Agilysys Inc (AGYS) 2009 Q2 法說會逐字稿

Good morning and welcome to the Agilysys fiscal 2009 second quarter earnings conference call. For your information, all participants will be in listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Before we begun, the company would like to remind you that all remarks today may include forward-looking statements based on current expectations that involve risks, uncertainties that could cause the company's results to differ materially from management's current expectations. Please refer to the risk factors which can materially affect results outlined in Agilysys' corporate filings with the Securities and Exchange Commission and the company's earnings release. (OPERATOR INSTRUCTIONS) This conference is being recorded. If you have any objections, please let us know by pressing star then 0 now.

Hearing no objections, I will turn the conference over to Mr. Martin Ellis, Chairman, President, and CEO of Agilysys. Mr. Ellis?

Thank you, and good morning, everybody. Our unaudited results were issued before the market opened and are currently available on our website. I'm pleased to introduce Ken Kossin, Senior Vice President and Chief Financial Officer who is with me for the first time today. Ken joined Agilysys in 2004 and prior to being elected CFO, Ken was controller for Agilysys. He also spent many years as Director, General Accounting at Roadway Express and as Corporate Controller at Lesco.

Let me start today by reviewing what has happened over the last five months. On June 16 we announced that our board of directors had authorized the company and JP Morgan to explore a range of strategic and financial alternatives designed to enhance value for our shareholders. In June we also announced that we had appointed Andrew Claiborne of MAK Capital, our largest shareholder, to the board. Andrew was also a member of the special committee created to oversee our strategic evaluation process. About month ago, following a five-month comprehensive evaluation process conducted in concert with JP Morgan, the board completed its review of strategic alternatives, concluding that the best course of action to maximize shareholder value is to remain as an independent company, realign cost structure and drive value creation. As a result, we have set a strategic objective of realigning overhead costs and company infrastructure with the current market realities. With an emphasis on reshaping and streamlining the company, it has become clear that we can no longer afford the corporate overhead that was anticipated to support our previous growth targets. As a result, we are restructuring corporate SG&A to improve performance and position the company for the future. As part of streamlining our cost structure, we are consolidating our Florida corporate headquarters into our Solon, Ohio offices. We expect this process to be complete by mid-December.

I'd like to take this opportunity to thank Art, Bob and Pete for their many years of service to the company We greatly appreciate their dedication and the many important contributions they made during their long and distinguished careers with Agilysys. As part of this management realignment, the leaders of our three operating segments, HSG, RSG and TSG will now report to me. All three joined the company via acquisition and are acknowledged industry leaders in their respective markets. Tina Staley, who heads up HSG joined Agilysys in 2004 through the acquisition of Inter-American data. Paul Civils, who leads RSG, joined Agilysys in 2003 through the acquisition of Kyrus Corporation, and Tony Mellina, who leads our TSG group joined Agilysys in 2007 through the acquisition of Innovative. Our three businesses are very well positioned in their respective markets and continue to build outstanding potential for the future. However, our task at hand requires that we refocus our corporate strategy and cost structure to ensure that we are more streamlined and are more competitive to take advantage of future opportunities.

We have three key objectives that we're focused on. The first is to exit non-strategic investments and allocate our resources to businesses with the highest returns. Secondly, to drive cash flow from operations and third, to reset cost structure and improve and grow profitability. With the focus on the business and successful execution against these three objectives, we will generate value for our shareholders. As part of focusing on our existing business, we're set about insuring that we devote resources to what we do best and are exiting investments no longer strategic to the company. On October 21 of this year, we signed an agreement to sell our 20% ownership stake in Magirus, back to Magirus for $2.2 million. We completed the sale this past Tuesday. In 2000, we had invested $10.6 million in Magirus to acquire a 20% ownership stake. Including a dividend of $7.3 million we received in July and a $2.2 million from the sale of Magirus this week, we have received a total return of $14.3 million with $9.6 million of that having been received in the last 90 days. We're also currently evaluating other non-core investments. The company is currently exploring divestiture opportunities for its Hong Kong and China operations. Agilysys acquired the Hong Kong and China business of TSG in December 2005. The assets and liabilities for these operations are currently recorded as held for sale on the company's balance sheet.

