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Edited Transcript of INWK earnings conference call or presentation 8-Aug-19 9:00pm GMT

Q2 2019 InnerWorkings Inc Earnings Call

Chicago Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of InnerWorkings Inc earnings conference call or presentation Thursday, August 8, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bridget Freas

InnerWorkings, Inc. - VP of Finance & IR

* Donald W. Pearson

InnerWorkings, Inc. - Executive VP & CFO

* Richard S. Stoddart

InnerWorkings, Inc. - President, CEO & Director

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Conference Call Participants

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* Adam David Kelsey

Craig-Hallum Capital Group LLC, Research Division - Research Analyst

* Christopher Paul McGinnis

Sidoti & Company, LLC - Special Situations Equity Analyst

* Kevin Mark Steinke

Barrington Research Associates, Inc., Research Division - MD

* Timothy Michael Mulrooney

William Blair & Company L.L.C., Research Division - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. Thank you for standing by, and welcome to the InnerWorkings Second Quarter 2019 Earnings Call. (Operator Instructions) I would now like to turn the call -- conference over to your host, Ms. Bridget Freas. Please go ahead.

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Bridget Freas, InnerWorkings, Inc. - VP of Finance & IR [2]

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Good afternoon, and welcome to our second quarter 2019 earnings call. Joining me on the call today are Rich Stoddart, our Chief Executive Officer; and Don Pearson, our Chief Financial Officer.

We issued a press release with additional information earlier today, which is available on our website, www.inwk.com. Please note, this call will include forward-looking statements relating to future results that are made pursuant to the safe harbor provisions of the federal securities laws. These statements are subject to a variety of risks, uncertainties and assumptions that may cause actual results to differ materially from those stated or implied by the forward-looking statements. Additional information concerning these risks, uncertainties and assumptions is contained in our SEC filings, including the Risk Factors section contained in our most recent Form 10-K. Any forward-looking statements represent our views only as of today and should not be relied upon as of any subsequent date.

This call will discuss, among other financial performance measures, adjusted EBITDA and non-GAAP diluted earnings per share. Please refer to the company's earnings release issued today for a reconciliation of these non-GAAP measures to most comparable GAAP measures. This call is intended for and analysts and investors and may not be reproduced in the media in whole or in part without our prior consent.

I'll now turn it over to Rich.

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [3]

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Good afternoon, and thank you for joining us. Our top priorities for this year continue to be lowering our costs, operational excellence and profitable growth. Our second quarter results demonstrate consistent execution against a robust plan focused on these 3 priorities.

We're very pleased with the progress we're seeing in realizing the benefits of our cost reduction plans, while effectively managing cost required to serve new clients. Our adjusted EBITDA in the second quarter was the highest in nearly 2 years and more than double that of the first quarter. Our profitability expectation for the second half of the year is even stronger. While we still have a lot of work ahead to execute our plans, our progress so far is giving us confidence in raising our full year adjusted EBITDA guidance today, as Don will outline later.

We are not solely focused on the bottom line, however. We also want to continue to grow our revenue and support an expanding list of brands by driving excellence in their marketing organizations. There are few areas of our revenue I'd like to tell you about. The first is our impressive list of new client wins here today. At a $135 million of new revenue at full run rate, this is by far the strongest year-to-date signings we've ever had at this point in the year. Even more notable in our view is the high quality of this revenue due to the robust new business review process we put in place at the start of the year. We believe as a group, these new wins will provide better economics than the new business awarded in recent years. This is achieved by finding more opportunities to maximize value for the client, while still securing the right economics for us. A strong profitability of this new revenue will take a little time to show in our results as there client wins ramp. But this improved mix of revenue gives us even greater confidence for EBITDA growth in the coming years. One of the new wins I'd like to highlight for you is a 5-year exclusive agreement we signed last month with a brand we have long served in the retail environments category.

This global sportswear company was one of our largest clients until a shift in their marketing strategy caused a significant decrease in business with us in 2018. Only 1 year later, the same client has now signed a new enterprise contract for us to provide a comprehensive 2D and 3D retail and wholesale program for North America, encompassing in-store graphics, temporary fixtures and displays, store windows, digital displays, seating kits and events. In addition, we will provide creative services, design engineering and installation. Unlike our legacy retail environment relationship with this brand, we will have an on-site team managing this program, with a significant minimum annual spend commitment.

Meanwhile, our legacy relationship of managing new store openings for this client continues. The end result is a transformation of the client relationship into a long-term enterprise solution, making the relationship significant, stable and consistent. Once ramped, we expect the total revenue from this relationship to roughly equal its historical peak with us.

