Welcome to the fourth quarter 2008 NaviSite earnings conference call. My name is Madge and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will hold a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Jim Pluntze, Chief Financial Officer.

Welcome to NaviSite’s fourth quarter and fiscal year 2008 earnings conference call. Arthur Becker, NaviSite’s Chief Executive Officer, is also with me today. We’ll be discussing our financial results and sharing key business highlights from our fourth quarter and full fiscal year 2008 which ended on July 31, 2008. We’ll also provide an outlook for the first quarter of fiscal year 2009 and share some of the strategic actions that we’ve taken to tune our business for fiscal year 2009. Before we get started please be aware that the information we’re about to discuss includes forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties. The company’s actual results could differ materially from those discussed in this call. Factors that could contribute to such differences include but are not limited to those items noted and included in the company’s SEC filings. The forward-looking information that is provided by the company in this call represents the company’s outlook as of today and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and other developments may cause the company’s outlook to change from that which is discussed today. We’ll also discuss NaviSite’s EBITDA performance for the fourth quarter of fiscal year 2008. Please note that EBITDA is not a recognized measure for financial statement presentations under the United States Generally Accepted Accounting Principles. The company believes that this non-GAAP measure of EBITDA provides investors with a useful supplemental measure of the company’s actual and expected operating and financial performance by excluding the impact of interest, taxes, depreciation and amortization. The company also includes such nonoperational items as impairment costs, stock-based compensation, severance and costs related to discontinued operations from its non-GAAP measure as such items are considered to be nonoperational in nature. EBITDA does not have a standard definition and therefore may not be comparable to similar measures presented by other reporting companies. Management uses EBITDA to assist in evaluating the company’s actual and expected operating and financial performance. These non-GAAP results should not be taken in isolation of or as a substitute for the company’s financial results prepared in accordance with US GAAP. A table reconciling the company’s net loss as reported to EBITDA is included in the condensed consolidated financial statement in NaviSite’s fourth quarter and fiscal year 2008 earnings press release. Now I’d like to turn the call over to Arthur Becker, NaviSite’s Chief Executive Officer.

We are pleased to report our results for the fourth quarter and full fiscal year 2008. I would like to begin by sharing financial results, reviewing some operating details and then share our outlook for FY09 along with a detailed update on some of the actions we have taken recently to achieve our FY09 goals. As reported in our press release earlier this morning, revenue for the fourth quarter fiscal ’08 that ended on July 31, 2008 was $40.2 million representing an increase of 16% compared to the $34.7 million reported in the same quarter last year. Fourth quarter revenue also represented a sequential increase of 2% over $39.3 million reported in the third quarter. For the full fiscal year 2008 revenue was $154.6 million representing a 22% increase over the $126.2 million reported in fiscal year 2007. Recurring revenue from our hosting related business segments was $34.4 million in the fourth quarter representing a year-over-year increase of 22% and a 4% sequential increase over the third quarter. Recurring revenue for the full fiscal year was $131.3 million representing an increase of 24% over the recurring hosting revenue of $105 million in fiscal year 2007. We have initiated the reporting of the hosting recurring revenue to provide more insight into the dynamics and growth of our core business. EBITDA excluding impairment costs, stock-based compensation, severance, costs related to discontinued operations and other nonoperational changes for the fourth quarter was $10.1 million representing a year-over-year increase of 35% and a 14% increase over the third quarter. For the full fiscal year 2008 EBITDA was $34.2 million representing an increase of 32% over the $23.1 million reported in fiscal year 2007. Income from operations for the fourth quarter was $1.4 million representing a 45% increase over the fourth quarter of fiscal year…