On the investment side, we continue to aggressively develop Guest 360, HSG's next generation property management solution which is recognized as best new technology at HITEC 2007. The company plans to complete development and launch Guest 360 in fiscal 2010. The product is on target for beta testing this year with Hutton Hotel in Nashville, Tennessee, a 250 room upscale property. A key objective for the company is to focus on driving cash flow. We will achieve this by increasing our efficiency, managing our segments to target profitability and aggressively managing working capital. As of September 30, we had had $57.5 million of cash on hand, an increase of $28 million over cash of $29.5 million reported in June. The increase was primarily due to a $3 .6 million tax refund, a $7.3 million dividend from Magirus and approximately $22 million in cash flow from operations and changes in our floor plan financing.

As of October 31, the company had approximately $86 million in cash on hand. The increase from September to October is primarily due to strong receivables collection. While we are very pleased with the improvement in the cash on hand in October, cash balances will vary from month to month due to timing of receipts and payments. As of November 19, we had approximately $18 million of our cash invested in the reserve's primary fund. As has been widely reported, the primary fund is working with the SEC to liquidate the fund. However, timing of liquidation is uncertain at this time. The company remains debt-free. However, as of October 17, the company's ability to borrow on its credit facility was suspended due to the company's failure to timely file its annual report with the SEC. We are currently working with members of our bank group to explore alternative financing arrangements. Thirdly, the realignment of our expense structure provides for a more efficient and streamlined organization that will allow accelerated decision making in these fast changing markets. In addition to the cost reduction initiatives initiated earlier this year, we are focused on reducing corporate infrastructure and segment costs. The management reorganization and other corporate cost reductions executed in the past four weeks have resulted in $8 million in annualized cost savings. The $8 million in savings includes the elimination of corporate level positions and the consolidation of our headquarters from Boca Raton to Cleveland. The company currently expects to report a restructuring charge of approximately $9 million associated with this reorganization. These savings are over and above the cost reductions announced in June this year. As previously announced in our fourth quarter earnings release on June 2, we implemented a cost savings program that resulted in full year net expense savings of approximately $14 million. Together with the additional $8 million in cost savings just discussed, total cost savings to date are approximately $22 million. These cost saving actions consist of $11 million in the corporate segment, $10 million in TSG and a million dollars in HSG. We continue to review cost structure to ensure that we better match our expenses to the current revenue and broader market conditions.

Before we turn to our second quarter results, let me spend a few minutes on our fiscal 2008 financial statements and the filing of our 10-K. We have reported over the past five months that we have been unable to complete preparation of our consolidated financial statements for the year end March 31, 2008 due to open accounting matters relayed to the company's investment in Magirus. As a result, we've been reporting summary financial information until our financial 2008 financial statements are complete. The divestiture of our investment in Magirus will allow us to complete our orders for the fiscal year ended March 31, 2008, and we expect to release our audited financial statements by early December. As far as filing the 10-K is concerned, we are required to include Magirus audited financial statements with our 10-K. We are currently in discussions with the SEC about the process for filing our 10-K given that we have sold our investment in Magirus and have no further access or influence over the company.

