Feb 11, 2009
Executives
Tim Bixby - President & Chief Financial Officer Robert LoCascio - Chairman & Chief Executive Officer
Analysts
Richard Baldry - Canaccord Adams Brad Whitt - Broadpoint AmTech [John Pintail - Pintail Micro Capital] Corbin Woodhull - Merriman Curhan Ford & Co.
Operator
Good afternoon. My name is Eli and I will be your conference operator today.
At this time, I would like to welcome everyone to the LivePerson fourth quarter 2008 financial results conference call. All lines have been placed on mute to prevent any background noise.
After the speakers' remark, there will be a question-and-answer session. (Operator's instruction) Thank you.
I would now like to turn the call over to Mr. Tim Bixby, President and CFO of LivePerson.
Sir, you may begin your conference.
Tim Bixby
Thanks very much. Thanks for joining us everybody.
Before we begin, I would like to remind everyone that during this conference call, comments that we make regarding LivePerson that are not historical facts are forward-looking statements and therefore are subject to risks and uncertainties that could cause such statements to differ materially from actual future events or results. These statements are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.
The internal projections and beliefs, upon which are based on our expectations today, may change, over time, and we undertake no obligation to inform you if they do. Results that we report today should not be considered as an indication of future performance.
Changes in economic, business, competitive, technological, regulatory, and other factors could cause LivePerson's actual results to differ materially from those expressed or implied by the projections of forward-looking statements made today. For more detailed information about these factors and other risks that may impact our business, please review the reports and documents filed from time to time by LivePerson with the Securities and Exchange Commission.
Also, please note that on the call today, we will discuss some non-GAAP financial measures when we talk about the Company's financial performance. We report our GAAP results as well as provide a reconciliation of these non-GAAP measures to the GAAP financial measures in our earnings release.
You can obtain a copy of our earnings release by visiting the Investor Relations section of our website. And now, I would like to turn the call over to LivePerson's Chief Executive Officer, Robert LoCascio.
Robert LoCascio
Thanks, Tim. Good afternoon everyone and thank you for joining us.
During the fourth quarter of 2008, we generated revenue of $19.6 million or 17% from a year ago and up 1% sequentially as compared to the third quarter of 2008. EBITDA per share was $0.07, which is the new high for LivePerson and better than our expectation at the beginning of the quarter.
LivePerson have a solid fourth quarter capping off and we had a continued strong growth and margin improvement. In 2008, revenue increased 43% year-over-year and grew to nearly $75 million.
EBITDA after the year was nearly $10 million and improved from 10% of revenue in the first quarter to 18% of revenue in the fourth. During 2008, we signed almost 40 new enterprise customers, 10 of them during the fourth quarter including companies like Sun Microsystems, Nestle, Sharp Electronics and Texas Instruments along with hundreds of small business customers.
Within our customer base, we currently serve 5 of the 8 largest US financial institutions with the five US telecommunications companies, 5 of the 7 largest Fortune 500 high tech companies. We are pleased with our 2008 results especially given the challenging macroeconomic environment.
Its attachments to the underlying strain from our product line did grow our business model. Furthermore, Forrester weekly validated the positive impact of our third generation chat solution used by of our enterprise customers.
Working with one of the largest financial service customers, they conclude that LivePerson proactive chat enabled consumers to double their application completion rate. The study validated that our proactive engagement solutions help companies increase revenue and deliver better online experience.
Looking at our business operations, enterprise revenue grew 2% sequentially and 27% for the year, while the small business groups revenues increased 5% sequentially and 35% over the course of the year. Overall, addressable market is large.
According to our estimates we currently serve more than 300 up to approximately 3,000 potential enterprise customers and about 7,000 of approximately 200,000 potential SMB customers. We continue to see expansion of our baker performance or PFP model especially long term communications customers.
This turnkey offering for online sales typically bundles our software with the labor provided by one of our contact center partners. On the line of our traditional business model, the PFP model is more aligned to a revenue share base model.