As we previously mentioned, revenue for the fourth quarter fiscal year 2008 was $40.2 million up 2% sequentially and up 16% over the fourth quarter of fiscal year 2007. About 14% of the revenue this quarter was from our professional services or nonrecurring type revenues. Revenue for fiscal year 2008 was $154.6 million a 22% increase over the $126.2 million in revenue reported in fiscal year 2007. Revenue for fiscal year 2008 includes the results of our first quarter acquisitions. Recurring hosting revenue was $34.4 million for the fourth quarter representing a year-over-year increase of 22% and a sequential increase of 4%. Recurring hosting revenue for the full fiscal year including our acquisitions was $131.3 million representing an increase of 24% over the revenue of $105.8 million in fiscal year 2007. NaviSite generated a gross profit of $12.6 million or 31% of revenue for the fourth quarter of fiscal year 2008 as compared to $11.2 million or 32% of revenue for the same fiscal quarter of 2007 and $12 million or 30.5% of revenue for the third quarter of fiscal year 2008. Excluding depreciation, amortization, severance, noncash comp and impairment costs our adjusted cash gross profit was 46% for the fourth quarter of fiscal year 2008 compared to 43% for the same quarter in fiscal year 2007 and 45% for the third quarter of fiscal year 2008. Income from operations was $1.4 million in the fourth quarter of fiscal year 2008 as compared to income from operations of $1 million in the fourth quarter of fiscal year 2007 but down from the $2 million reported in the third quarter of fiscal year 2008. The sequential decline was mainly due to higher cost of sales and G&A costs in the fourth quarter as compared to the third quarter. For the full…

Now I’d like to take this opportunity to discuss details of a few strategic actions we have taken to improve our operating performance amid economic uncertainties and to make our growth objectives for fiscal for the fiscal year 2009. Earlier this month in response to the decline in our bookings for professional services, we realigned the professional services portion of our business by consolidating the delivery of this group, primarily the implementations services of packaged applications with our enterprise hosting business. This change has resulted in the elimination of certain management overhead and the reduction of some underutilized professional services personnel. The short-term impact will be a reduction of revenue from this group which has historically been of marginal profitability and the strategic result will be our sharpened focus as an enterprise-hosting provider to provide professional services capabilities for our customers throughout the life cycle of their hosted applications. Implementation services of our professional services group is very complementary with our existing hosted application management services delivery team that was already in place in the hosting organization. These changes are designed to create a seamless model of service delivery to our customers and an elimination of redundancies and underutilized resources within the company. This realignment is consistent with our strategy to offer a full suite of hosting and life cycle management solutions for hosted applications to our enterprise customers. We have seen good results with this packaged life cycle management approach that was already in use for our Lawson suite of applications and we’re now shaping our Oracle and PeopleSoft practice to reflect these best practices as well. In addition to the changes that we have made to our professional services delivery group, we’ve also consolidated our sales organizations. New customers sales efforts for hosting, professional services and application management…

(Operator Instructions) Our first question comes from Mark Kelleher - Canaccord Adams.

Could you guys tell us what your estimated quarterly cash interest expense is now?

It’s probably about a million higher. We have at the end of the year about $108 million or $109 million of senior debt so $108 at 1%, we’re talking about $1 million a year or $1.1 million a year.

On a quarterly basis you were around $2.5 million or something like that so maybe $3 million?

Yes, approximately that.

Could you walk us through what went through in the quarter, the reasoning behind the renegotiation of the debt covenants and maybe what has led to the delay of the 10K filing?

The delay in the filing was primarily due to the fact that we were in the process of renegotiating our credit agreement with our lenders. That was dictated by a couple of things. One is we were in violation of some of our covenants at the end of the year so we were required to seek a waiver. We also looking ahead into fiscal year ’09 realized that it was time to be looking at relaxing covenants as opposed to tightening covenants so we were working with the lenders on that aspect also. Both of those took a little bit of time given the volatility in the credit markets and until we reached that agreement, we really weren’t in a position to file our 10K. Now that’s we’ve reached that agreement we’ll be filing that shortly.

How about your churn? I know the churn was within normal levels for the July quarter. Do you anticipate that creeping up as we get into a more difficult economic environment?

Certainly we would contemplate that in our forecasting. Fortunately we’ve not seen that yet in the early portions of fiscal year ’09 but that certainly wouldn’t be something you could rule out as you look toward the year and given what’s going on in the business climate.

Our next question comes from Srinivas Anantha - Oppenheimer & Co. Srinivas Anantha - Oppenheimer & Co.: A couple of questions on the guidance. Jim, could you walk through on the guidance for 1Q09? How much of that is coming based on your bookings during the past 12 months and how much of an incremental booking are you guys expecting in 1Q to provide that revenue? Also with respect to you were slightly surprised at given the lower contribution from professional services that margins would actually be better, but it looks like that’s not the case based on your EBITDA guidance.