Let me turn to the quarter just ended. We continue to be effected by the broader weak macro economic environment and general industry-wide slowdown, particularly in our technology solutions business. However, notwithstanding the overall softness in demand, we generated meaningful improvements in profitability in the second quarter. Before I continue with the review, let me clarify that since we do not have a reconciliation to net income, any reference to EBITDA in this discussion or in the questions is based on operating income plus depreciation and amortization. Revenue for the second quarter decreased $11.6 million -- 11.6% to $170.9 million compared with $193 million in the second quarter of last year. Fiscal 2009 second quarter revenue from hardware products was $121.8 million, down 15.4% from a year ago. The decrease in hardware sales was primarily due to soft demand for server and storage products. Software revenue was $14.4 million, down 1.4% year-over-year, and services revenue was $34.7 million, unchanged from a year ago. Gross profit for the second quarter was $50.4 million, or 29.5% of revenue compared with 21.9% a year ago. The increase in gross margin was due to higher sales of proprietary software and rebates compared with the prior year. Selling, general, and administrative expenses, excluding restructuring for the second quarter, was $52.8 million, or 30.9% of revenue, compared with $45.6 million or 23.6% of revenue in the same quarter a year ago. The $7.2 million increase in SG&A year-over-year is primarily due to SG&A from acquisitions of ETEC and Triangle of $1.8 million, which included incremental intangible amortization of $500,000. Incremental intangible amortization for the company of $2.6 million and an increase in the bad debt provision of approximately $1.5 million due to current weak market conditions. In addition, the company incurred approximately $500,000 and $1 million dollars in exploring strategic alternatives in the quarter and year-to-date, respectively. Consolidated depreciation and amortization for the quarter was $7 million compared with $3.6 million a year ago. Operating loss for the quarter was $2.9 million compared with a loss of $3.3 million in the second quarter of fiscal 2008.

Let me take a moment to briefly comment on our current evaluation of goodwill and goodwill impairments. Based on a combination of factors, including the current weak economic environment, our recent operating results and a significant decline in our market capitalization, applicable accounting guidance requires that we perform an interim goodwill and trademark impairment analysis. As a result, the company -- as a result, the company's current market capitalization is below its book value, and we are compelled to write off goodwill and trademarks recorded on the balance sheet. We expect to finalize the amount and timing of the impairment shortly and in the process, expect to record a non-cash write off of up to $290 million. While the past three-quarters have been tough, I'm very pleased that even in a quarter with softer sales than March and June, we were able to improve EBITDA. After having reported an EBITDA loss in our prior two quarters, we turned the corner and reported positive EBITDA of $4.6 million in the September quarter, a $6.2 million improvement over the first quarter. As a company, we were clearly distracted and our performance was impacted by exploring strategic alternatives over the past five months. We have renewed energy and a focus and look forward to generating sustainable improvements in EBITDA. Given the challenges of many of our competitors, we are well positioned with a strong balance sheet and the financial flexibility to compete effectively, seize market share and drive shareholder value. With that, let me turn the call over to Ken to review the segments and the balance sheet for the quarter.

Thank you, Martin, and good morning, everyone. Starting with the Hospitality Solutions Group, in the second quarter of fiscal 2009, HSG recorded revenue of $23.1 million, down 2.1% compared with $23.6 million in the second quarter of 2008. Excluding $1.8 million in revenue from the acquisitions of Etec and Triangle, HSG revenue was $23.1 million. Lower sales of HSG's legacy property management software in the quarter accounts for the year-over-year decline. Gross margin was $14.9 million, or 64.5% of revenue compared with $12.7 million or 53.7% of revenue in the same period a year ago. The increase in gross margin was due to higher software sales as a percent of total sales. Depreciation and amortization for HSG was $1.9 million in second quarter of 2009 compared with $1.8 million in the second quarter of 2008. SG&A increased $2.9 million over the prior year. The increase was primarily due to $1.8 million related to the acquisition of Etec and Triangle and $0.6 million of incremental development costs associated with Guest 360, HSG's next-generation property management solution. Also included in the quarter was incremental bad debt expense of $1.2 million. Operating income was $0.2 million in the second quarter for HSG compared with $0.9 million a year ago. Operating income plus depreciation and amortization was $2.1 million in the second quarter compared with $2.7 million in the second fiscal quarter a year ago.

