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Article by DailyStocks_admin    (06-24-08 09:33 AM)

The Daily Magic Formula Stock for 06/24/2008 is EasyLink Services International Corp. According to the Magic Formula Investing Web Site, the ebit yield is 12% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview
EasyLink Services International Corporation (“EasyLink” or “ESIC”, formerly known as Internet Commerce Corporation) creates, deploys and manages the secure and reliable electronic exchange of essential business documents. With our value added network (“VAN”), desktop software and hosted applications, managed services and consulting and professional services, we are a trusted provider of e-commerce solutions to connect businesses, regardless of their size and level of technical sophistication, with their trading communities. Thousands of customers, ranging from sole proprietorships to large corporations, in a variety of industries rely on the value delivered from EasyLink’s comprehensive line of solutions, expertise, and 24x7 customer service to help meet the unique requirements for trading partner compliance, coordination and collaboration.
We pioneered the use of the Internet for electronic data interchange (“EDI”) business-to-business (“B2B”) solutions and continue to develop new technologies as requirements emerge for more efficient business communication. Our operations include two business segments defined as follows:
• Electronic Commerce Solutions (“EC Solutions”) segment, which includes VAN services, browser-based and hosted applications, and desktop software; and

• Electronic Commerce Services (“EC Services”) segment, which is comprised of the EC service center, EC outsourcing, mapping and professional services.
These segments complement one another, giving us the ability to provide solutions to many different enterprises, which operate in a variety of industries.

We changed our reportable segments as of August 1, 2006 to coincide with management’s realignment of our business operations to follow our service and product lines. The EC Solutions segment was formed to consolidate the services and products offered with direct or indirect connections to our VAN. The EC Services segment was formed to consolidate all of our professional, managed and outsourcing services. Specifically, professional service revenue and mapping revenue were moved from the old ICC.NET segment to the EC Services segment. Hosted applications and desktop software were moved to the EC Solutions segment from the old EC Service Bureau segment. Our browser-based and hosted applications were also added to the EC Solutions segment. In addition, we will no longer allocate 100% of our operating expenses to the reporting segments. Only those expenses that are directly related to the development and delivery of a reporting segment’s products and services will be allocated. We have restated the previous period’s reporting segments for comparability purposes between the periods.
Our principal executive offices are located at 6025 The Corners Parkway, Suite 100, Norcross, Georgia 30092, and our telephone number at that location is (678) 533-8000.
Recent Acquisitions
EasyLink Services Corporation. On August 20, 2007, we completed our acquisition by merger of EasyLink Services Corporation (“ESC”), which is now a wholly-owned subsidiary. Headquartered in Piscataway, New Jersey, ESC is a leading global provider of outsourced business process automation services that enable medium and large enterprises, including 60 of the Fortune 100, to improve productivity and competitiveness by transforming manual and paper-based business processes into efficient electronic business processes. ESC is integral to the movement of information, money, materials, products and people in the global economy, dramatically improving the flow of data and documents for mission-critical business processes such as client communications via invoices, statements and confirmations, insurance claims, purchasing, shipping and payments.
ESC’s business has traditionally operated along multiple segments, including VAN and EDI outsourcing operations, desktop to fax and fax to desktop offerings, corporate production and broadcast fax, telex operations and proprietary e-mail systems. See “Subsequent Events” on page 12.
Stewart Technical Services, Inc. On January 31, 2007, we acquired certain assets of Stewart Technical Services, Inc. (“STS”), a privately held corporation that provided integrated EDI software and services. In accordance with the Asset Purchase Agreement (“Agreement”), we paid $300,000 upon closing and have a contingent payment of up to an additional one times revenue for the first year’s revenue less the $300,000 payment made at closing. Additionally, if the first year’s revenues are less than $400,000, then no additional earn-out will be paid. We received tangible assets of approximately $27,000, which included accounts receivable of $22,000 and fixed assets of $5,000, and intangible assets of approximately $288,000, which are comprised of internally developed software of $188,000 and customer relationships of $100,000. Under the Agreement, we also recorded a liability of $15,000 for transition costs. The operating results from the STS acquisition are included in the EC Solutions segment.
Industry Background
B2B transaction management solutions range from mail and fax based approaches to Internet-based point-to-point communication systems. EDI customers typically use a number of these B2B transaction management solutions. The solution that is appropriate in each case depends on the size, nature and needs of the individual customer. Non-electronic means, such as mail and courier services, are appropriate for some document exchanges, whereas electronic solutions including fax, e-mail exchange, point-to-point, EDI and web-based marketplaces, may be more suited to different operating environments.
B2B supply chain communications continue to evolve towards electronic means and away from paper-based formats. Traditionally, buyers, such as retailers or manufacturers, have driven the adoption of electronic means of exchanging business information and documentation. Often referred to as “hubs,” these buyers have promoted an evolution towards electronic means of exchanging business information within their industries by requesting that their suppliers or “spokes,” ranging from the very large to single product suppliers, have the capability to exchange information electronically. At times, compliance with such electronic exchange requests is a mandate for doing business with the buyer.

