Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from Analyst for James Breen – Thomas Weisel Partners.
Analyst for James Breen – Thomas Weisel Partners
I just had a couple of quick questions, one was I was wondering if you could talk a little bit more about the trends in gross margin and kind of how we should see those going forward and whether or not this level is kind of sustainable and if there’s any more room for improvement there? Also, if you could talk a little bit about churn, if you think we’re going to see a little bit of an elevated level because of the economy and such or if you expect maybe that it will kind of go back down a little bit more to your historical rate?
Arthur P. Becker
Jim, why don’t you tackle gross margins.
James W. Pluntze
If you look at gross margins we obviously seen a reasonable improvement over the fiscal year and really sequentially quarter-by-quarter. I think that mainly reflects as we said the fact that our professional service practice has declined as a percentage of our revenue so along with the revenue many of the costs are variable and we’ve been able to reduce those costs in line with revenue. It’s been a relatively low margin business so I think that’s fundamentally a significant portion of the margin increase. So, in a sense our hosting margins have been understated because of our professional services business. So, as we become more of a hosting company our gross margin has increased.
I think going forward we certainly have margin room. I think as we’ve talked about before as our hosting revenue grows, it’s fairly significantly accretive to margins, it’s incrementally EBITDA positive, that sort of 45% level and can be gross margin positive at even the sort of 75% to 80% level. So, as we grow our hosting revenue we certainly feel like we can expand our gross margins.
Arthur P. Becker
With respect to churn Jim?
James W. Pluntze
Churn was increased as we said to 1.7% during the quarter and if you looked at our range over the last say five quarters we’ve been in the 1% to 1.3% range and as I mentioned, the cause of us sort of getting out of that range were mainly the result of a couple of accounts that went under this quarter. We did see a few, and I mentioned on the call, a few customers in that sort of other group that sort of went out of business because of the economy. I certainly believe that with the effort we’ve undertaken in our account management group to reduce churn and other efforts that we’ve undertaken that we can get back to that 1% level. I wouldn’t shock me if churn was a little higher but we certainly aren’t planning for churn it’s just one of those things. We plan for maintaining our services with all of our customers and the economy is improving so my view is that along with an improving economy we’ll see improving churn.
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