Moving on to our Retail Solutions Group, in the second quarter of fiscal 2009, RSG recorded revenue of $29.9 million, a decrease of 10% compared with $33.2 million in the same quarter a year ago. The decrease is primarily due to lower volume of point of sale hardware and implementation services in the quarter. Gross margin was $6.2 million or $20.8% of revenue compared with $6.3 million or 18.9% of revenue in the same period a year ago. The increase in gross margin percent was due to lower volume of point of sale hardware. Depreciation and amortization for the quarter was $0.1 million, unchanged from a year ago. Operating income was $0.7 million in the second quarter fiscal 2009 compared with $2 million in the second quarter of fiscal 2008. Operating income was down versus the prior year as a result of increased compensation expense and an increase in bad debt provision of $0.5 million. Operating income plus depreciation and amortization was $0.8 million in the second fiscal quarter compared with $2.8 -- with $2.1 million in the second quarter a year ago.

The Technology Solutions Group excludes both Hong Kong and China operations resulting from both periods as a result of operations being classified as held for sale. In the second quarter of fiscal 2009, TSG recorded revenue of $117.9 million, down 13.6% compared with $136.5 million in the second quarter of fiscal 2008. Softness in demand for IT products was broad based, but was partially offset by higher sales of some products. Gross margin was $28.7 million, or 24.3% of revenue compared with $23.5 million or 17.2% of revenue in the same period a year ago. The increase in gross margin is due to a favorable product mix and higher rebates. Depreciation and amortization for TSG was $4.1 million in the second quarter of fiscal 2009 compared with $0.6 million in the second quarter fiscal 2008. The increase was due primarily to intangible amortization. Operating income was $7.5 million in the second quarter of fiscal 2009 compared with operating income of $3.9 million a year ago. The increase is due to higher selling margin and rebates, along with lower compensation costs due to cost-cutting executed in the first quarter fiscal 2009, including the restructuring of the unit's professional services go to market strategy. During the second quarter of this year, TSG consolidated its professional services management and delivery groups and will continue selling specific proprietary professional services, including identity management, security and storage virtualization. Operating income plus depreciation and amortization was $11.6 million, or 9.8% of revenue in the second fiscal quarter compared with $4.5 million or 3.3% of revenue in the second fiscal quarter a year ago.

Finally, in our corporate segment, operating expenses were $11.9 million in the second quarter of 2009 compared with $10.2 million in the same period for fiscal 2008. The increase in corporate operating expenses was largely due to restructuring costs of $0.5 million and higher professional fees of $0.3 million. Depreciation and amortization was $1.1 million in the second quarter fiscal 2009 compared with $1 million a year ago. Stock compensation cost was $0.4 million in the second quarter compared with $1.4 million in the prior year. Operating loss was $11.3 million in the second quarter of fiscal 2009 compared with an operating loss of $10.1 million a year ago. We expect the executive management realignment that Martin mentioned earlier to reduce corporate expenses by $2 million per quarter. In addition, we have plans for additional cost saving measures.

Now I would like to turn briefly to the balance sheet. At September 30, 2008, accounts receivable were $135.4 million, a decrease of $21.3 million from $156.7 million at June 30, 2008. The decrease in receivables is due to the overall decrease in sales we have experienced during the quarter and a 6.3 day improvement in DSO to 72.6 days at September 30, 2009 from 78.9 days at June 30, 2009. Accounts payable combined with floor plan financing were $110.6 million, an increase from $108.7 million at June 30, 2008, which resulted in a 9.6 day DPO improvement sequentially. DPO increased to 83.8 days at September 30, 2009, from 78.9 days at June 30, 2009. Inventory was $24.8 million at September 30, compared with $24.1 million on June 30. With that, I will turn it back to Martin.

Thank you, Ken. Before we take your questions, let me briefly review our outlook for the remainder of the fiscal year. As previously announced for October 2, the company revised its revenue and adjusted EBITDA guidance for fiscal 2009. However, due to the unprecedented uncertainty in the macro economic environment, the visibility into demand for the quarters ahead is much more limited than normal. As a result, the company is suspending revenue guidance until conditions stabilize. We have revised our adjusted EBITDA guidance and now expect adjusted EBITDA of approximately $20 million, which excludes restructuring charges and any goodwill impairment charge we may take. We expect to generate adjusted EBITDA of a loss of $1.6 million in our first quarter ending June 2008, positive EBITDA of $4.6 million in our second quarter, between $9 million and $11 million in the third quarter, and between $6 million and 8 million in the fourth quarter. We also expect cash on hand at March 31, 2009, to be between $60 million and $70 million. The macro economic environment remains challenging. However, we are fully committed to insuring that we remain profitable in this difficult economic environment and that we have the financial flexibility to execute and compete in a market where we believe we'll have significant opportunities to grow market share. With that, we'll open it up for questions.

