Crexendo Inc (CXDO) 2007 Q2 法說會逐字稿

Welcome to the iMergent second-quarter fiscal 2007 earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded Tuesday, February 6, 2007. I would now like to turn the call over to Kirsten Chapman. Please go ahead.

Thank you. Good afternoon and thank you for joining us for the iMergent fiscal 2007 second-quarter results conference call. With me today are Don Danks, Chairman and Chief Executive Officer of iMergent; Brandon Lewis, President and Chief Operating Officer; Rob Lewis, Chief Financial Officer; David Rosenvall, Chief Technology Officer and Jeff Korn, General Counsel. After reading a short Safe Harbor statement, I will turn the call over to Don.

Statements and comments made on this call that are not historical in nature constitute forward-looking statements within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements and comments are based on the current expectations and beliefs of the management of iMergent and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements and from management's current expectations. For a more detailed discussion of factors that affect iMergent's operating results, please refer to its SEC reports, including its most recent Form 10-K and Form 10-Q. The Company undertakes no obligation to update this forward-looking information.

Also, the Company wishes to remind listeners of this call that US GAAP requires the Company to generally recognize revenue as cash is received from customers often over a period of 24 months after the time of sale based upon the financing arrangement offered to customers. However, US GAAP requires the Company to recognize the related expenses at the time the contract is written and no later than the expiration of the customer's cancellation period. Consequently, during periods of growth and sales activity, which is also referred to as net dollar volume of contracts written, earnings recognized under US GAAP will generally decline as the finance revenues are deferred and recognized over the time, but related expenses are recognized at the time the contracts are written.

Conversely, during periods of declining sales activity, earnings may increase as fewer revenues are deferred, previously deferred revenues are recognized and fewer operating expenses are recognized as a result of lower sales. The non-GAAP measures including non-GAAP net income and non-GAAP earnings per diluted share assume -- one, the net dollar volume of contracts written is recognized as revenue at the time of its sale; two, certain corresponding costs of revenue and selling and marketing expenses are also recognized at the time of sale; and three, the income tax provision is based upon an estimated federal, state and foreign statutory blended rate of 40%. Non-GAAP net income per diluted share is defined as non-GAAP net income divided by the weighted average of diluted common shares outstanding.

With that I will turn the call over to Don Danks, Chairman and Chief Executive Officer. Don?

Thank you, Kirsten, and thank all of you for joining us today. I'm very excited to be speaking with you today.

Once again, this quarter we have executed our plan, and we have delivered tremendous results. The first half of the year has exceeded our expectations on all fronts. As a matter of fact, for the past year, each quarter we have exceeded even our own expectations and growth significantly. We are proud of serving our constituents and building this impressive track record of success for a number of reasons. Our bright and dedicated employees are a tremendous resource. They are the engine that drives our growth, and as such, we are devoted to them in return. It has been demonstrated many times that we at iMergent run a principal business, sell a great product line supported by suburb customer service and an innovative transparent educational sales channel. We have a very large and growing satisfied customer base. As a public company, we are committed to serving our shareholders and delivering on our growth strategies.

Finally, the Company is completely dedicated to maximizing shareholder value, and as many of you are aware, I am one of the largest private shareholders in the Company.

Now I would like to address a few issues. If you're listening to this call, I must imagine you are aware of the strange trading patterns that our stock has experienced. As a general policy, our Company and representatives will not comment on stockprice for activity, nor do we intend to on an ongoing basis. However, today in a public forum in the spirit of disclosure I feel compelled to comment.

As reported by the American Stock Exchange, there has been a considerable short interest in our stock for quite some time. We're convinced it is the holders of these short positions -- it is some of these short position holders who are conducting negative campaigns contacting investors, Attorney Generals and other public officials to undermine our Company for their own financial gain.

As you may know, iMergent has been on the rate show list for most of the past year, meaning that short sellers are not delivering the shares that they have sold short in a timely manner. In the face of our continued positive operating results over the past several quarters, we believe the short sellers have increased their activities and are working to spread misinformation about the Company. These short sellers feed misinformation amongst themselves to new potential short sellers and even to our current long-term shareholders. I receive calls on a regular basis from institutional investors who have done a great deal of diligence on our Company, who have owned our stock over a long period of time and know the company and the management very well. They consistently tell me that they have been contacted by short sellers intent on misinforming them of the nature of our company and the risk that they face by being low on their stock. And I am told by these shareholders that the response to the short seller's misinformation efforts is simply to buy more stock.

Our response to it all has been the following. First and foremost, to execute on our plant. Our performance, as demonstrated by the results we have reported today, further reinforces our potential. We will continue to execute our plan by driving growth in revenue, net dollar volume of contracts written and non-GAAP earnings while providing our customers with excellent quality, feature-rich, easy to use, industry-leading e-commerce software with best-in-class customer service.

Second, we are fully cooperating with securities regulators by sharing information to assist them in identifying those who may be party to unlawful and manipulative trading.

Third, we will continue to diligently resolve litigation. We will battle vigorously as we fully believe these lawsuits are not substantiated.