In the early 1980s, private networks using a dedicated leased line or dial up connection in combination with interface software and a modem emerged as a means of connecting companies electronically with a limited number of strategic suppliers and customers. To set up such a private network point-to-point solution, companies needed to negotiate and agree upon communication protocols and data standards on an individual basis with trading partners. Communication protocols enable computers to identify and communicate with each other and send and receive data at the same rate. Data standards enable computers to process data received into documents without human intervention. These standards fix the order in which data appear in a given document.
The use by companies of different proprietary data standards meant that different trading communities were unable to communicate with each other. It also forced individual suppliers to implement a variety of solutions to communicate with their customers. A number of industries therefore began to develop common EDI standards that enabled companies within particular sectors to communicate with each other. These led to the development of X.12 and other data standards still in use today. Today, these standards co-exist with XML standards, such as RosettaNet, ebXML and CIDX.
The use of industry specific or proprietary data formats as well as different communication protocols also lead numerous companies to develop and offer VAN services in the 1980s. These third-party services allow customers to receive and send electronic documents between trading partners, even if they use different EDI standards and communication protocols. Essentially, VANs provide electronic mailboxes to send and receive electronic documents. Data is submitted by the sender to a VAN, where it is processed and held with other transactions before being retrieved by its intended recipient.
During the late 1990s, millions of dollars were funneled into e-commerce, leading to the development of new technologies and standards for moving B2B data electronically. During this time, we became the first company to exclusively use the Internet rather than private networks as the communications infrastructure. The proven security and reliability of the Internet, facilitated by the development of virtual private networks (“VPNs”) and encrypted communications over the Internet viewable only by the parties to the communication, underscored the advanced functionality of Internet EDI services.
Internet-based point-to-point solutions also effectively emerged in 2000. An important factor behind the growth in Internet-based point-to-point solutions has been the development and implementation of globally adopted standard communications protocols, such as AS2 or AS3. Any files conforming to these protocols can be communicated securely and effectively by means of a single continuous connection to the Internet with the transactions taking place in real time.
Many companies continue to rely heavily on paper-based manual processes to exchange information and documentation. For most companies, mail, courier, telephone and fax remain the primary methods of exchanging information with business partners. Even when hubs have adopted electronic B2B transaction management solutions, they still rely to a significant extent on these traditional means of communication, both to communicate with smaller trading partners who do not have electronic B2B transaction management systems and for other types of communications. We believe the continued pressure to adopt EDI B2B communications represents a growth opportunity for our services.
Company Background
EasyLink Services International Corporation was incorporated in Delaware in 1991 under the name Infosafe Systems, Inc. (“Infosafe”). Infosafe completed an initial public offering on January 25, 1995. On April 16, 1997, Infosafe entered into an agreement to create and fund a newly incorporated majority owned subsidiary, Internet Commerce Corporation. On June 19, 1998, Infosafe entered into an agreement of merger that merged the Internet Commerce Corporation subsidiary into Infosafe, with Infosafe remaining as the surviving corporation. On July 2, 1998, Infosafe changed its name to Internet Commerce Corporation (“ICC”).
On June 22, 2004, we acquired Electronic Commerce Systems, Inc. (“ECS”), expanding our outsourced EDI services to small and medium sized businesses. On March 17, 2005, we acquired the Managed EC Ô (“MEC”) division of QRS Corporation, continuing the expansion of our EDI outsourcing business. On November 1, 2005, we acquired The Kodiak Group, Inc, (“Kodiak”), adding additional outsourcing and professional service offerings. On May 9, 2006, we acquired the Enable Corp. (“Enable”), adding web based EDI capabilities to our service offerings. On August 20, 2007, we acquired EasyLink Services Corporation (“ESC”) as a wholly-owned subsidiary. In conjunction with the ESC acquisition, we changed our name from Internet Commerce Corporation to EasyLink Services International Corporation. See “Subsequent Events” beginning on page 12.

We pioneered the use of the Internet for business-to-business e-commerce solutions. We capitalized on the Internet’s capabilities to enable trading partners to exchange information just as the Internet was entering mainstream commerce. Initially, we offered a VAN solution with greater user benefits at a lower price than the competition. We believe that our entrance into the traditional VAN marketplace changed the dynamics of the industry by setting off stiff price competition and significantly lowering the price that had previously been charged to VAN customers.
Our VAN service, currently known as ICC.NET, was the mechanism used to launch and grow our revenues. Through July 2000, we were entirely focused on the VAN services that allowed for the secure exchange of business-to-business electronic forms, documents and data files. Recognizing that the market required a more complete range of services, we made acquisitions of several service bureaus, which became the backbone of our EC Services segment. In order to expand our abilities to deliver a wide range of EDI services to businesses, we made the additional acquisitions of Kodiak and Enable in fiscal 2006 and STS in fiscal 2007. In addition to an expanded customer base, these acquisitions now allow us to offer a wider range of professional services and a hosted application.
Business Strategy
Our goal is to grow profitably by providing our customers a range of products and services with high returns on investment and the functionality and scalability to enable trading partners of different sizes, diverse company infrastructures and various levels of technical sophistication to electronically transport, route and deliver information seamlessly and securely, regardless of communication protocol or data format.
In order to reach this goal, we specifically intend to:
• acquire or invest in complementary businesses that provide us with additional service offerings or technologies and/or expand our customer base and distribution channels;

• develop innovative offerings that are specifically aimed at bringing EDI capabilities to small and medium sized businesses at affordable price points;

• expand strategic alliances and indirect sales channels by establishing and expanding strategic alliances and partnerships in order to generate organic business growth both inside and outside of the United States;

• enhance service delivery through continued development of our existing service platforms, increased training for customer support representatives, addition of customer self-service capabilities and focus on operating efficiencies; and

• improve sales efforts through additional investments in sales resources, sales training and marketing campaigns and initiatives.
Products and Services
Our products and services enable trading relationships, add value to ever-evolving supply chain structures and offer migration paths for business model evolutions. Our two reportable segments (EC Solutions segment and EC Service segment) are described below.

EC Solutions Segment
The EC Solutions segment, which includes VAN services, browser-based and hosted applications and desktop software, accounted for approximately 74%, 67%, and 71% of our revenue for the years ending July 31, 2007, 2006, and 2005, respectively.
ICC.NET VAN Services. ICC.NET is a VAN solution that meets multiple EDI requirements in a secure, reliable and flexible environment regardless of file size, communication protocol or data format. In addition to setup fees and monthly service fees, our charge for this service is based upon the amount of information that the customer transmits through the network to its trading partners. These charges are primarily made on a set price per “kilo-character” (every thousand bytes of information through the network).
Our ICC.NET VAN services include:
• Detailed audit trails: We maintain detailed audit trails of all set-up, configuration and document transmission events. Thus, our technical support team can quickly answer questions and address issues.

• Protected data center: Our redundant servers are housed in facilities where servers are secured by guards and backup power supply 24 hours a day, seven days a week, 365 days a year.

• Array of real-time reports: We provide a wide selection of on-line, real-time reports that may be accessed on-line or batched and delivered to our customers through a browser, e-mail or EDI system.

• Extended archival storage: We archive the information sent and received on-line for a period of 30 days, so our customers have a safety net should they need to resend or review a document or data. Archiving beyond the standard 30-day period is available for an additional charge.

• Extensive connectivity options: We provide a variety of standard and customized communications options and connect to more than 50 private networks, public interconnects, exchanges, service bureaus and value added networks to ensure effective communications that meet unique requirements within a trading community.

• 24x7x365 world-class support: We provide U.S.-based support representatives, 24 hours a day, seven days a week, 365 days a year to set up accounts, initiate proactive communications, solve problems or answer questions.

• Reliable and secure transmission: We offer a variety of industry-standard encryption solutions to provide secure transmissions over high-speed connections to the Internet that are authenticated and provide for non-repudiation to secure supply chain communications.

• Real-time data delivery and alert system: We deliver information in real-time, on a scheduled or ad hoc basis for customers and their trading partners, reducing batch delivery problems such as data corruption and time delays in delivery. We also provide proactive alerts for document processing events, transmission issues or delivery receipts, enabling the customer to respond to trading partners and address critical events immediately.