In environment where companies are focused on managing spending, the PFP program is attractive that it can remove significant barriers from the sales process. The portion of our enterprise revenue driven by PFP has more than doubled from less than 5% to more than 10% for enterprise revenue over the course of 2008.
One PFP customer is now among our five largest customers in terms of revenue which indicates that we have passed in form improved point for this innovative model. We are pleased with the response to our PFP model and a positive result is generated and we will continue to leverage this model in conjunction with our initial business model to maintain appropriate mix within our overall revenue base.
During 2008, our consumer group focused on both transition and integration into LivePerson. In fact in third quarter, we combined the Kasamba and LivePerson brands within the LivePerson.com URL while updating the overall look and feel of the website.
In the fourth quarter, we created new marketing team in New York City and launched the online advertising campaign promoting the expert platform. However, as we now know, this advertising for a strong side with the dramatic serves negatively surrounding both the consumer side and general economic outlook.
In the face of this, we currently reduced our plan advertising spend on full branding campaign. Now, we focus our efforts on strengthening business product categories from the platform.
We also continued to focus on the synergies between the consumer and the product line of the business. For example, by integration of the independent job programming experts from the LivePerson platform with Sun Microsystems' Java.com website, it begins to show solid result.
We will continue to improve and expand this deployment and more broadly within Sun Java. This deployment has proven to be a solid first step towards our ambitious goal of providing independent experts within our BBB customers' websites.
We clearly see a lot of opportunity for the consumer platform and we want to give it a proper amount of time to successfully execute on strategic and tactical goals. Therefore we have decided to use the full leverage of the consumer business model and the flexibility of our platform.
We have taken steps to win the annual cash burn rate which is approximately $4 million in 2008. We expect to run the consumer platform at breakeven or better starting in Q2.
Our goals moving forward in 2009 are clear. After the most compelling ROI driven solution in the online conversion space, companies in this environment need to improve their online sales and walk along the most efficient sales consultative solutions on the market today.
We decreased our leading market share in both the enterprise and small business market places, continue to manage our cost structure, generate steady margin improvement over time and improve operating cash flow in the process. Strengthening core customer relationships with our large enterprise accounts and SMB group and move to profitability within the consumer group while growing course categories and supporting synergies with enterprise expert and BBB implementations.
Though we are operating in tough economic environment, we feel well positioned to leverage our strong business model and leading product lines to be successful going into 2009 and with that, now I would like to turn the call over to Tim. Tim?
Tim Bixby
Thanks, Rob. We posted sequential revenue growth that Rob mentioned overall of 1% in the fourth quarter.
This is a good result due to overall economy and specially the pressure on financial institutions. We performed extremely well in expense management, gross margin improvement as well as generating cash flow from operations.
EBITDA per share for the full year ended very strong at $0.20 per share. We signed 38 enterprise deals in total in the quarter, again a very strong showing.
Ten new names were among those deals and the number was right in line with our performance in the first three quarters of the Company. Pricing held well as the average yield measured per deal had not changed as compared to each of the three prior quarters of 2008.
Net of total our clients will be in the note in the press release from today including ShopNBC.com as well as the global leader in consumer electronics, the top three global wireless carriers and the world largest online florist and gift shop. We also expanded the business with several large customers including Panasonic as well as the world leading provider of networking equipment, the leading online photo service, the leading global financial lending services company and the world's largest home improvement retailer.
In terms of breakdown of our enterprise business, deals list in revenue terms were as follows; 40% of the new deals came from new customers in terms of revenue and about 60% or the balance came from existing customers expanding. This is actually a strong showing for revenue growth from new customers especially as compared with the prior quarter.
In terms of the product line breakdown, almost 100%, 95% of business done in the quarter was sales driven as opposed to service driven which may have about 5% of the new revenue. Overall, average enterprise deal size was about $66,000 and that is right in line, as I mentioned, with first three quarters.
In terms of attrition, in the enterprise group, attrition increased from 1% to 1.8% monthly in the first three quarters of the year to about 2.7% in the fourth quarter and what we saw there was increased downturn activity among interested clients. About 60% of the attrition impact in the fourth quarter was driven by customers' lower active seats along with internal headcount adjustments but not actually canceling the overall service.