Not included in our new wins this year is additional business coming to us from our acquisition of Madden Communications announced earlier this week. While not a large transaction financially, Madden brings new clients in the beer, wine and spirits vertical. In particular, attractive relationships with Miller cores and Mike's Hard Lemonade. This acquisition will add to our revenue in 2019. But the greater significance is in the capabilities we have inherited. Madden has a robust logistics offering that adds to our capabilities in the fulfillment services we provide to our clients. In addition, Madden's creative studio adds talent to our creative services offering, an area we believe holds promising growth potential. This acquisition is not meaningful to our bottom line on day 1, but we believe it can be a stronger contributor to our growth and profitability over time. We're very excited to welcome this new talent from Madden to the InnerWorkings family.

One final point I want to make on revenue. While the Madden clients and the organic contract wins will give our 2019 revenue a boost, our revenue guidance is unchanged as this effect is offset by year-to-date foreign currency headwinds we've experienced and the removal of certain client revenue that we decided to walk away from this year. We are highly focused on trading our less profitable revenue for the high-quality revenue growth we're starting to ramp. We're confident this is the right strategy to drive value for our shareholders. And it reinforces our path to sustainable, profitable growth.

I will now turn it over to Don.

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Donald W. Pearson, InnerWorkings, Inc. - Executive VP & CFO [4]

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Thanks, Rich. Hello, everybody. Our second quarter gross revenue was $284 million, an increase of 1% over the second quarter of 2018. Excluding currency impact, gross revenue increased 3%. Our gross profit or net revenue was $69 million in the second quarter compared to $65 million in the same period of last year. Our net revenue increased 6% in the second quarter and 8% excluding currency impact. Our gross margin was 24.3% in the second quarter compared to 23% a year ago.

As anticipated, our gross margin improvement is due to a more favorable revenue mix, supply chain initiatives and a continuing focus on optimizing client profitability either by improving our terms or exiting low-margin businesses. Our second quarter adjusted EBITDA was $13.6 million compared to $8.2 million in the second quarter of last year, which represents growth of 66%.

For the year-to-date period, adjusted EBITDA increased 30% from $15.5 million to $20.2 million. This factor demonstrates further year-over-year growth in adjusted EBITDA to the second half of 2019, as we realize the benefits our cost reductions and an improvement in the mix of revenue, as Rich discussed earlier.

The plan to optimize our account staffing model, developed in partnership with third-party consultants is complete, and we're well into the implementation. Altogether, we have actioned $16 million in cost reductions from the plan we announced last summer, and we are on track to action against $15 million in cost reductions from the second phase announced in March. We expect to realize a minimum of $3 million in savings in 2019 from actioning at least $9 million of the $15 million of Phase II cost reductions this year, with the balance to be actioned in 2020.

Our second quarter non-GAAP diluted earnings per share was $0.06 compared to $0.01 in the second quarter of last year. For the year-to-date period, our non-GAAP diluted earnings per share was $0.07 compared to a loss of $0.01 in the first 6 months of 2019.

Turning to the cash flow statements and the balance sheet. Cash provided by operating activities was $1.3 million year-to-date. We expect cost reductions and profit enhancement initiatives will drive improvements in our operating cash flow going forward. Our capital allocation priority is to use excess cash to pay down debt.

At June 30, our net debt position was $124 million. On July 16, we completed the refinancing of our debt in a new long-term structure, which provides us the liquidity and flexibility we need to execute our strategic and financial plans.

Now turning to the outlook for 2019. We are maintaining our full year guidance for gross revenue and non-GAAP diluted earnings per share, and we are raising and narrowing our adjusted EBITDA guidance based on the pace at which we are executing our plans to date.

We expect 2019 gross revenue to be in the range of $1.15 billion to $1.18 billion and adjusted EBITDA in the range of $44 million to $47 million, up from the prior guidance of $42 million to $46 million. We expect non-GAAP diluted earnings per share to be in the range of $0.20 to $0.24.