• Browser-based document flow management tool: We enable customers to view and time stamp documents and transaction events through the use of the Internet, offering them control over data, including the flexibility to acknowledge, view, send, receive, hold, release, sort or search documents and other data files.
For additional fees, our ICC.NET VAN service can be extended with service capabilities that augment the basic services and meet requirements that are unique to businesses or trading communities. Those services are priced in various ways, depending upon the service selected, and include:

• ICC.AS2: We manage all aspects of an AS2 implementation, from connectivity to trading partner enablement and program management.

• ICC.EMAIL: We provide real-time and cost-effective EDI-to-E-Mail capabilities for documents to any e-mail server worldwide.

• ICC.FAX: We provide real-time and cost-effective EDI-to-fax capabilities for any document to any fax machine worldwide.

• ICC.TRANSLATE: We provide in-line translation capabilities for any data format, including X.12, flat file, XML and many others.
Hosted Applications. By accessing a browser-based application, our customers have the technology required to communicate through EDI with their trading partners. Our hosted applications are available for set-up, monthly service fees and hosting fees primarily based upon trading partners and documents for our Private label exchange and TradeGateway.
• Private label exchange: The application is customized to maintain integrity of our customer’s brand and conform to their business requirements. In addition to customizing and maintaining the application, we provide enablement services to launch and manage the rapid on-boarding of the trading partner community.

• TradeGateway: TradeGateway facilitates the exchange of business documents within trading communities. Unlike the Private Label Exchange which is customer specific, TradeGateway enables subscribers to comply with the business requirements for a multitude of enterprises by simply logging into one application.
Desktop Software. Our software is designed to enable the management and exchange of information between trading partners and address a full-range of requirements for effective EDI operations. The applications operate on Microsoft Windows computing platforms, features “plug and play” installation and configures easily to support the customer’s needs. Software licenses are billed at a one time fixed price. Software maintenance is available for an annual or monthly fee that is usually a percentage of the original sales price for the software.
• Performance EDI: We provide a large collection of pre-configured transactions maps and connectivity to public and private networks. The data translation component enables rapid implementation of new trading partners and facilitates compliance to the trading partner’s business requirements. We provide the automation required to handle, process, transmit and receive purchase orders, ship notices and invoices, in accordance with preferred formats and specialized instructions and Universal Product Code information management capabilities.

• EDINet Partnership: We provide an integrated EDI solution for processing essential business documents between our customer’s trading partners and the Oak Street accounting application of Industrious Software Solutions.
EC Services Segment
Our EC Services segment includes the EC service center, EC outsourcing and professional services and accounts for approximately 26%, 33%, and 29% of our revenue for the years ending July 31, 2007, 2006 and 2005, respectively.
EC Service Center. The EC service center is staffed with EDI professionals serving as an extension to organizations by performing activities that enable compliance to trading partner mandates. Those activities include the following:
• EDI-to-Fax/E-Mail: We receive electronic formatted information, convert it into a fax-readable file and route that information to our customers’ fax machines or e-mail accounts.

• Fax/E-Mail-to-EDI: We receive customer information via a fax or e-mail. That information is then entered into an EDI form and transmitted to the trading partner in a format that is consistent with trading partner specifications.

• Label/Tag/Sticker Services: We generate and print UCC-128 case labels. Those printed labels are sent to our customers so they can be applied to the cartons that will be shipped to a retailer. We also create and print price stickers and hang tags for our customers.

• Universal Product Code (“UPC”) Catalog Services: We add, update and delete product information in on-line UPC catalogs. Once we have received the electronic or hard-copy product information, we generate the necessary EDI transaction and send it to the catalog service provider. Through this process, our customer’s product information is up-to-date in the UPC catalog.
EC service center customers are billed a monthly fee in addition to a charge for services rendered during the month. The services charges are primarily a per document, label, sticker, hang tag or UPC charge.
EC Outsourcing. Our outsourcing services include:
• The internal management of the day-to-day operations and projects required to exchange supply chain information with trading partners. By leveraging our experience in the industry, we manage our customers’ operational environments and transaction workflows as well as strategic projects, from concept through solution delivery optimizing their supply chains.

• The identification of the requirements to integrate our customers’ trading partners into their supply chains and the development and implementation of a solution that allows the customer and its trading partners to communicate electronically in an efficient and effective way.
Professional Services. Within the EC Services segment, we offer a number of EDI related professional services. We price our professional services through various methods including hourly fees and fixed pricing fees. The professional services include the following:
• Customized software services: We provide software services to customize a private label exchange, to maintain our customer’s brand integrity and business requirements.

• Data mapping services: Our technical experts provide EDI data mapping in a wide-variety of tools to enable the translation between different data formats.
ESC Services
With the acquisition of ESC, we now provide additional On Demand Messaging and Supply Chain Messaging Services, which are described below:
On Demand Messaging Services
Integrated Desktop Messaging Services . EasyLink Integrated Desktop Messaging allows our customers to integrate fax sending and receiving with their existing corporate e-mail systems and associated administrative systems. Offered on an outsourced basis, this service helps align fax communications with existing electronic workflow systems and procedures, including employee administration, security and compliance. In addition to providing user faxing functionality, the service offers several key administrative management features, including user administration (including integration with back office personnel systems), call detail reporting for internal accounting support, private label branding services, and fax delivery / non-delivery confirmation services.