Attrition among our small business customers was right in line and consistent with prior periods. Data performance continue to expand like I mentioned increased from less than 5% of enterprise revenue early in the year to just over 10% by yearend 2008.
Over the course of 2008, we had increased the size of our direct sales force from 13 and ending at 17 and we are looking to continue to expand this team more likely in the mid part of 2009 opportunistically with potential increases in the US, Europe and also potentially in Asia. Our [21.57] coming from outside the US primarily the UK is really does not change from the prior quarter and that is running about 25% of total revenue.
Also the vertical concentrations that are made fairly stay as well. By serve, financial services continues to make up about 25% of our business, telecommunications about 25%, retail and technology, each of them about 15% and then whole large combining them to the balance of 20%.
As of yearend, we have 11 customers billing over $0.5 million per year. We have three over the $1 million mark and three, actually over the $3 million mark which is a good progress on those metrics.
With the customer profile, we have six customers over a million dollars and our largest customer near $4 million is a solid proof of our ability to prove ROI to the world's largest enterprises. This is a dramatic increase over the last four years when we thought $500,000 might be the high end of this revenue per customer for us.
Overall, revenue grew 1% sequentially. This is reported as our 29th consecutive quarter of revenue growth.
Enterprise revenue growth in the fourth quarter was 2% sequentially while our SMB grew more than 5% sequentially. Our consumer revenue was down about 8% as compared to the prior quarter.
If we look at the year-over-year, we delivered 17% annual growth. Adjusted for the acquisition, the organic growth has grown our business operations combined was 23% for Q4 as compared to the year ago period.
Full year revenue growth for just the business operation is just the enterprise and the SMB operations combined was 30% annual growth. Our gross margin line continued to show solid improvement for the third consecutive quarter, as expected, primarily as the result of operating leverage due to revenue growth and also due to reduced hosting costs which continue to be driven by our co-location transition and optimization within our early facilities.
Gross margin improved by 170 basis points in the quarter on the top of 120 basis point improvement in the prior quarter. Gross margin overall came in at 75% and on our non-GAAP basis, if we adjust for non-cash expenses, gross margin would be about 79% in the fourth quarter.
Total cost of goods in absolute dollar actually declined a bit in the fourth quarter below the rate of Q2 and Q3 so we are seeing progress up there. Operation costs improved significantly in the areas of both G&A and R&D where we saw significant improvement as compared to the prior quarter.
This improvement completely offset the planned increase in sales and marketing investment in the quarter and that increased investment are related to the outcome marketing efforts for our consumer operations that Rob detailed. And during the last call, we increased our sales and marketing spending by end of Q4.
From the cash flow perspective for the full year, we invested slightly less than expected, about $3.9 million from the business operation cash flow in support of the consumer efforts that will put us at about $1 million quarterly run rate in 2008. For the fourth quarter, [25.21] is about $1.7 million, also slightly less than expected.
As Rob mentioned, we decided given this economic environment to work toward bringing the consumer operations to breakeven better on a cash flow basis and we expect to achieve that goal by early in the second quarter. This change will deliver that improvement as compared to the $4 million run rate during 2008.
As a result of the deterioration of our market capitalization fourth quarter of 2008, this is not rare to all the companies, we reevaluated the goodwill related to our consumer operations. Due to weaker than expected financial performance of the operations in the later portion of 2008, we recorded a non-cash goodwill impairment charge of $23.5 million or about $0.50 per share.
This charge is a non-cash thing and therefore, had no impact on the Company's cash flow. Notably, performance of our enterprise and small business operations continues to be very strong such as no impairment related to those operations was necessary.
Operating cash flow was strong in the quarter. We generated $3.4 million of cash from operations and we get to that by including a $1.7 million benefit from non-cash taxes.
This was offset by planned capital expenditures of $1.4 million related primarily to the continued build out of our hosting facilities and DR, disaster recovery, facilities. Full year cash from operations was $9.7 million, again including the $1.7 million tax benefit.