(OPERATOR INSTRUCTIONS) If you decide you want to withdraw your question, please press star 2 to remove yourself from the list. Our first question comes from Matt Sheerin of Thomas Weisel Partners.

Yes, thanks. Hello, Martin.

Hi, Matt.

So, I guess just a first question, I understand why you are not giving specific revenue guidance, because of the disability issue that we're seeing from everybody, but obviously on your EBITDA guidance, you've expecting -- you've got internal budgets, certainly. Are you seeing any trends that suggest there's still some seasonality in terms of -- particularly on the IT side, customer spending patterns, year-end budget flush and that sort of thing, or is that completely out the window?

Our forecast still has seasonality improvements included in it for December, although at this point, December seasonality or changes sequentially are not as robust as they have been in the past.

Okay. So you are seeing less than seasonal trends with some seasonality?

We're seeing the seasonal improvements, but probably not as significant as it has been historically.

Okay. Then your guidance on the cash position, potential cash position at the end of the March quarter of $60 million to $70 million, you can back in there by looking at your cash position now and then also your projected EBITDA, but I know the receivables will spike up as they normally do in the December quarter, correct? So it looks like, just backing into that number, that receivables won't go up as much as they normally do, or am I -- is there something else there going on?

No, in terms of guidance for cash, what we've done was started out with our balance at the end of September, had a look at the forecast over the next couple quarters and made an assumption with respect to profitability and changes in DSO and payables over the next two quarters. So that the end of the fiscal year it accounts for sort of changes in profitability for the next two quarters, plus reasonable expectations for working capital. As far as the December quarter is concerned, there will be an increase in receivables sequentially given that we expect seasonal increase in sales and as a result, working capital should grow in the December quarter as it historically has done and then release to cash in our fourth quarter. So we expect to see some increase in working capital at the end of December.

Okay. Then you talked about the credit line issues right now regarding your 10-K. When do you expect to -- is there any sort of time line when you expect to complete the 10-K and the financials?

From a financial statement standpoint, we expect to complete the audit and have financial statements available in early December, and there two are components to this. We will be able to provide audited financials that effectively complete with respect to everything except the electronic filing with the SEC. In other words, we can share those financial statements with anybody. We can print them, mail them, put them on our website. There is however, a requirement that in filing the 10-K with the SEC, that we attach Magirus audited financial statements, and given that we no longer own our investment in Magirus, we're in discussions with the SEC about the process for filing our audited financials given that we won't have Magirus' audited financials. So our financial statements will be audited, they will be available for everybody. The technical issue of filing the 10-K with the SEC is what we're discussion at the moment.

So if you can't technically file it because of that Magirus issue, you still won't be in good standing with the creditors on the -- or rather the line of credit?

We'll be in good standing with respect to providing financial statements, but there's also a requirement of being compliant with our listing requirements, and so that's something that we have to deal with.

The question is, will you be able to borrow or tap into those line of credits in early December?

Matt, at this time, probably not, because we're in discussions with the bank group about the structure of our credit agreement. The fact that we weren't in compliance, given that we haven't provided financial statements has effectively opened up the credit agreements for discussion, as obviously, the overall credit markets have changed and pricing the credit agreement is very different to pricing of facilities today. So at this point, I'm not able to provide guidance on exactly how the credit agreement may be restructured, but we're having a conversation with our bank group about how the credit agreement may be restructured, given the current environment.

Okay. Then just lastly, regarding that, is the goodwill impairment charge, will that trigger any additional issues related to the line of credit?