As you know our hosting bookings we typically guide as a five-month installation so we don’t recognize revenue in our modeling for much of the in-quarter bookings. As a result the EBITDA or the revenue for the quarter isn’t really dependent very much on the existing quarter’s bookings. That’s less so with respect to revenue for professional services which has a lot faster start date than hosting does. So I guess the quick answer is, very modest. Secondly, the first quarter does we don’t think necessarily reflect a normalized quarterly business. The changes we made in professional services were mid-quarter so some of the negative impact of the declined bookings in professional services impacted the EBITDA results of the first quarter. We believe that as we go forward on a normalized basis that some of the negative contribution margin from the professional services business will be mitigated and therefore the margins as a percentage of revenue will increase. Srinivas Anantha - Oppenheimer & Co.: I know you mentioned that professional services is going to decline in FY09. To what extent have you guys really de-emphasized the business when you say it’s going to be declining? Is it more like 20% to 25% or 10% to 15% or what kind of percentage of decline should we expect?

Are you talking about dollars? Srinivas Anantha - Oppenheimer & Co.: Year-over-year percentage?

We saw bookings decline 34% year-over-year FY08 over FY07. So you’ll see that there is a lag affect of that so it doesn’t just mean that the revenue in FY08 was materially lower than FY07. Where we’ll see the impact of the decline in bookings of professional services will be in this first half of FY09, and to the extent that we have both reduced the size of the group of service delivery we’ve reduced our ability to generate revenue from that group even if we did have bookings, although that’s not the case. We think the outlook for professional services, particularly professional services’ only transactions, has become very competitive. Pricing has been very, very competitive as well and we’re really feeling that the right answer here for us is to deliver a service model that’s very similar to what we’ve done for Lawson, which is to sell a package life cycle approach to application management customers where professional services is a piece of the deployment of the overall contract. So we think it’ll be a material decline in terms of professional services only from FY08 revenue to FY09 revenue. Srinivas Anantha - Oppenheimer & Co.: You guys have renegotiated your covenants. Do you have any principal payments for the next 12 months? Also on your balance sheet I see notes payable to AppliedTheory has been taken out from current liabilities? Has it been shifted to notes payable current portion? I’d just like a little clarification on that.

The AppliedTheory notes were settled during the quarter and are gone. They’re off our balance sheet. In terms of amortization payments we didn’t change the amortization as part of our credit agreements so we still have a 1% amortization. We did however change the frequency of our cash sweep which will allow us to repay our debt from excess cash on a more frequent basis, so we might see some additional pay-down. But it’s not a requirement; it’s based on a calculation of free cash flow. Srinivas Anantha - Oppenheimer & Co.: I’m not sure if you guys gave the cap ex guidance. I might have missed it. Could you just talk about what kind of a cap ex we should expect for FY09?

As usual it depends on our bookings and it depends on I think those generally lag the quarter of the bookings. So given that we had a reasonable, pretty strong quarter in Q4, we would probably have a similar type of spend or maybe a little bit higher in Q1 than we saw in Q4 going forward. Then given the more modest expectation of bookings in Q1, Q2 would then come down but we believe the covenant level of $14 million is adequate for our expected growth for fiscal year ’09.

Our next question comes from Dave Coleman - RBC Capital Markets.

Going back to the 1Q EBITDA guidance, are there any one-time charges that you’re incurring that’s being reflected in that EBITDA guidance?

I wouldn’t say from an accounting point of view there are any one-time charges. It wouldn’t say specifically one time. But we did see a negative contribution of professional services during this last quarter and the reductions in underutilized resources as well as some of the management overhead during the quarter should result in an elimination of some of that negative contribution margin. So in that context we don’t see the same level of negative contribution in Q2 and going forward that we saw during this existing quarter.

Maybe to ask it a different way, if you were to normalize for these negative contributions from pro services, what would the 1Q adjusted EBITDA guidance be?

That’s a good question. We don’t break that out really but I just would think that there is an existence of that negative contribution margin in Q1. I don’t think we can go into a detail of more breaking it out unless Jim you’re feeling optimistic about breaking it out.

Overall we’ve always said that professional services should result in a sort of 10% EBITDA margin. Given that the business has been volatile, I think we’ve talked to you guys about more of a break-even business. If you think of a reduction in revenue for the first quarter, you might see a modest loss in that category that wouldn’t replicate itself going forward to other quarters. It’s not going to be millions of dollars but it might be a few hundred thousand dollars that we would see as we’re looking to eliminate as we move forward.