CEO BACKGROUND

Richard J. Berman , age 65, joined the Company in September 1998 as Chairman and Chief Executive Officer and served as the Company’s Chief Executive Officer from 1998 until June 1999. Mr. Berman’s business career spans over thirty-five years of venture capital, management and merger and acquisitions experience. In the last five years, Mr. Berman has served as a professional director and/or officer of over a dozen public and private companies. Mr. Berman is currently Chairman of NexMed, Inc., a small public biotech company; Chairman of National Investment Managers, Inc., a public company in pension administration and investment management; and Chairman of Secure Fortress Technology Systems, a company specialized in the homeland security area. Mr. Berman is also a director of the following public companies: Dyadic International, Inc. (AMEX: DIL); Broadcaster, Inc. (OTC: BCSR.OB); NexMed, Inc. (Nasdaq: NEXM); National Investment Managers, Inc. (OTC: NIVM.OB); Advaxis, Inc. (OTC: ADXS.OB); NeoStem, Inc. (AMEX: NBS); and Secure Fortress Technology Systems (trading in the United Kingdom and listed on the Frankfurt Exchange). Previously, Mr. Berman worked at Goldman Sachs; was Senior Vice President of Bankers Trust Company, where he started the M&A and Leverage Buyout Departments; helped create the largest battery company in the world by merging Prestolite, General Battery and Exide to form Exide Technologies (Nasdaq: XIDE); helped create what is now Soho (NYC) by developing five buildings; and advised on over $4 billion of M&A transactions. Mr. Berman is a past director of the Stern School of Business of NYU, where he received BS and MBA degrees. Mr. Berman also has United States and foreign law degrees from Boston College and The Hague Academy of International Law, respectively.
Kim D. Cooke , age 52, has served as a member of the Board of Directors since December 2000 and was appointed the Company’s lead director in November 2003 and as Chairman of the Board in September 2005. Mr. Cooke is a founding partner and Managing Director of Blue Water Capital, L.L.C., a private venture capital firm, founded in 1996. Mr. Cooke serves on the board of directors of Tech Enterprises Inc. (Techbooks) and Verus Financial Management, Inc. Mr. Cooke is a transactional lawyer and private equity investor with extensive business and legal experience. Mr. Cooke also serves as a director of several not-for-profit organizations.
Donald R. Harkleroad , age 63, joined the Company as a director in June 2004 following the Company’s acquisition of Electronic Commerce Systems, Inc., of which Mr. Harkleroad was Chairman. Mr. Harkleroad is the founder and President of The Bristol Company, a diversified investment and management holding company formed in 1983, and is an officer and director of several of its subsidiaries and affiliated companies. Additionally, Mr. Harkleroad serves on the board of directors of Summit Bank Corporation and Lighting Science Group Corporation. Mr. Harkleroad is also a transactional lawyer and private investor with extensive management, investment and entrepreneurial experience.
Paul D. Lapides , age 53, has served as a member of the Board of Directors since October 2005. Mr. Lapides is Director of the Corporate Governance Center at the Michael J. Coles College of Business at Kennesaw State University, where he has been a professor of management and entrepreneurship since 1993. Mr. Lapides currently serves as a director on the board of directors of Sun Communities Inc. (NYSE: SUI) and The Board of Directors Network, Inc. Mr. Lapides is a member of the Advisory Board of the National Association of Corporate Directors and served on the NACD’s Blue Ribbon Commission on Audit Committees in 1999. A certified public accountant, Mr. Lapides is the author or co-author of more than 100 articles and seven books on management and directors’ responsibilities. Mr. Lapides received a BS with honors in economics from The Wharton School of the University of Pennsylvania and an MBA from New York University.
John S. Simon , age 51, has served as a member of the Board of Directors since October 2004. Mr. Simon has been the Chief Executive Officer of afterBOT, Inc. since 2002. afterBOT provides various services to retailers and their vendors using proprietary digital receipt technology. Mr. Simon has more than 27 years of experience in the retail industry, including 14 years with QRS Corporation, a provider of electronic commerce services to the retail industry, of which he was a founder in 1988, and 9 years with Carter Hawley Hale Stores. Mr. Simon was formerly a director of Electronic Commerce Systems, Inc., which was acquired by the Company in June 2004.

Thomas J. Stallings , age 60, joined the Company in December 2003 as Chief Operating Officer, in which position he served until April 2004, when he was appointed Chief Executive Officer. Mr. Stallings has also served on the Company’s Board of Directors since June 2004. Prior to joining the Company, Mr. Stallings spent seven years in the management of venture capital backed or privately held technology companies. Mr. Stallings was the president and chief operating officer of CoreHarbor, from October 2002 to June 2003, where his efforts led to the effective merger between CoreHarbor and USinternetworking Inc. From 1999 to 2002, Mr. Stallings served as president and chief executive officer of Cambar Software Inc. and was successful in completing the sale of the company to a private investment group in November 2002. From 1997 to 1999, Mr. Stallings served as president and chief executive officer of Analytika, Inc., where he effectively grew this early stage software development firm and completed the sale of the company in late 1999 to Dendrite International. From 1995 to 1996, Mr. Stallings was a vice president with Oracle, responsible for sales and marketing to Oracle’s top enterprise customers in the telecommunications industry. Prior to 1996, Mr. Stallings held management and executive positions at IBM with progressively greater levels of responsibility.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview
Our EDI Internet, software and service center solutions allow thousands of customers to rely on our expertise and support to help balance the cost and function required to meet the individual requirements for communicating with their trading partners in compliance with partner specifications.
Our two reportable segments are:
• EC Solutions segment, which includes VAN services, browser-based and hosted applications, and desktop software; and

• EC Services segment, which is comprised of the EC service center, EC outsourcing, mapping and professional services.
We changed our reportable segments as of August 1, 2006 to coincide with management’s realignment of the business operations to follow our service and product lines. The EC Solutions segment was formed to consolidate the services and products offered with direct or indirect connections to our VAN. The EC Services segment was formed and consolidates all of our professional, managed and outsourcing services. Specifically, professional service revenue and mapping revenue were moved from the old ICC.NET segment to the EC Services segment. Hosted applications and desktop software were moved to the EC Solutions segment from the old EC Service Bureau segment. The browser-based and hosted applications acquired from Enable were also added to the EC Solutions segment. In addition, we will no longer allocate 100% of our operating expenses to the reporting segments. Only those expenses that are directly related to the development and delivery of a reporting segment’s products and services will be allocated. We have restated the previous period’s reporting segments for comparability purposes between the periods. For a more complete description of our business segments, see “Products and Services” under Item 1, beginning on page 4 of this Form 10-K.
The VAN business remains highly competitive. Throughout fiscal 2007, we continued to add new customers and increase the volume of data transmitted through our VAN business. However, our larger accounts are susceptible to competitive attack, which often leads to a price reduction. Our total VAN revenues increased by approximately 3% in fiscal 2007. In addition, the EC Solutions segment included the financial results from the January 31, 2007 acquisition of STS.
Our Carrollton, Georgia based EC service center facility continues to be one of the largest EDI outsourcing operations in North America. Total revenue for the EC Services segment in fiscal 2007 was down approximately 10% over fiscal 2006 primarily as a result of customer attrition from our MEC and Kodiak acquisitions.