Yes, it will, because one of our covenants is a net worth covenant, and so the write-off of the goodwill will obviously reduce retained earnings and even though it's a non-cash charge against retained earnings, the specific formula for dealing with net worth will be impacted by that write off, and so that will be an additional discussion with the bank group.

Okay. And what is the line at right now? What was it at?

Zero. We have not drawn anything under the line.

But what is the --

The total facility is $200 million, and it had significant flexibility for making acquisitions built into it.

Okay. Thanks a lot.

Sure.

Our next question comes from Brian Kinstlinger of Sidoti & Company.

Thanks. Martin, can you give us -- is there seasonality outside of the IT business in the hospitality business and the retail business, and given hospitality, especially in the Vegas-like places as well as the retail world is kind of tough, will we see further declines probably from where we've seen in the second quarter compared to the first?

The most significant part of seasonality is in the technology solutions business. There is a little bit of seasonality in our hospitality solutions business, but if you look at the mix of products and services in hospitality, a large portion of revenue there is software maintenance revenue. Then in addition to that, you've got implementation services and those types of revenue streams, particularly on the software maintenance, are independent of seasonality. Where there is a little bit of seasonality is maybe on additional hardware sales or on sales that are being closed out at the end of the calendar year. So we expect a little bit of seasonality in hospitality. In the retail business, generally less seasonality, although there are often customers that look to make use of year end buying discounts to purchase product for the year ahead, but probably less seasonal than some of the other parts of the business. In addition to that, obviously, the holiday season is a key season for retailers as they have their busiest couple of months of the year and so from a services side, that generally is a period where retailers are focused on their business.

But with the bankruptcies going on and the difficulties in retail, and you just saw, I don't know if it is sequentially even that important, but we only have that sort of $38 million in revenue and retail at $30 million. Will the seasonality be offset by the weakness in the sector and we might see retail revenues come down related in December?

No, in fact, in our retail business, if you look at the first quarter, revenues were very strong in retail in the first quarter. Our sales can be a little bit lumpy from quarter to quarter. There's certainly a volatility in sales given the potential size of a sale with a particular customer, our first quarter was very strong. Second quarter was pretty close to expectations, so if you have a look at our performance year-to-date, we're pretty much on track with our expectations in the retail business for this year. Our customer base in that market includes a number of supermarket and grocers and that part of the retail market is still pretty stable, given, obviously, the products that those companies sell.

The $20 million adjusted EBITDA guidance, I totally agree with the first caller that it's difficult to give a revenue assumption in this market, but I guess it seems a tad strange to give EBITDA guidance given there could be a wide range of revenue. It's got to be based on some assumptions to get to those levels with the expenses being cut. How is that formulated? Is there a number and you are at this point, given the market, not comfortable sharing that range, or is that sort of a tight range, and that's where you would end up in that tights range? Does that make sense?

We've tried to be as transparent as possible on performance for the year. Revenue guidance is tough at this time. It moves around on a weekly basis, based on expectations. As for as EBITDA is concerned, it's tied into expectations with respect to the top line and in addition to that, we obviously have included the benefit of the cost savings that have been executed in June and then again those now in the last four weeks and doing some fairly detailed work on our cost structure for the next two quarters. So the variability in EBITDA picks up variability in revenue, based on our current forecast at this time. From a cost structure standpoint, I think we've got a reasonably good idea as to what cost structure looks like for the next two quarters. However, on the revenue side, we just have a significant amount of volatility in expectations for customers from month to month as opportunities are there, get scaled back, come back on the opportunity pipeline and probabilities of close change. So we're struggling a whole lot more with the revenue line at the moment but I think on the cost side, where we have some control over the outcome, we've got a much better understanding, and then guidance for the year effectively reflects uncertainty about revenue, but at least reasonable understanding of what our cost structure will look like.

And the second quarter, is that fully reflect since the customer made in June those first round of cuts, and in the second round of cuts of costs, will that fully come out of your segment called corporate overhead, where we'll just see a drop-off of almost $2 million since it was in the middle of the quarter, or when will we see that full $2 million come out? Was that the March quarter?