I apologize for harping on this but if I look at your total revenue guidance and your hosting guidance, that would imply about $3 million to $4 million of pro services revenue in the first quarter and then your adjusted EBITDA guidance would imply roughly $1.5 million EBITDA loss from pro services. I’m just having a tough time reconciling how you actually have negative margins in that business.

I think the reason you have negative margins in professional services in general is when you have underutilized staff and bookings aren’t sufficient to fully utilize those bodies. As Arthur mentioned, some of the actions we’ve taken have been to essentially eliminate that underutilized staff on our books.

You indicated slower MRR bookings in the latest quarter. Is there any type of deals that you’re seeing lengthening sales cycles among larger customers of small or medium size businesses? The final question is, any update on the UK as far as where things stand there as far as getting customers into that facility?

We’ve just begun to see in the last few weeks the deferral by some of our customers of some of their decision-making. We’ve seen reasons like, “The Board has decided to reconsider things.” We’ve seen feedback from our sales force of deals that they had thought would close in Q1 which has looked reasonably good throughout the quarter and in the last few weeks has taken a noticeable change in momentum. Some of that we expected to be as seasonal because just strangely enough we’ve seen our first fiscal quarters in the past couple of years be materially lighter than the rest of the quarters. No real reason for that but we’ve just seen it. We are seeing now some deferral noise from our sales people illustrating what the customers are talking about. How much that will impact Q2 is hard to know of course. We continue to have a robust pipeline of both modest size deals, the typical kind of size deals that we have, as well as the larger deals which I am frequently quite focused on. So it’s hard to predict what Q2 will be like but qualitatively we have seen this noise that we’ve been anticipating for some time now. The second question I guess was about the UK. What we’ve seen in the UK is the market for co-location space within [M25] which is around London continues to be quite robust. We’ve seen a difficulty in the ability for us to book and close bookings because of the long lead-time that’s associated with the delivery of that data center. The data center’s not going to be available for occupancy for another six or seven months and I think that for some of the larger customers that’s fine but some of the smaller customers, they don’t need to make a decision today about something that’s in six or seven months that they’ll take delivery of. But we’re still reasonably confident that we’ll be able to fill it. Speaking of that we had some conferences and some open houses that were very well attended so we believe that the appetite continues to be quite strong.

Our next question comes from Analyst for James Breen - Thomas Weisel Partners.

I was wondering if you anticipate you’ll see an increased demand as some of your customers or potential customers shrink their IT departments and get their budgets in line for ’09 on maybe possibly outsourcing more of their services than they have in the past? Second question is, as far as your cap ex next year do you anticipate it’ll be a similar 70% customer installation and 30% maintenance cap ex that it was this quarter? Lastly, if you could just provide a little bit more detail on the note settlement, the $1.6 million, if you could talk a little about the history there and how it impacts the financial statements, that would be great.

Certainly theoretically we believe in that thesis but it’s very difficult for us to know that that’s the reason that customers are selecting us or putting out opportunities, and I think that theme will take some time to really emerge. I will say that if you believe that the economy’s contracting and t hat IT spending is probably contracting as well, I think one of the mitigating factors to that contraction in IT spending is this decision to outsource versus in-source. We haven’t seen a dramatic decline in our bookings prospects even though Q1 is light. We aren’t suddenly becoming gloomy about our prospects because that’s just not what the pipelines reflect and that could in large part be a result of that very decision making process that you mentioned. The second question had to do with cap ex and Jim will talk about that.

Yes, I would anticipate the 70/30 split would be similar to what we project for fiscal year ’09. And as far as the AppliedTheory notes settlement, back in 2003 or 2002 maybe NaviSite purchased AppliedTheory or it was an acquisition back in that point in time. The note was a note issued by NaviSite for the purchase of the deal. At one point in time we made an agreement with the senior lenders of AppliedTheory to settle what was outstanding at the time and it was finally approved by the court during the fourth quarter so we reflected a gain on the settlement of that note.

You have no further questions at this time. I would now like to turn the call over to Arthur Becker for closing remarks.

No, I don’t have any other closing remarks. We just appreciate your attendance and we’ll talk to you all soon. Thank you very much.