Critical accounting policies are those policies that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
The following list of critical accounting policies is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in Note 2 of the notes to the consolidated financial statements included elsewhere in this Annual Report. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. We have identified the following to be our critical accounting policies:
Revenue Recognition: We derive revenue from subscriptions to our VAN service, which includes transaction, monthly service and fax transmission fees. The subscription fees are comprised of both fixed and usage-based fees. Fixed subscription fees are recognized on a pro-rata basis over the subscription period. Usage fees are recognized in the period the services are rendered. We also derive revenue through implementation fees, interconnection fees and by providing data mapping services to our customers. Implementation fees are recognized over the life of the subscription period. Interconnection fees are fees charged to connect to another VAN service and are recognized when the data is transmitted to the connected service. Revenue from data mapping services is recognized when the mapping service has been completed and delivered to the customer.
We have a limited number of fixed fee data mapping services contracts. Under these arrangements, we are required to provide a specified number of maps for a fixed fee. Revenue from such arrangements is recognized using the percentage-of-completion method of accounting. We also recognize professional service contracts using the percentage-of-completion method of accounting, as prescribed by SOP 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”
The percentage of completion for each contract is determined based on the ratio of direct labor hours incurred to total estimated direct labor hours required to complete the contract. We may periodically encounter changes in estimated costs and other factors that may lead to a change in the estimated profitability of a fixed-price contract. In such circumstances, adjustments to cost and profitability estimates are made in the period in which the underlying factors requiring such revisions become known. If such revisions indicate a loss on a contract, the entire loss is recorded at such time. Amounts billed in advance of services being performed are recorded as deferred revenue. Certain fixed-fee contracts may have substantive customer acceptance provisions. The acceptance terms generally include a single review and revision cycle for each deliverable to incorporate the customer’s suggested or required modifications. Deliverables are considered accepted upon completion of the review and revision, and revenue is recognized upon acceptance.
Our EC service bureau revenue is comprised of EDI services including data translation services, EDI-to-print and print-to-EDI purchase order and invoice processing, UPC services including UPC number generation, UPC catalog maintenance and UPC label printing. Revenue from EDI services and UPC services is recognized when the services are provided.
Within our EC Solutions segment, we also derive revenue from licensing software and providing software maintenance and support. We account for software license sales in accordance with the American Institute of Certified Public Accountants’ Statement of Position 97-2, “Software Revenue Recognition,” as amended (“SOP 97-2”). Revenue from software licenses is recognized when all of the following conditions are met: (1) a non-cancelable non-contingent license agreement has been signed; (2) the software product has been delivered; (3) the price of the software is fixed or determinable; and (4) collection of the resulting receivable is probable. Revenue from software maintenance and support contracts is recognized ratably over the life of the contract.

In addition, SOP 97-2 generally requires that revenue from software arrangements involving multiple elements be allocated among each element of the arrangement based on the relative fair values of the elements, such as software licenses and post contract customer support. SOP 97-2 also requires that revenue be recognized as each element is delivered with no significant performance obligation remaining on our part. We allocate the aggregate revenue from multiple element arrangements to each element based on vendor specific objective evidence. Customers are charged standard prices for the software and post contract customer support, and these prices do not vary from customer to customer. If we enter into a multiple element agreement for which vendor specific objective evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until all elements of the arrangement are delivered.
Goodwill: Goodwill consists of the excess purchase price over the fair value of identifiable net assets of acquired businesses. Goodwill is evaluated for impairment at least annually and whenever events or circumstances indicate impairment may have occurred. The assessment requires the comparison of the fair value of each of our reporting units to the carrying value of its respective net assets, including allocated goodwill. If the carrying value of the reporting unit exceeds its fair value, we must perform a second test to measure the amount of impairment. The second step of the goodwill impairment test compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. We allocate the fair value of a reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
Other Intangible Assets: Other intangible assets are carried at cost less accumulated amortization. Other intangible assets are amortized on a straight-line basis over their expected lives. We did not have any indefinite lived intangible assets other than goodwill that were not subject to amortization.
Impairment of Long-lived Assets: Our long-lived assets, including amortizable intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Management also reevaluates the periods of amortization of long-lived assets to determine whether events and circumstances warrant revised estimates of useful lives. When such events or changes in circumstances occur, we test for impairment by comparing the carrying value of the long-lived asset to the estimated undiscounted future cash flows expected to result from use of the asset and its eventual disposition. If the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset, we would recognize an impairment loss. The amount of the impairment loss will be determined by comparing the carrying value of the long-lived asset to the present value of the net future operating cash flows to be generated by the asset.
Stock-based Compensation : In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “ Share-Based Payment "(“SFAS 123R”), which revises Statement of Financial Accounting Standards No. 123 (“SFAS 123”) and supersedes Accounting Principles Board Opinion No. 25 (“APB 25”). SFAS 123R requires companies to record in the financial statements all share-based payments to employees, including grants of stock options, based on the fair-value of the grant date of the stock. In January 2004, the Company had adopted the fair value provisions of SFAS 123, which are now required by SFAS 123R.
Income Taxes : Deferred income taxes are determined by applying enacted statutory rates in effect at the balance sheet date to the differences between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. A valuation allowance is provided, based on the weight of available evidence, if it is considered more likely than not that some portion, or all, of the deferred tax assets will not be realized.
Use of Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant accounting estimates used in the preparation of our consolidated financial statements include the fair value of equity securities underlying stock based compensation, the realizability of deferred tax assets, the carrying value of goodwill, intangible assets and long-lived assets, and depreciation and amortization. The following discussion reviews items incorporated into our financial statements that required the use of significant management estimates.

We have entered into several transactions involving the issuance of warrants and options to purchase shares of our class A common stock to consultants, lenders, warrant holders, placement agents and other business associates and vendors. The issuance of these securities required management to estimate their value using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires management to make certain estimates for values of variables used by the model. Management estimated the values for stock price volatility, the expected life of the equity instruments and the risk free interest rate based on information that was available to management at the time the Black-Scholes option-pricing calculations were performed. Changes in such estimates could have a significant impact on the estimated fair value of those equity instruments.
We estimate the fair value of our reporting units based on the net present value of expected future cash flows. The use of this method requires management to make estimates of the expected future cash flows of the reporting unit and our weighted average cost of capital. Estimating the weighted average cost of capital requires management to make estimates for long-term interest rates and risk premiums. Management estimated these items based on information that was available to management at the time we prepared our estimate of the fair value of the reporting unit. Changes in either the expected cash flows or the weighted average cost of capital could have a significant impact on the estimated fair value of our reporting units.
Fiscal Year Ended July 31, 2007 Compared with Fiscal Year Ended July 31, 2006
Results of Operations — Consolidated
The following table reflects consolidated operating data by reported segment. All significant intersegment activity has been eliminated. Accordingly, the segment results below exclude the effect of transactions with our subsidiaries.
In fiscal year 2007, management realigned its reportable segments to better manage its service and product lines. As such, the following reclassifications have been made to the 2006 consolidated statements of operations to better reflect comparability between the years represented. Sales and marketing expenses were reduced by $254,000 in 2006 to reclass acquisition related amortization to cost of services. General and administrative expenses were reduced by $188,000 in 2006 to reclass rent to cost of services and by $225,000 in 2006 to reclass acquisition related amortization to cost of services.