Yes. The cost cutting that was executed in June, you will see come out in the December quarter fully and then in March. The cost cutting of the last four weeks, you will see completely out of the business in the March quarter, but the entire $22 million that we referred to is not all corporate related. If you go back to my comments, about $11 million of that is corporate, about $10 million comes out of the cost structure of TSG and about $1 million comes out of HSG.

Right. That was 22, but in the March quarter, it is going to be $2 million straight out of corporate overhead, that sounds like. You had the executives as well as the facilities. That's straight corporate overhead.

Yes, 2 million out of corporate.

And in the December quarter, you still haven't fully reaped the benefits of that first 22, so we are going to see costs come out in different pieces of business. Is that accurate, or is it fully reflected in the September quarter, all the cuts?

No, it's not fully reflected in September. Those cost-cutting actions from early in the year and the most recent will it not be fully reflected in December.

Okay. Can you give us a sense of what pricing is like out there with fewer deals, then in addition, related to that, are there distributors or suppliers trying to move downstream given the weakness in their business that are trying to all of a sudden address smaller customers that they may not have addressed before?

I'm not able to comment on distributor business strategies. From our standpoint, it's obviously a competitive market environment at the moment. Everybody is looking at managing costs, and so there's certainly competition on the pricing side. However, we've had, depending on the mix of hardware, software and services that we've sold, we've had good margins in sales with customers. I think it ultimately becomes more of a customer-specific issue based on what the solution is that we're selling and our mix of hardware, software and services. However, given the overall macro economic environment, there's certainly -- probably greater pressure on prices now than there was a year ago.

Okay. And my last question is, the cash you mentioned as being held up in the fund, has that been reclassified as a long-term investment or is that part of your $57 million in cash and do you have to do anything on the balance sheet with that cash?

It's part of the $57 million at June 30 and it's part of the $86 million at October 31. We obviously continue to track the reserve fund and its updates on liquidating that fund and if status changes, we will potentially classify it differently. We have also explored alternatives to liquidate it if we need to or if we want to, and so we have other alternatives to liquidate if the we see the need to.

Thank you.

At this time, it appears we have no further questions. Oh, actually, we do have one follow-up from Matt Sheerin of Thomas Weisel Partners.

Yes, Martin, I just wanted to get into the cost cutting. I'm not sure if you -- I know you said there's additional cost cutting efforts going on, but could you be more specific? I mean, is there a plan B and plan C if revenue continues to fall off with the market and sales?

Well, we've certainly been fairly aggressive in the last four weeks. We've had a look at additional cost cutting, and there is some realignment of cost structure taking place right now. We haven't communicated how much that is or what it will be, Matt, but obviously, given the overall macro economic environment, our objective is to ensure that cost structure matches the overall demand in the market and to ensure that we remain profitable and competitive in this market. So at this point, I'm not in a position to share any additional targets, but our objective is to ensure that we're profitable and that cost structure is aligned with overall demand and revenue of the company.

Okay. And then just a question about your board and the make-up of your shareholder base. You've got your largest shareholder now is active on the board, and the second largest shareholder has filed some letters indicating that it wants to be active and I believe has put up a slate of directors. Where does that stand now? What is the board doing in terms of considering or changing the makeup?

We've had conversations with Ramius about their nominees and their desire to nominate a slate of directors. We're in what I believe is constructive discussions regarding their proposed nominees. At this time, the board is evaluating its skill sets and needs for managing and overseeing the changes that are taking place in the company as well as dealing with the overall macro economic environment, so we're in the process of evaluating the types of skill sets that we need. And that's probably about as much as we can share at this point, Matt.

Okay. Thanks a lot and good luck.

Thank you.

At this time, there are no further questions. I would like to turn the call back over to our conductors for any closing remarks.

Thank you, Ryan. Well with that, thank you very much, everybody, and we look forward to speaking with you again next quarter.

The conference has ended. You may now disconnect your lines. Thank you.