This is offset by about $4.1 million for share repurchases that we made during the year. We also incurred about $6.8 million in capital expenditures in total related primarily to servers and network infrastructure.
With regard to the share repurchase that I mentioned, during the year we purchased approximately 1.4 million shares at average price per share a little less than $3 and we will continue to buy shares opportunistically in both fourth quarter of 2008 as well as into the first quarter of 2009. Accounts receivable remained steady as a percentage of revenue and collection continued to be in line to the historic margin in the current macro environment.
Overall, total headcount was 366 at yearend. This was essentially unchanged from September 30 and it is actually down somewhat to about 355 as of today's conference call.
In terms of our expectations going forward in the first quarter, we expect no material revenue growth and some of the incremental revenue added we would expect to offset the slightly higher attrition rates that we saw in Q4 and that we expect in the earlier part of Q1. We expect EBITDA per share of $0.05 to $0.06 and that equates to a dollar number between $2.5 million to $3 million and also GAAP EPS of between $0.00 and $0.01 per share.
We currently expect for the full year of 2009 a raise of revenue growth between 13% and 17% and that would put us total revenue for the year for the total Company at $84 million to $86 million. We expect GAAP EPS for the full year of $0.04 to $0.05 and EBITDA per share of between $0.23 and $0.27 unless increased to $0.20 reporting today.
There is a few other current assumption that we think will be useful as you go by on analyzing the business for both the first quarter and the full year and this is not part of our guidance but it is an internal assumption that we think may find useful. Share account of approximately 49 million shares fully diluted.
It is the appropriate number to use. We see both tax rates of approximately 65% in 2009 and it is also appropriate to assume a cash tax rate of approximately 40%.
We expect GAAP gross margin between 74% and 75% and it also equate to a cash gross margin of about 78%. In terms of the first line relative to revenue, sales and marketing fair assumption is about 32% of revenue overall and a little bit higher probably in the range of 34% in the first and second quarter.
For full year 2009, G&A expense fair assumption is running at about 20% of revenue, R&D partially 17% of revenue and then on the non-cash charges, we expect the following reasonable assumptions; depreciation approximately $3.7 million for the year, amortization of intangibles approximately $2 million run rate, stock compensation expense approximately $4.3 million. These three, depreciation, amortization of intangibles and stock comp expense, it is reasonable to assume more or less a straight line pattern over each of the four quarters.
For the full year, we expect capital expenditures between in the range of $7 million to $9 million for all of 2009 and that is sort of caps off the assumptions and we will be happy to go into more detail in the Q&A if that is helpful. EBITDA in the fourth quarter, a debt rebalance sheet among the $25 million cash, a recurring revenue model, I think we are positioned well heading into the first quarter, to the rest of the first quarter and all of 2009.
This I think is likely when strong companies continue to invest and grow profitably and that is what we intend to do. We invested reasonably in the past two years into significant hiring, co-location hosting infrastructure and R&D innovation.
We expect to continue to fund those efforts going forward and by far a market leader in proactive online conversion solutions, we continue to be well positioned to succeed even in challenging environment and I think we have made smart adjustments in our operating plan to ensure that we are ready to take advantage of opportunities as conditions begin to improve. That covers our operational and financial highlights and now if we could ask the operator to rejoin the call.
We will be happy to take a few questions from the folks on the call.
Operator
(Operator's instruction) Your first question comes from the line of Richard Baldry - Canaccord Adams.
Richard Baldry - Canaccord Adams
I think on the prior call, you thought the key works typically had something on the range of a three to four extra return on dollar spend. So, during the pullback in spending, did you do that to those metrics really tail off pretty quickly in the quarter?
I am trying to figure out sort of how that decision was made.
Tim Bixby
Yes, when we started to run our campaigns, and we ran, we did some offline in radio and then we did some online with mostly in media stuff outside of the core. It gets sort of got lost.
We saw it very quickly got lost and now our consumers were feeling about all the negative noise and so the rates are very good but the conversion rates were not. So, we decided to sort of pull it back and then on the keywords, in the media that we now get the solid return of investment which is down at our core categories that we have been working on the last couple of weeks that we started moving for probably a couple of years.