Our EC Solutions segment uses the Internet and our proprietary technology and software to deliver our customers’ documents and data files to members of their trading communities. The following table summarizes operating results for our EC Solutions segment:

Revenues — EC Solutions — Revenues from our EC Solutions segment were 74% of our total consolidated revenues for the fiscal year ended July 31, 2007 (“2007”) and 67% for the fiscal year ended July 31, 2006 (“2006”). Revenue for the EC Solutions segment increased $2,775,000 in 2007, or approximately 21%, compared with 2006 primarily due to the inclusion of TradeGateway revenue for a full year in 2007 and an increase in VAN revenue of $388,000 in 2007 from 2006, or approximately 3%. The increase in VAN services revenue is primarily attributable to an increase in monthly service fees implemented in the third quarter of fiscal 2007 and higher transaction volumes.
Cost of services — EC Solutions — Cost of services relating to our EC Solutions segment was 26% of revenue derived from the EC Solutions segment in 2007, compared to 28% of revenue in 2006. Cost of services related to the EC Solutions segment consists primarily of salaries and employee benefits, contract labor, connectivity fees, amortization, rent and product development and enhancement allocation directly related to supporting and enhancing the EC Solutions products. Cost of services increased $479,000 in 2007 from 2006. The increase was primarily the result of a $402,000 increase in amortization expense mainly resulting from our recent acquisitions, and a higher product development allocation of $577,000, offset by a reduction in telephone and connectivity fees of $554,000.
Product development and enhancement — EC Solutions — Product development and enhancement costs relating to our EC Solutions segment consist primarily of salaries and employee benefits. Product development and enhancement costs increased $1,235,000 in 2007 from 2006. The increase is primarily related to the additional staff, consulting and rent expenses from the acquired Enable operations.
General and administrative — EC Solutions — General and administrative expenses supporting our EC Solutions segment consist primarily of salaries and employee benefits, legal and professional fees, facility costs, travel, meals and entertainment, depreciation, amortization and telephone charges. General and administrative costs supporting the EC Solutions service increased $215,000 in 2007 from 2006. The increase was primarily due to additional depreciation expense from the acquired Enable operations.
Non-cash charges — EC Solutions — Non-cash charges of approximately $145,000 and $26,000 in 2007 and 2006, respectively, consist of stock options issued to employees.
Results of Operations — EC Services
Our EC Services operations primarily focus on facilitating the EDI communications of small and mid-sized businesses with their trading partners through our EC service center, EC outsourcing and professional services. The following table summarizes operating results for our EC Services segment:

Revenues — EC Services — Revenues from our EC Services were 26% and 33% of our total consolidated revenue in 2007 and 2006. Revenue from the EC Services segment decreased $676,000, or approximately 10%, primarily due to customer attrition from our MEC and Kodiak acquisitions of approximately $913,000, offset by an increase in non-recurring professional service revenue of $284,000 related to our TradeGateway application. We feel that the attrition related to the MEC and Kodiak acquisitions has stabilized.
Cost of services — EC Services — Cost of services related to our EC Services segment consists primarily of salaries and employee benefits, amortization, connectivity fees, costs of software, product development and enhancement allocation and rent. Total cost of services relating to our EC Services segment was 60% of segment revenue in 2007 compared to 58% of these revenues in 2006. Cost of services decreased $281,000 mainly due to lower salary and benefit costs due to lower headcount, offset by increased customer list amortization related to our Kodiak acquisition.
Product development and enhancement — EC Services — Product development and enhancement costs consist primarily of salaries and employee benefits and rent. Product development and enhancement costs incurred by our EC Services segment increased $278,000 in 2007 from 2006 primarily due higher salaries and benefits mainly related to our EC outsourcing and professional services of $545,000, offset by a higher allocation of product development costs of $291,000 to other departments.
General and administrative — EC Services — General and administrative expenses consist primarily of salaries and employee benefits, office expenses, depreciation, telephone and rent. General and administrative expenses incurred by our EC Services segment increased $236,000 in 2007 compared with 2006. The increase is primarily due to higher telephone and depreciation and computer maintenance expenses related to recent investments in capital expenditures.
Non-cash charges — EC Services — Non-cash charges of approximately $10,000 and $13,000 in 2007 and 2006, respectively, consist of stock options issued to employees.
Corporate Expenses and Other
Our Corporate expenses represent the general, administrative, corporate and executive expenses not directly related to our EC Solutions or EC Services segments. The following table summarizes operating and other expenses for our corporate expenses:

Product development and enhancement — Corporate — Product development and enhancement costs consist primarily of salaries and employee benefits and rent. Product development and enhancement costs increased $142,000 in 2007 compared with 2006. The increase is primarily a result of unallocable salary and benefit costs not directly related to the EC Solutions or EC Services segments.
Selling and marketing — Corporate — Selling and marketing expenses consist primarily of salaries and employee benefits and rent. Selling and marketing expenses decreased $384,000 in 2007 compared with 2006. The decrease is primarily a result of lower salary, benefits and commission expense of approximately $252,000 due to fewer headcount.
General and administrative — Corporate — General and administrative expenses consist primarily of salaries and employee benefits, office expenses, depreciation, telephone and rent. General and administrative costs decreased $754,000 in 2007 compared with 2006. The decrease is primarily a result of lower salary and benefits, office rent and lower legal expenses.
Non-cash charges — Corporate — Non-cash charges of approximately $696,000 and $608,000 in 2007 and 2006, respectively, consist of stock options issued to employees and directors.
Other income — Corporate — Other income of $157,000 in 2007 is comprised of interest income earned on our higher levels of cash reserves, while the $883,000 in 2006 is comprised primarily of the one-time patent sale of $825,000.
Provision for income taxes — Corporate — Provision for income taxes consists primarily of federal and state income tax expense. The provision for income taxes increased $140,000 in 2007 compared with 2006. The increase is due to current year state income taxes of $51,000 which were not covered by our existing state net loss carryforwards, a true up of past years’ federal and state income tax timing differences of $64,000 as a result of changing the tax year-end from December 31 to July 31, and current year federal alternative minimum tax of $86,000.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Nine Months Ended April 30, 2008 Compared with the Nine Months Ended April 30, 2007
Results of Operations
The following table reflects consolidated operating data by reported segment. All significant inter-segment and inter-company activities have been eliminated.

Revenue – Total revenue for the nine month period ended April 30, 2008, was $68.2 million, an increase of $51.7 million as compared to the nine-month period ended April 30, 2007. This increase is due to the acquisition of ESC in August 2007.
The Supply Chain Messaging segment grew $19.7 million from the nine-month period ended April 30, 2007 as compared to the nine-month period ended April 30, 2008. This increase included $8.4 million from telex services and $11.3 million from EDI services acquired from ESC. The portion of the business that generated the $16.5 million in EDI services in the 2007 fiscal period decreased $600,000 during the 2008 fiscal period due to less demand for EDI professional and managed services. The Supply Chain Messaging segment comprises approximately 53% of our revenue during the 2008 nine-month period.

