After getting within sight of profitability, a misstep resulted in a Q4 loss of $306,000 for digital services company The Orchard, the company reported in its Q4 and fiscal 2008 earnings report on Wednesday. Pro-forma revenues for Q4, which account for the merger with Digital Music Group Inc. in November 2007, increased 35% to $16.2 million while full-year pro-forma revenues rose 42% to $57.4 million.

There were many positives. The Orchard increased its gross margin to 33% in Q4 2008 from 25% the previous year. It achieved positive cash flow of $1.05 million for the year. The company's acquisition of TVT added to the bottom line and the incorporation of its physical distribution business has been a positive factor in the recruitment of labels.

But extraordinary items dampened an otherwise excellent finish to 2008. One item was a $300,000 loss on foreign currency transactions. The other a $400,000 writedown of accounts receivable due to bad debts related to vendor bankruptcies. That misstep created an operating expense equal to about 3.3% of net accounts receivable at the end of Q3 2008.

With those extraordinary items, what would have been the company's first quarterly net gain turned into a small loss. The company is considering strategies to hedge against future foreign exchange movements, said President and CEO Greg Scholl during the earning call. About the accounts receivable writedown, Scholl said the company will "own up to the performance," take necessary measures and move forward.

A review of the most recent earnings sheds more light on the different strategies of The Orchard and its competitors. To increase its gross margin, the company not only added new labels to improve scale, it succeeded in deriving value from acquisitions, and value-added media services. The addition of physical distribution makes it a more well rounded company that can better address the needs of its clients. Since acquisition, TVT has generated just under $2 million in revenue with higher gross margin than the company's typical licensing business.

In June 2008, The Orchard acquired the assets of TVT Records. During the earnings call, the company revealed some unique ways it had monetized that investment. As the new owners of recordings by rapper Pitbull, The Orchard made a one-song deal with Pitbull that sold 500,000 units and helped the rapper secure a deal with Sony. The Orchard will participate in the next three records with no financial outlays. The major-label deal will most certainly increase sales of Pitbull's TVT catalog.

In 2009, the company appears able to continue both revenue and gross margin growth. And it could acquire additional distressed assets that would further improve gross margin.

iTunes accounted for 55% of revenue in 2008, versus 54% in 2007. eMusic was the number two vendor and Verizon was third. The U.K. accounts for about 35% of international business, or 8-10% of total revenue.