And now, we would be glad to answer your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of George Sutton with Craig-Hallum.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [2]

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This is Adam on for George. Richard, I was wondering if you could talk a little more about the additional changes you made over the quarter in the business development review? It seems like it is going really well. Would love to hear what else happened?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [3]

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Yes. So I would say, look, this is a process that we implemented at the beginning of the year and I think it is now a process that is hardwired into the way we run our business. There's obviously a bit of a catch up when you build that in and you have to catch up to some sales pursuits though -- it may not have been part of the process. So everyone is clear on the way the process works, when the engagement happens, what the different functions are that are involved. And I think -- I would argue that this has been a critical strategic driver of incremental improvement in the economics of the contracts we are signing, go forward. So I think you're right to observe that it is going well and it is a key part of the discipline we will sustain going forward.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [4]

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Yes. And then just dovetailing off of that. Could you speak to the pipeline? Has there been any effect on how wide you've been able to reach or the amount of time you've been able spend searching for new business?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [5]

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Yes. So I'd say the pipeline continues to remain robust. Clearly, we're very happy with the pace we've seen in the annual run rate of $135 million year-to-date. That's very strong for us. I would say -- I would suggest that if you are -- have any temptation to take that $135 million and double it, that's probably the wrong approach, right? Remember, we are -- the timing of signings is -- really has a lot to do with clients and the client engagement and nature of the engagement. But these are great clients, great wins, a nice ramp, and we have a strong pipeline going forward.

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Adam David Kelsey, Craig-Hallum Capital Group LLC, Research Division - Research Analyst [6]

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Great. And one final question. Could you give us an idea of the timing of the $3 million in savings this year?

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Donald W. Pearson, InnerWorkings, Inc. - Executive VP & CFO [7]

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Yes. This is Don. We'll start to see some of it in the part of back half of Q3 and then into Q4.

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Operator [8]

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Your next question comes from the line of Chris McGinnis with Sidoti & Company.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [9]

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I guess as a follow-up on the contracts won so far this year. If you are being a little bit more careful for what you're bringing in, can you just maybe talk about what's driving such a strong start for the first 6 months?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [10]

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Yes. So look, I would say the -- this management team has been together now for -- and complete for the last -- since the beginning of the year so for the last 2 quarters. I think you're seeing a team that's really focused on executing. You're seeing some of the leads that some of this team brought with them start to manifest themselves. And just a real laser-like focus on the right growth, chasing the right growth. We've spend a lot of time last year on getting much more visibility to our pipeline, ensuring we're focused on the right opportunities and spending time on pursuits that we believe we have a higher likelihood to win and have the most value for the client and the most value for us. So I think it's sort of the logical conclusion, a lot of those efforts in, sort of, the back half of last year into this year.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [11]

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Okay. And can you just maybe highlight maybe the rate of growth coming in new versus existing?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [12]

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It's roughly 50-50. It may be 60-40 new versus existing. But it's pretty close to 50-50.

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [13]

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Okay. And then just one last question. The -- with the help of the third-party out now, where are you on the, I guess, on the network, you trying to call it, with the back office optimization, if you are -- I guess if you're thinking about it in terms of being streamlined at this point on a percentage basis?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [14]

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Are you referring to sort of the back office functions?

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Christopher Paul McGinnis, Sidoti & Company, LLC - Special Situations Equity Analyst [15]

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Yes. I guess, more optimization, is that fully complete at this point? Or is it still being adopted?

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Donald W. Pearson, InnerWorkings, Inc. - Executive VP & CFO [16]

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Yes. So he's referring to our restructuring with the account -- the $16 million. So when you take a look at our -- again, we -- as reminder, we spent about the first 4 or 5 months of this year rigorously planning and designing this action and activities with the outside consultants and our team. The implementation of that started, I'd say, late in June. So really just the very end of second quarter and into the first couple of months of Q3. And we expect to action about $9 million of the $15 million this year. So we're not quite done with the $9 million. We've probably got several million to go on that. But we're on pace as to what we had planned. And we expect to hit the targets that we've laid out for you today.

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Operator [17]

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Your next question comes from the line of Kevin Steinke with Barrington Research.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [18]

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Maybe talk a little bit more about the 5-year enterprise agreement with the global sportswear company? How they came about following obviously the significant reduction you had. What was the approach? What was the client's view of the work you're doing? Obviously, they were happy with it, but just maybe if you can just give us a little more detail on how that all came about.

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [19]

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Yes. Great question, Kevin. Look, I think this is an indicator of the power of the diversified service offerings that InnerWorkings brings to the table. So the client had a shift in strategy. As they had that shift in strategy, it seemed to us that there was an opportunity to pivot the offer to the core InnerWorkings offer around an enterprise contract that could drive efficiencies, speed, savings and embedded on-site team enabled by technology.

