it has been a littlesofter than expected. How are you guyslooking at your SG&A dollars? Do youexpect those to stabilize or continue to grow or could we even see potentialreductions to SG&A depending on your outlook on the sales cycle. How should we think about that?

[Rob Wolf:]

I think if you look at our SG&A, if youlook sequentially, we have seen a flattening out there. However, what we will continue to do, iscontinue to invest in the sales area trying to place sales people in the properregions where we feel we maybe under penetrated and so we may see some slightgrowth in that area. R&D, we thinkwill continue obviously trying to invest dollars in that area as we continue toidentify new reasons for product development if it is trying to attack acertain market with a certain type of a product feature. We will continue seeing some spend in thatarea. However, obviously, we anticipatewith the additional sales ads that we will see continued sales growth from thatwhich on a percentage basis we would hope to keep relatively flat.

[GregMcKinley:]

Okay.

[BernieAldrich:]

I would like to add to that. I think our selling expenses and marketingexpenses as ae percent of SG&A should remain somewhat stable. I think we will see there maybe some shiftingof expenses. There maybe some shiftingfrom marketing programs and to more end to direct sale type expenses. We definitely know that this business is aboutbeing out in front of people. We willcontinue to add some field sales people here in the US. We will add additional field sales personnel in Europe. We will continue also in Asiaas that market develops. I think that is where you will see theinvestments made will be more along the lines in the selling arena, but forpeople that have direct impact on sales. We will continue to have invest in R&D, it is a new product,applications are really the key to any company’s role and we need to. As we continue to develop our product roadmap here, if you look at the applications, where we play into whether it iscontent delivery of the audio visual market is another entirely a real comingapplication force and archive. We aremore into the archive inside as we see some of the opportunities developedthere which in turn like I said when I talk about all the, if you look at thelarge cross section of business services, the markets that we play into willcontinue to drive a lot of what our product road map turns into and theapplications that we really go after.

[GregMcKinley:]

Okay. Thank you.

[Operator:]

Our next question comes from Steve Ryan. Please go ahead.

[SteveRyan:]

Good morning guys. A couple of questions. What was the stock option expense for thequarter?

[RobWolf:]

It is about almost exactly the same as lastyear’s third quarter.

[SteveRyan:]

And then cap-ex, what did you guys actuallyspend on that for the quarter?

[RobWolf:]

Right around $300,000.00

[SteveRyan:]

And you guys seemingly continue to generatea lot of cash from your working gap and having an extraordinary amount of cashflow and generating the quarter. How dosee that kind of trend in going forward? You still think you will be able to pull out cash out of your workingcapital or is it something that should be some of a drain going forward?

[RobWolf:]

We think we will. Again, look at third quarter. We had a record quarter in sales and if youlook at the pattern of those sales, they were actually front-end loaded, moreso the back-end loaded so we had time to collect on those receivables. So third quarter was a very strong quarterfrom a cash flow perspective but absent any repurchase agreement or anyrepurchasing of shares, we foresee continuing to generate cash.

[SteveRyan:]

In regards to the share repurchases, youguys were pretty aggressive right off the bat of repurchasing your shares aftergetting authorization last quarter. Imean, what is your sense, this quarter the stock actually trended up quite thismorning in testament to your good results but what is your appetite for buyingstock at higher levels than the average that you had in the last quarter?

[RobWolf:]

We are going to be just looking at it andwe are not going to take a real aggressive approach but we will be continuingto look at and see what the value is and determine whether or not we want to gointo the market but we cannot get into many details around where we are goingto be at.

[SteveRyan:]

Okay. As an aside, I am happy that you guys authorized another half millionshares but you guys had three million still left on authorization lastquarter. What happened there?

[RobWolf:]

I am sorry.

[SteveRyan:]

I was just kidding around to a certainextent. You guys spent $ 12 million outof the $15 million. You left 3 on thetable. You could have bought 3 extramillion shares in the low 20s.

[RobWolf:]

I guess I should not be in the market as aday trader.

[SteveRyan:]

No, you should not. Thanks guys.

[Operator:]

Our next question comes from JerryHeffernan with Lord Abbett. Please go ahead.

[JerryHeffernan:]

Good morning, gentlemen. Thank you very much for some reallyoutstanding results here. In regards toSG&A, I just wanted to ask about with the strong revenue line, I imaginethere are some people who are getting some bigger bonus checks or commissionchecks than initially anticipated. Hasthat been accrued for in the current period’s SG&A?

[RobWolf:]

It would be, yes.

[JerryHeffernan:]

Okay. So, you do true that up every quarter as per the results dictate?

[RobWolf:]

Correct.

[JerryHeffernan:]

Okay.

[RobWolf:]

Yes, it is a variable expense. Yes.