Richard Baldry - Canaccord Adams
And maybe on looking at the balance sheet or cash resources versus the market account, can you talk about sort of your comfort levels, of what type of cash you want to have to run the business. It looks like it start of pulling back on growth or spending on one side of the table and maybe put under for increased buybacks over the year ahead.
Tim Bixby
Yes, I think if you look back I guess at the last couple of years, it is a good project. When we think about it, in the case of 2008, we generated a healthy cash flow from operations and then we felt comfortable enough with our cost structure and our outlook to reinvest that into primarily the co-location transition and also a healthy amount to the share repurchase.
The share repurchase is obviously a little more discretionary. I think that is something that we are comfortable with.
The cash at the beginning of the year was essentially unchanged at yearend but that range feels comfortable for us and I think we are looking into the 2009 something similar where $3 million ahead on cash or breakeven or better and so we will invest in this current ROI. That is what you should expect.
Robert LoCascio
Yes, it is the pipeline as we feel like in the face of bluer economy and I think what everyone is seeing is it is sort of a slowdown in the buying process, not as much as people saying, I do not want this or I do not want that. They are just like us.
We are doing the same thing. We have been very conservative on our cost side and even on the consumer group, we decided in the face of capital consumer market, let us generate cash.
Let us not try to outbid what consumers feel. So the best thing we can do as a Company is generate as much cash as we can with the growth that is what we are going to achieve this year.
Operator
(Operator's instruction) Your next question comes from the line of Brad Whitt - Broadpoint AmTech.
Brad Whitt - Broadpoint AmTech
Tim, just a clarification on some of the expense items that you gave, when you said sales and marketing 32%, G&A 20%, R&D 17%, is that a non-cash number that excludes stock base comp?
Tim Bixby
No.
Brad Whitt - Broadpoint AmTech
Okay, I just want to clarify that. And Rob, maybe you can give us a little more color on what is going on in the consumer side.
I think you said it was down 8 to 10 sequentially and I noticed you are using email. I am just curios as to what the dynamic is between email and chat and whether you are able to generate revenue from email as well as chat.
Robert LoCascio
Yes, about 15% of revenues right now are offline so they are through email and the remainder is through chat and there is a little bit of voice in the platform too. Basically, focused in the later half of the year in Q4 was really to shift some of the marketing budget off the core which is all of the personal budget categories included into the general campaigns and so because of that, it has an impact on some of the core categories.
The thing I was seeing now with core categories and all the personal budgets are hanging in there. The conversion rates are hanging in.
The lifetime values are hanging in so the one way we got we feel like now that we have confidence is in that personal category. So that is the focus there and grow the business from there versus trying to do general brand building around the world of experts and that also allows us to basically change the dynamic of the spending and run it as a breakeven profitable group and that is our intention.
Brad Whitt - Broadpoint AmTech
Rob, any new products that you are planning to launch this year that we can look forward to?
Robert LoCascio
Couple of things that we have coming up, we got the whole data warehouse investment that we have been making over the later half of last year and I think going through full year of this year. We hired eight people in the data warehouse team and we are very focused on the analytic side of the business and we have some amazing data.
We call it like voice of the customer that we will transfer data of what people are chatting about and we really do these transcripts seven million a month that we capture so I think we show that we are very focused on presenting that to our customers and making get real data out of it so they can see what are people talking about on the website, what issues they are having and we even talked about rolling that up on an industry wide so they can see what are the LivePerson, financial customers, what are they talking about, their customers talk about. So, that is an exciting project that we are putting a fair amount of focus on.
We have got a couple of things in small business data that are coming but I would rather just will talk about it in the later half of the year from a competitive standpoint and then in the consumer side, we are testing voice now and we are just going to focus, like I said, on that core and getting back to growing it. So, I think data warehouse is the biggest project on the enterprise side.
Operator
Your next question comes from the line of [John Pintail - Pintail Micro Capital].