The On Demand Messaging segment is made up entirely of service lines acquired from ESC in August 2007. As a result, there is no comparability to the nine-month period ended April 30, 2007. The On Demand Messaging segment comprises approximately 47% of our revenue during the 2008 nine-month period.
Cost of Revenue – Total cost of revenue increased $16.0 million from the nine-month period ended April 30, 2007 compared to the nine-month period ended April 30, 2008. Again, this increase is due primarily to the acquisition of ESC during the first quarter of fiscal 2008. Cost of revenue consists mainly of telecommunication costs, which include interconnect, data line and telephone costs and network operating costs, which includes salaries, benefits, depreciation, rent, utilities and other operating costs. For the period ended April 30, 2008, telecommunication costs increased $9.4 million from the period ended April 30, 2007 and network operating costs increased $6.3 million from the same period ended in 2007.
Product Development – Product development costs increased $4.1 million from the nine months ended April 30, 2007 compared to the nine months ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted mainly of a $3.2 million increase in labor and benefits; an increase of $303,000 in rent, utilities and other operating expenses and a $263,000 increase in consultant and professional services.
Selling and Marketing – Selling and marketing expenses increased $6.9 million from the nine months ended April 30, 2007 to the nine months ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted of $4.7 million in labor and benefits, $1.4 million in external commissions, $330,000 in outside marketing expenses $256,000 in travel expenses and $133,000 in rent, utilities and other operating expenses.
General and Administrative – General and administrative expenses increased $14.2 million from the nine months ended April 30, 2007 to the nine months ended April 30, 2008 due mainly to increased costs that were the result of the ESC acquisition. The increased costs consisted mainly of $4.9 million in labor and benefits costs, $2.7 million in rent, utilities and other operating expenses, $1.2 million in professional and legal fees, $375,000 in software and hardware expenses, $230,000 in bank fees and $169,000 in insurance expenses. In addition to the regular operating expenses mentioned above, there was $3.1 million in amortization on the intangibles acquired in the acquisition.
Other Expense – Other expenses for the nine-month period ended April 30, 2008 consist mainly of interest expense of $10.5 million and a loss recorded under the equity method of $930,000 from our 20.7% ownership of ESC common stock outstanding prior to the acquisition on August 20, 2007. These expenses were partially offset by approximately $600,000 of interest income and approximately $914,000 of foreign exchange gains during the nine months ended April 30, 2008. Interest expense consists of $6.2 million for the non-cash interest expense (see Note 5, Long Term Debt, to the Interim Condensed Consolidated Financial Statements) and $4.3 million for interest on the outstanding debt.

CONF CALL

Emily Hanan



With us today from management are Thomas J. Stallings, CEO, and Glen Shipley, CFO, of EasyLink Services International Corporation.

Before we get started, I would like to remind listeners of some key points.

First, during this conference call, including the question-and-answer session, management may make forward-looking statements regarding future events and/or future financial performance of EasyLink Services International Corporation. You are cautioned that any such forward-looking statements are not guarantees of future performance and involved risks and uncertainties and that actual results may differ materially from those contemplated by such forward-looking statements.

I refer you to the documents that EasyLink Services International Corporation files from time to time with the Securities and Exchange Commission, particularly the company's annual report on Form 10-K for the fiscal year ended July 31, 2007 filed with the SEC on October 23, 2007, including the risk factor discussion in Item 1A of that report and the risk factor discussion in Part II, Item 1A of our subsequent quarter report on Form 10-Q. These documents contain and identify important factors that could cause actual results to differ materially from those contained in our projections.

EasyLink Services International Corporation undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events, or changes in future operating results.

Second, if you do not have a copy of the earnings release, you may access it through the company's website, www.EasyLink.com, under the About EasyLink and Investor Information tabs.

At this time I'd like to turn the call over to Thomas J. Stallings. Tom, please go ahead.

Thomas J. Stallings



Thank you for joining us for our fiscal third quarter earnings call.

You will remember last quarter we talked about this being a year of growth and integration following our recent merger with EasyLink Services. The team and I are very pleased to report that this has been another quarter during which we have made great strides in building a pipeline that supports our aggressive growth plans and working through the final phases of our business integration. This is now the second full quarter of reporting following our merger and the results are clearly on par with our expectations for the year.

We would like to reiterate the metrics that we believe best illustrate our performance, which are revenue, gross margin, operating income and adjusted EBITDA. In each of these categories our results are consistent with the strong numbers we reported last quarter, once again showing that our team has remained focused on the integration process and new growth initiatives.

Glen will discuss our financial results in greater detail, but here are some highlights:

Total revenue for the quarter was $23.6 million and $68.2 million for the 9-month period.

Our combined gross profit margins improved to a solid 71.1% from the previous quarter, when we reported 70.2%.

Operating income was $4.52 million for the quarter and $12.38 million for the 9-month period.

Adjusted EBITDA for the quarter was $7.2 million, and that takes us to $19.7 million for the 9-month period.

The story behind our numbers has not changed dramatically from our second quarter. The solid revenue and gross margins reflect the ability of our dedicated team and its commitment to meet the year end projections of $90 million in revenue and $22 to $24 million in EBITDA. We feel secure with these numbers and are confident that this objective is obtainable.

During the quarter we announced our vision for the company in terms of its financial goals. We plan to achieve $250 million in revenue by the end of our fiscal 2010 year. The past two quarters have been a great launching pad for us to meet this objective, and we've been pleased with our results so far.

We have benefited from the smooth transition and integration process between ICC and EasyLink. As a result, the team has been able to focus its energies on new opportunities as they pertain to both organic expansion and acquisition prospects. The result is an improved company with clearly defined goals and strategies as well as the manpower to help ensure we deliver on our intentions.

As a result of the progress we have made, I am pleased to note that Gartner, a leading industry analyst firm, recently included EasyLink in its report entitled, "Magic Quadrant for Integration Service Providers”. The analyst report defines and depicts leading vendors in the integration service providers category and measures 14 companies against particular criteria. We believe the inclusion in the Gartner report is validation that the market recognizes our growing role and presence as a key player in this space.

Likewise, our recent accomplishments led to MDB Capital Group initiating coverage of EasyLink beginning on June 2 with a very comprehensive report written by Jon Hickman.

On the operational front, we have several achievements I'd like to mention.

First, John Mecke, our Vice President of Global Product Management and EDI Managed Services, was appointed chair of X12's Marketing Advisory Group. X12 is the cross-industry standard designed by the American National Standards Institute to support any business function in any industry, and it was designed to provide a single standard with a common uniform language for electronic communications. And we're proud to have John join that group.

Most recently we expanded our sales team with the appointment of Scott Ferguson. As was announced yesterday in the press release, Scott will become or has become the Vice President for Sales in Asia Pacific. Scott brings more than 25 years experience in the information technology industry and we are pleased to have him join our team as part of our efforts toward continuing to expand our international footprint. He has significant experience driving growth and new business across Southeast Asia and the Pacific. We think he has the capability to help us penetrate the international market, in particular the Asia Pacific region.