[JerryHeffernan:]

In regards to the well documented ordersthat you have received and just by making statement well documented on soundingfour shift as I do not have all the documentation which hold the 14.5 million,some of that came through on the second quarter and significant part came throughin the third quarter. Could you justremind me again, how much did we actually experience in the second quarter andwhat was experienced in the third quarter?

[RobWolf:]

Approximately four million in the secondquarter and approximately eight million in the third quarter revenuerecognized.

[JerryHeffernan:]

Okay.

[RobWolf:]

And then the remaining portion would be themaintenance revenues that would be recognized over multi year periods.

[JerryHeffernan:]

Okay. So, the stuff that we would recognize on as shipped basis, that is allthe way through of both of those orders as hereby complete?

[RobWolf:]

Correct.

[JerryHeffernan:]

Okay. Someone did ask about the medical business and if I could beg yourpatience, ask you to review that just a little bit more deeply. How much did we actually experience a revenuethrough the medical vertical in this current quarter and where do you thinkthat can go? Were you going in andreplacing a film system on an existing machine? I know that you are still getting clearances and approvals on the OEMsbut just that break up here and how you see that going out in ‘08 and ’09looking further ahead?

[RobWolf:]

I will answer the first question. We do not necessarily break out the revenuefor our medical divisions. It is verydifficult as we sell through the channel to get those figures. I can tell you that we did recognize somegrowth over the second quarter subsequentially within the medical market, butwe do not get into the detail of the revenue amounts per se.

[ManuelAlmeida:]

Just adding a little bit of color. It is not just film replacement anymore inthe medical market. I mean certainly,our attachments to packs, which would be primarily film replacement, we arefairly well-penetrated in the US. We still see some strong potential growth inAsia and in Europe. But there are many other applications. For example, electronic medical records arejust beginning to emerge. They havestarted to emerge in Franceand in Japan more rapidlythan in the US,but we think that is a market that has some very significant potential withinour medical applications. So we arestill seeing strong potential growth in the market. There are a lot of dynamics at play withinthe markets in the US. There are a lot of dynamics having to do withMedicare reimbursement that may ultimately drive business from film to CD. So it is a lot more complex business to justsay, wow, yes, we expect strong growth. But we still see a good potential in that market.

[JerryHeffernan:]

Okay. So to the extent that you are describing a still growing market and notgrowing as in buying more of the same but growing as in the number of differentways you are solving a problem here, is it fair to say you would expect prettysignificant growth in this for the next three to five years? Rob Wolf I do not know that we can define prettysignificant. We do view that there areapplications that offer us opportunities to experience growth and it is one ofour targeted markets that we are going after.

[JerryHeffernan:]

Okay great. Thank you very much for your time.

[Operator:]

Our next question comes from Greg Weaverwith Current Capital. Please go ahead.

[GregWeaver:]

Very glad to see the buyback and thecontinuation of the buyback, definitely agood use of your cash. Could you give mea little sense in terms of the salespeople that you are thinking ofhiring, is somebody out there today that is kind of “What is the goalthere?” and help me understand again are these quota carrying folks and how arethey paid given I guess you are doing fulfillments through the channel right?

[BernieAldrich:]

What we are talking about Greg ishistorically, we sell through a channel. We have salespeople who are out in the field calling on the value-addedresellers and the end-users that these value-added resellers sell to. And as I explain this large broad range ofmarkets under the business services umbrella, we see many opportunities out there,and it is very important for us to be out there in front of the customer. It is important for us to understand who thecustomer is and what is driving their buying habits. And so therefore, we have operated historicallywith approximately about 10 people in the field here in the US. We will continue and what we will do is as any business grows, thedemands get higher and you break some of those regions into smallerregions. We are not talking aboutdoubling our sales force. We are talkingabout in selected strong regional parts of the country, we will add maybe twoor three people this year in the US. In Europe, as that market continues todevelop there, we will expand there where we would most likely add a person in Eastern Europe very shortly. We will continue to add perhaps one or twopeople in Western Europe. The Asian market is again one that we havejust got started with within the last three years. We just recently placed a man in China and wewill continue to look at that market and place people as we see the businessdeveloped. I am not talking aboutputting 25 people on to this company. Wewill go upon in a pragmatic style but there is a definite priority here to getpeople in the field so we can be in front of that customer.

[GregWeaver:]

So everybody at this point is geographicfocused. I thought you are doingsomething on vertical specialization?

[BernieAldrich:]

No. We may have some people that workinternally there. Perhaps may have somemarket focus or application focus but for the most part we were geographicallyplaced. We need to be in that marketin. Our people, their compensation isheavily intended towards, they get paid for producing.

[GregWeaver:]

Okay. Well if you are talking to a VAR, I guess, how do you measure that,right? But if an end-user and a guybuys, that is pretty obvious but.

[BernieAldrich:]

I guess I do not understand the question.

[GregWeaver:]

If you are compensated on increasing sales,right? I mean it is just within yourregion. It does not matter how you getit done?