[John Pintail - Pintail Micro Capital]
I have a quick question on your guidance just for understanding that. But before then, can you just give me a little bit of sense, given the environment out there; can you get the auto focus on the consumer business and by that on some of your current client and trying to create the tie-overs that you did, for example, the Java or just a little bit of flavor?
Robert LoCascio
Yes, I think we are really blocking and tackling with Java and it is really doing quite well in how it is growing and we want to just sort of get the models down. We have been doing all the sort of packaging and take it up for the customers because we have proven a basic point which I think a lot of people really did not believe which was- if you go to Java.com and you go to the Help Center, people are paying now for help versus sending in an email or picking up the phone to Java, to Sun Microsystems' call center and so we are seeing the point that consumers will pay for other consumers knowledge if they can get it in real time and they can it through chat.
So, now I think we are very excited and I think in this economic environment, people do not want to staff as much and maybe play nicely into that. In the flip side, there is a lot of people are looking for alternative ways to make money and they are experts at something.
So the supply side of our business is used to, if we get about a hundred new experts a day applying to be experts. So, yes I think both sides are working with the supply and demand side.
So we are excited about that.
[John Pintail - Pintail Micro Capital]
So, when you said you are focusing on the personal side and on the consumer then it sounds like you have got to set your focus also in really trying to mind your current business customers. Should we expect Java type relationships coming out soon or is that something that that is just taking longer than you ought to do?
Robert LoCascio
Yes, I take it as; it is probably we will see some more throughout the year. We are just on resource perspective, we have a limited amount of resources and we just want to make Java work at a 110% and we may, if you keep going back to the site, you will see so many changes.
Pretty much like every two weeks, there is a change to what we are doing because we are learning a lot because we have first gotten to do this. So expect a few more and for the core, we know the core.
The core makes money. The core has strong return on investment.
There was very strong lifetime value in the core categories between $200 and $300 we get from each consumer per year. So, we got to focus.
We do not have an opportunity right now to go on and try to educate the market about experts when they are thinking about their mortgages or losing their houses and their jobs. So they shows how personal advice when it comes to that stuff.
[John Pintail - Pintail Micro Capital]
And then maybe just to Tim or you Rob, on your EBITDA guidance for the year of $0.23 to $0.27 and then your Q1 guidance that is putting that in light with the goal of being breakeven beginning in Q2 for the personal business, the fact you blew or you spent the $4 million last year, when you look at that that should be a $0.06 benefit, you did $0.15 in the three quarters last year. It looks like your modeling right now at the top of other range you are guiding for flat EBITDA from the core business.
Am I reading this wrong or..?
Tim Bixby
Yes, I think if you do a simple math count now, you will get the numbers that we just got to. I think a better way to think about how we are putting the guidance together is getting the consumer operations at breakeven.
That is one specific piece of the business in isolation and so we want to be very clear on that. The timing of that is uncertain.
We expect to be there early in Q2 and so we expect to get the majority of that business fit for the year but not a full year benefit. Now, the other piece of that business is unpredictable as well as the purpose starts to be a little bit conservative on both counts in terms of ROI and EBITDA guidance but your straight math is definitely correct in that it is going to be exactly as it is this year and we make that change and you will get to a number that would be better than our stated guidance.
[John Pintail - Pintail Micro Capital]
Okay and something, you are not at this point trying to tell us something about the core business being down year-over-year on EBITDA.
Tim Bixby
No, to the contrary, I think it is definitely as strong as ever. The margins were strong.
Gross margin improvement was better than we anticipated. There is some cost structure that issues the change in the first quarter every year in terms of payroll taxes and those kinds of things so you see a natural, maybe a half percent or so of change from a normal Q4 but other than that, it is all definitely good news on the business operation platform.
[John Pintail - Pintail Micro Capital]
And you should get some benefit in the first two quarters on the server performance as well, right?
Tim Bixby
Yes, I mean we are not guiding to consistent improvement every quarter in gross margin but we certainly saw that and more in 2008 worth noting but I think we are getting to the levels now that are almost at our targets back at 75% and so I think, the range is 75% to 80% each bit of improvement gets a little bit tougher so we are going to be comfortable actually, very pleased with the 75% gross margin rate.