In addition to our operational achievements this quarter, there have also been many exciting business developments I'd like to speak about. We have succeeded in consolidating our quality programs from both our legacy companies into one that addresses the business objectives of EasyLink Services International. We also made several upgrades to our technology. We upgraded our domestic fax platform to deliver traffic at higher speed with improved quality at a lower cost per minute. Additionally, we upgraded our EDI environment in London with state of the art equipment to deliver improved performance. These modifications will ensure we are providing the highest quality service for our customers.

I am pleased to mention we negotiated new telecom contracts with our providers to effectively reduce expense by approximately $1 million a year. Additionally, we significantly expanded our customer base during this quarter, much the same as we reported last quarter. We secured several noteworthy accounts that I'd like to specifically mention by name: California Pizza, Brookstone, Red Hat Software, Quintiles, Prudential Insurance, Union Bank of California, and Micron Technologies. These new accounts along with others will generate more than $1 million in recurring revenue. Our team continues to produce strong results, and we're pleased to report another solid quarter that will help us meet our year end goal.

At the international level, we made notable progress securing contracts and building revenue through our continued support of our telex solutions. Specifically, in May, McCall signed a contract for a $90,000 telex IP gateway, Italy Cablegram billed out over $33,000 in April and $44,000 in May, and the Venezuela Network billed out $46,000 of new revenue in May. Our accomplishments in these areas prove our commitment to global expansion. It also demonstrates the efforts of our team, which we continue to strengthen.

We continue to expand our customer base even further. We currently have over 15,000 clients worldwide across a wide range of industries. Many of our companies are household names and have an established market presence. We see value in the percentage of our business that comes from outside the United States, currently accounting for approximately 25% of our total business. Going forward, it is one of our goals to increase this percentage dramatically.

At this point I'm going to hand over the call to Glen, who will review our financial results in detail. After that, I will return to review the company's strategy and vision, and then we'll take some calls from our investors.

Glen E. Shipley



I would like to review the financial results for EasyLink's third quarter ended April 30, 2008 and the corresponding 9-month period in more detail.

As previously noted, revenue for the third quarter ended at approximately $23.6 million, with revenue for the 9month period of approximately $68.2 million. While we will provide you some year-over-year comparisons, we continue to stress that we do not view these comparisons as meaningful to our shareholders as a result of the magnitude of the EasyLink acquisition.

Last fiscal year's revenue for the third quarter was $5.4 million and for the nine months of fiscal 2007, revenue was $16.5 million. The operations that generated these 2007 revenues are now part of our Supply Chain Messaging segment.

And, on a segment reporting basis, the results for the third quarter are as follows:

Revenue for Supply Chain Messaging, which includes all electronic data interchange or EDI services and our telex services, was $12.3 million, which represented 52% of total consolidated revenue and produced a 74.8% gross margin.

Revenue from our On-Demand Messaging, which includes faxing, production messaging, document capturing, management and other e-mail services, was $11.3 million, which represented 48% of total consolidated revenue and delivered a 68.1% gross margin.

Our combined gross profit margin for the quarter held strong at 71.6%.

Revenue for the 9-month period in Supply Chain Messaging segment was $36.2 million or 53% of total revenue, with a gross margin of 74.2%.

Revenue for the 9-month period for the On-Demand Messaging segment was $32 million, representing 47% of total revenue and delivered a gross margin of 67.5%, with a combined gross margin for the 9-month period of 71.1%.

On a quarter-over-quarter basis, third quarter revenue of $23.6 million was essentially flat compared to the second quarter's revenue of $23.65 million. We do notice some minor quarter-over-quarter seasonality in revenue, particularly in our Supply Chain Messaging segment, and in particular the retail vertical.

Our gross margins, however, were up from the second quarter's 70.8% to 71.6% in the third quarter, with operating income for the third quarter at $4.25 million, up $300,000 from the second quarter's $4.49 million.

We continue not to emphasize GAAP net income as a metric by which shareholders should measure our success, but we note that GAAP income for the third quarter was $6.89 million as compared to GAAP income of $3.27 million for the second quarter and had a fully diluted income per share of $0.17 in the third quarter as compared to $0.10 in the second quarter.

In the third quarter we recorded $1.09 million in non-cash interest expense from amortization of our beneficial conversion feature as compared to $2.37 million in our second quarter. We also booked a net tax benefit of $4.42 million in the third quarter from the release of a portion of our tax loss carryforward reserve. This compared to $1.02 million in the second quarter. We do not expect to release any more of this reserve in fiscal 2008 as we anticipate the amounts released to date will cover expected tax income for the fiscal year.

We continue to encourage shareholders to consider adjusted EBITDA as a better measure of our performance as this figure filters out many of our adjustments, such as the beneficial conversion feature. Adjusted EBITDA for the third quarter was $7.2 million and $19.7 million for the 9-month period, comparing this to fiscal 2007 third quarter of $1.4 million of EBITDA and $4.3 million for the 9-month period.

As noted in the second quarter earnings call, our second quarter EBITDA included a one-time reversal of $768,000 in expenses which, if taken into account for comparative purposes, second quarter adjusted EBITDA would have been $6.9 million.

Turning to the balance sheet, we ended the third quarter with $27.2 million in cash, total current assets of $45.8 million, and total current liabilities of $17.5 million. Net debt was $42.8 million.

Before we open the floor for questions, I'd like to turn it back over to Tom for some final comments.

Thomas J. Stallings

To reiterate what I mentioned earlier in the call, we believe we are on track for continued financial growth as we expand our business both organically and through acquisitions. Our team is particularly focused on expanding our international footprint while remaining committed to providing superior solutions and services to our customers worldwide.

In achieving these goals, we hope to build momentum for growth to ensure we produce results for the company and its shareholders. We have succeeded in securing a significant number of new accounts with established notable companies and plan to continue work toward expanding our list of customers, both domestically and internationally.

As mentioned in the beginning of this call, the four metrics we remain focused on are revenue, operating income, gross margin and EBITDA.

I would like to also emphasize that we remain interested and very active in pursuing acquisition opportunities. We realize that our ability to execute acquisitions going forward and integrate new businesses will be a critical component of our overall results.

We also believe that we have already exhibited our ability to successfully identify good targets and execute an efficient integration process. This remains the strategy going forward, and we hope you will look to our track record in evaluating our capabilities.

Overall, we are pleased with the strong results of the quarter. We believe we are on the path to achieve our revenue objective of $250 million by 2010. As we have mentioned in the past, we expect fiscal 2008 to be a very strong year for EasyLink. Taking into account this quarter's results, paired with our performance through Q2, we believe we are positioned to consistently deliver solid results and continue to meet our goals as we move forward.

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