[BernieAldrich:]

Well it is not that simple. Because we cross sell into differentareas. We have certain team aspects ofour compensation plan as well.

[GregWeaver:]

Okay. How about on the exchange rate side of things? I know you are not a low pricer in the marketbut is this helping your foreign sales opportunity at all or causecompetitiveness?

[BernieAldrich:]

I think what we are seeing that obviouslythat it is helping us as I I stated that 2% net increase on our worldwide salesbut also does introduce some issues in terms of where people buy products and Ithink we always have to pay close attention as the pricing correct, revisit itand make sure that we make adjustments where necessary worldwide.

[RobWolf:]

And I think what you see Greg with the weakdollar and since everyone is so internet astute, it is very easy for them to goin on the internet and see what prices the products that are here in the U.Sand also look and see who selected partners are in open market products and thechallenge we face sometimes is managing and ensuring that our partners in theU.S. are not unloading product in Europe.

[GregWeaver:]

I got you. Okay, last question on the U.S. distribution channel that yourreferenced that was strong for you. Howbig is that in terms of revenue?

[BernieAldrich:]

Today, probably if you look at the U.Schannel we are probably at about 30% right now.

[GregWeaver:]

Total revenue?

[BernieAldrich:]

Yes, U.S. and that was a third quarter.

[GregWeaver:]

Yes, okay thank you.

[Operator:]

Our next question comes from RichardFeldman with Monarch Capital.

[RichardFeldman:]

Your quarterly results top line have beenquite lumpy and if one were to look out over an extended period of time, whattype of growth rate do you think is a fair one to say, this represents what wehave done in the past and also that we think we can continue or improve upon thisin the future.

[BernieAldrich:]

We cannot give that information out. We can go out to fourth quarter and that isit. We cannot really get beyond that to‘08 or ‘09.

[RichardFeldman:]

Would it be fair to say that the potentialsthat you see in aggregate at looking out for a couple of years to buy theirincrease or decrease roughly the same?

[BernieAldrich:]

I have been always a believer. Historical data is probably, you have to lookfor indicators on what you can do in the future. Everything we do, the investments we make areplanning as all of you towards the fact that we will continue to grow thisbusiness.

[RichardFeldman:]

Do you think the10% top line number isrealistic?

[BernieAldrich:]

I will not go into that.

[RichardFeldman:]

Okay, very good. Nice quarter and thankyou.

[Operator:]

Next question is follow up from GregMcKinley. Please ahead.

[GregMcKinley:]

Thank you. Could you just comment a little bit more on what you think contributedto European strength. Was it, do youthink it might have been leadership changes in your operations over there? Can you can just tell us what you think gotthat strength in that quarter. And then specifically I think earlier in thisyear you had introduced a number of new marketing initiatives, new marketingmaterials maybe even put some people under new marketing roles. Can you tell us how you think that is goingand how you are evaluating that investment?

[BernieAldrich:]

I can comment on what we have done in Europe with the changes that we have and a man by thename of Stefan Exner is our new managing director. And certainly I think themarket in Europe has much like the market herehas continued to evolve. I think everynow and then you need to have a fresh look at how you are addressing thatmarket looking at not only internally, but externally as well. We have spent a fair amount of time in thelast year really assessing where we are at, where do we want to be, looking atour partners. Are we addressing the right applications? Are we addressing theproper geographic markets? Do we have the proper people in place? We have been very successful in Europe. We did notmake a change in Europe because we werefailing. It is just part of theevolution of the business as the markets and business continues to develop, butI do believe that some of the success seen is the fact that we are becomingmore focused. We are establishing somevery clear priorities and we are hopefully over the course of the next 12months we will have ourselves positioned to perform even stronger there. As for what we have done in marketing perhapsI will let Manny comment a little bit on that and some of the projects andchanges there.

[ManuelAlmeida:]

Well, Greg as you know earlier this year westarted to change our materials. Changeour focus in developing much more sophisticated set of tools for our salespeople to be able to use. That is an ongoing effort, but we would say so farwhat we see is good results and it is not just marketing materials. For example, we undertook some fairlysignificant training efforts of our sales people moving them from transactionalbased selling to solution based selling here in the US. We think we are starting to see payback from that. Certainly strengthening the brand, we are nota consumer brand. I do not anticipate thatwe will continue to develop a lot of materials to brand our product. It is more of a focus of providing tools forour sales people to be able to really sell solutions rather than justindividual products.

[GregMcKinley:]

Okay. Thank you.

[Operator:]

At this time I am showing no additionalquestions in the queue. I will turn the callback with management for any concluding remarks they may have.

[BernieAldrich:]

Okay again for taking the time to join usthis morning and we look forward to talking with you once again at the conclusionof the fourth quarter. Thank you.

[Operator:]

Ladies and gentlemen, this does concludethe Rimage Corporation Third Quarter Earnings Conference Call.