And so that coupled with building the right relationships to go back in with a different offer. It was a conscious decision on our part to say, we think given where you are in the strategy you have going forward, we can help you in a different way. And we were successful in converting that. There was -- it was a really fantastic example of collaboration between the existing team, already doing the retail environments work and a new team that we put together to bring the new offer to the table.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [20]

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Okay. That's good to hear. Maybe just talk a little bit more to about the how the Madden acquisition came about? That sounds like it's kind of more of a one-off and not necessarily a switch in your strategy that you're going to ramp up acquisition activity or anything like that. But maybe just talk about how that came about and your overall philosophy with regard to acquisitions going forward?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [21]

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I'm glad you brought that up, Kevin. So you are 100% correct. This is not a shift in our strategy. We've been organic since 2014. The Madden acquisition developed as we were onboarding and beginning to implement the some new business that we won that we announced in Q1. That was part of that $75 million in Q1. And as we did so, there was an incumbent relationship with Madden at a warehouse that existed that we actually took over that warehouse as we moved the relationship to InnerWorkings. It was a really collaborative effort. The Madden team was doing a great job and that led to a broader conversation around potentially a larger -- a move of the entire Madden business to InnerWorkings. So I think it provides a great home for some really talented people at Madden. It's accretive to our capabilities in the logistics, warehousing space as well as some really talented creative studio folks. They bring some great new clients. But this is not -- we're not "back on the acquisition trail" by any means. And as I said on -- in my remarks, this is really immaterial from a financial standpoint. So it really is about capability and talent.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [22]

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Okay. Great. That's helpful. And you mentioned walking away from some less profitable revenue. Sounds like that helped out the gross margin. Maybe as you look at the portfolio, client portfolio that you have, are there more of those out there? I mean do you think you're pretty much through the review process, renegotiation process? Or should we just kind of think about this as an ongoing process improvement in activity?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [23]

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Yes. I think -- look, I think there was another discipline that we felt that actually haven't talked about, which is the account performance reviews that we do every month. And invariably, account performance is not a static thing, it changes by type of work we're doing, it changes depending on volume. And so we're always reviewing how is every account performing. Are there opportunities for us to improve that performance internally. And so I think it is a regular discipline to just sort of look at the portfolio of businesses that we have and say, are we doing -- can we optimize? I will say, we, in the latter half of last year or sort of Q4 into Q1 and a little bit into Q2, we probably had more identified issues to solve. And we'll begin to move more toward just, I'll call it, just a regular maintenance approach that says, where can we optimize. Part of this, again, is building the discipline into the organization to be highly focused on this.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [24]

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Okay. And you talked about gross margin benefiting from that improvement in client profitability as you walked away from some business, also favorable revenue mix, supply chain initiatives. How should we think about gross margin in the back half of the year? Do you expect that favorable revenue mix to continue? I mean I just guess we'd get some of the run rate from walking away from that business in the second half. So maybe just how those factors all play out in the second half as you see it?

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Donald W. Pearson, InnerWorkings, Inc. - Executive VP & CFO [25]

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Yes. As of this time, we're still looking at 24%. It is kind of a sweet spot for the year. There's some upside down -- upside to that. And certainly, we've been hit with surprises in the past. So we're really targeting 24% for the year.

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Kevin Mark Steinke, Barrington Research Associates, Inc., Research Division - MD [26]

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Okay. And then lastly, you raised the EBITDA guidance a bit, EPS guidance unchanged. Should we think about maybe higher interest expense associated with the new credit agreement, maybe that having a factor in the EPS guidance on being unchanged?

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Donald W. Pearson, InnerWorkings, Inc. - Executive VP & CFO [27]

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Yes. So that will definitely be a factor. At least in the first year, the new debt agreement is a much higher interest rate.

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Operator [28]

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Your final question comes from the line of [Sam Cuzwarm] (sic) [Timothy Mulrooney] with William Blair.

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Timothy Michael Mulrooney, William Blair & Company L.L.C., Research Division - Analyst [29]

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We have a quick question relating to your new business wins. Is there any difference in margin between the new contracts and contracts that are being renewed?

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Richard S. Stoddart, InnerWorkings, Inc. - President, CEO & Director [30]

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I think -- look, the economic profile that we're looking to as a company is doesn't matter whether it's new or a renewal. I will say on a new business, one dynamic that's different is the ramp time is slower. We're beginning to implement. We're probably putting some people on-site. And so we'll see the profitability improve as the revenue ramps, whereas with the renewable, if the service that is the same, you're probably already at a sort of an efficient run rate of revenue in static. So that's the only really material difference.

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Donald W. Pearson, InnerWorkings, Inc. - Executive VP & CFO [31]

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Yes. I think what I would just add to that is I think, it's a higher level of achievement of the underwritten gross margin that will really make a step change, versus in the past, we might have desired to get a gross margin, but we just didn't really achieved it. I think we have a much higher possibility of achieving the contracted gross margins because of this more rigorous process.

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Operator [32]

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This concludes today's teleconference. You may now disconnect.