Operator
(Operator's instruction) Your next question comes from the line of Corbin Woodhull - Merriman Curhan Ford & Co.
Corbin Woodhull - Merriman Curhan Ford & Co.
I jumped on the call a little bit late so I am sorry I miss this but I was just wondering if you can just give your underlying assumptions for 2009 revenue guidance in the consumer segment whether they are flat or down from the 2008 revenues.
Tim Bixby
So our assumption is that they are essentially flat with the current revenue. We are making adjustments to the revenue structure as Rob mentioned that would likely take effect later in the first quarter so we will expect to see a step change that will raise that run rate up.
But all that is, we could see a number, the guidance number is very similar to the total we did in 2008. So, the $10 million net revenue number will be consistent with what we did in 2008.
Operator
You have a follow up question from the line of Brad Whitt - Broadpoint AmTech.
Brad Whitt - Broadpoint AmTech
Can you just comment a little bit on the CapEx and expenditures? It seems a little higher than we have got for not only to this past year but for next year as well.
Then also, I do not quite understand your 20% G&A guidance for next year. This quarter, I think G&A was about, fall on 13%.
It is about 13.5% of revenue for the year and you got to come to 20%. That would imply G&A grow on probably three to four times faster than revenue, if you could just explain that too.
Tim Bixby
Sure. So, I will have the second one first and then I think the difference of the G&A is amortization of intangibles you may have separately and to that 20% includes, that include that number.
Brad Whitt - Broadpoint AmTech
Right, I asked you awhile back if it would be included, if there is a cash number or not.
Tim Bixby
Yes, I am sorry. That is different because we breakout in the face of the P&L for G&A.
My response earlier was not 100% correct so for the other line items, it includes the non-cash in G&A. You have to combine the two line items from the P&L and that should reflect but the demand will change from the Q4.
Brad Whitt - Broadpoint AmTech
Okay. The Q4 has a pretty big drop from Q3, was there some one-time reversal of accruals or something like that in Q4?
Tim Bixby
In G&A?
Brad Whitt - Broadpoint AmTech
Yes.
Tim Bixby
The biggest shift, two significant shifts. One was we have some higher legal expenses and accruals just for an ongoing legal cost in Q3 that tapered off really in Q4 and we also do accruals in the course of year due late bonus payments.
There was a bit of an adjustment there. I think that was a little more in Q4 than in other quarter and so that, assuming that as it goes away in Q1 and that is why that rate might go up in Q1.
So, I think we have to have big improvement in Q4. I think we will get most, but not all of that going to Q1.
Brad Whitt - Broadpoint AmTech
Okay and just back to the CapEx, what kind of things are you going to be investing in this year, the $79 million capital expenditures?
Tim Bixby
Yes, the bulk of that is on servers and network infrastructure and in terms of what is in that in 2008, the main focus was moving on primary hosting facility in the US to co-location. That is essentially finished in terms of transition so all our small business enterprise and consumer has all been transitioned as of the latter part of 2008.
We then moved to do a similar transition with our disaster recovery, or DR facility so we present sort of leverage other cost going forward in that transition. That will be the bulk of the investment in 2009 as well as some extent to date warehouse that about investment that Rob mentioned and that also has a sort of server and software component.
I think the $8 million and the $79 million number at this point is somewhat conservative. It is figured early in the year.
We wanted to have that out there and we will update that next quarter as we get a better view of the rest of year. It is somewhat fungible so if we think we want to be a little try to earn cash, we can delay and push some of the transition out and vice versa.
If we are tracking well, we want to move forward and certainly move that accordingly.
Operator
Your next question comes from the line of Nathan Schneiderman - Roth Capital Partners. I am sorry.
He has disconnected. There are no further questions at this time.
Robert LoCascio
Thank you everybody for joining the call and we will see you on the Q1 call. Thanks very much.
Tim Bixby
Thanks very much.
Operator
That concludes today's conference. You may now disconnect.