Fourth, we're taking proactive measures to contact and educate attorneys general and Better Business Bureaus nationwide about iMergent, our products and our customer service practices.

Finally, management will continue to proactively meet with potential long-term growth-oriented investors to educate them about our Company and our future. I was in Dallas meeting with over 20 portfolio managers two weeks ago, and I will be out on the road meeting with investors next week in New York, Boston and throughout the Midwest. In addition Rob Lewis, our CFO, and I will be presenting at the Roth conference in Southern California the week of February 19, 2007. We're working to bring on new analyst coverage, and I intend to be proactive and consistently on the road in front of new and existing stockholders, continuing to educate them about our prospects for sustainable growth.

I reiterate, my colleagues and I are committed to this Company and our shareholders, and we will move forward aggressively.

While I'm spending time with shareholders and with regulators, Brandon Lewis and his team continue to execute our first and foremost initiative, and that is delivering growth. I will now provide you with a quick review of our financial results for the quarter.

Our total revenue for the second quarter of fiscal 2007 reached $35.7 million. We conducted 297 workshops, up from 200 in the prior year. 1.5 times more workshops, increasing the number of buying units we reach. Additionally we have been monetizing our customer base and driving our ancillary product revenue. We have increased Web hosting, added tax products and augmented our money resource network product, and last month we announced the launch of AVAIL, an exciting new product that will enhance our product offerings and further drive recurring revenue.

Net dollar volume of contracts written is irrelevant in meeting statistic to the understanding of the operations of the Company. This quarter net dollar volume of contracts written reached another record high at $37.6 million, up 50% compared to last year's figure of $25.1 million. Net income for the second quarter of fiscal 2007 was $11.7 million or $0.90 per diluted share, which includes $5.2 million related to an income tax benefit.

Our non-GAAP net income was $5.5 million or $0.42 per diluted share for the quarter. During the quarter we generated $5.1 million in cash through operating activities and increased our cash and cash equivalents by $5.7 million resulting in a cash balance at December 31 of $37.1 million. Although we have a board approval plan to repurchase stock, we did not do so as we were in blackout period, which will be lifted three days after this earnings announcement.

Additionally trade receivables net of allowance for doubtful accounts increased by $4.3 million during the second quarter to a total of $29.5 million.

Consequently our Company has a very strong balance sheet. Excellent execution has enabled us to generate cash flow and grow organically. Such financial stability gives us ample resources to repurchase stock and fund organic growth, as well as evaluate other uses of cash including accretive acquisitions, an additional stock repurchase program, stock dividend or other appropriate uses of cash. We will continue to weigh every option with the shareholders best interest in mind.

Second, we are working nonstop to resolve litigation. Before I provide updates on specific matters, it is incredibly important to know that our business continues to be strong. As you know, we have previously resolved most of the legal matters before us. We have never been found to engage in any wrongdoing, and no one has found us to be a business opportunity, and we have not changed the manner in which or where we conduct the business. It is our intention to aggressively defend any and all actions.

Third, we have taken proactive measures to educate state and consumer agencies. On January 18, 2007, we began sending a detailed letter, as well as a test license, for our StoresOnline Pro Software to state attorneys general and Better Business Bureaus nationwide, providing a thorough overview of our products and services, as well as our customer service and support practices.

In addition, we posted this letter on our website as it is our intention to maintain transparency to government organizations, customers and investors.

It is important to note over the past two years our Company has been targeted and has received legal complaints from two AG offices and the ACCC in Australia. In all three cases, we worked openly and closely with agencies giving them access to our software, our customers, our training workshops sessions, etc., and in all previous cases, we reached an amicable resolution and satisfied all of their concerns. Therefore, we believe our efforts to educate AGs and Better Business Bureaus can help litigate mitigate future concerns.

Finally, back to our business. Brandon will discuss this in more detail later in the call. Throughout the quarter we continue to execute on our growth strategy by continually enhancing our superior technology, providing excellent customer service, driving recurring revenue, leveraging our new sales teams and actively developing marketing partnerships and test marketing partnerships with three additional well-known financial institutions. We are thrilled with the positive trends we're seeing in our business, and we are confident that these trends will continue through the end of fiscal 2007. As such, we are again increasing our expectations for fiscal 2007 annual growth of net dollar volume of contracts written to approximately 40% over fiscal 2006, up from approximately 35% that we had previously expected.

With that, I will turn the call to Rob Lewis, our CFO, to review our strong financial results. Rob?

Thank you, Don. When reviewing our financial results for the current fiscal periods as compared to the same periods last year, please keep in mind our change in business model, which occurred during the second quarter of the prior fiscal year.

In December 2005 the Company changed its business model to one, limit certain free services to a period of one year for all customers who purchased the StoresOnline software prior to December 20, 2005, and two, begin charging customers for those services as part of customer support. This change in business model resulted in the recognition of product and other revenue of $108.0 million in December 2005 of previously deferred revenue which would have been recognized in future periods had the change in business model not occurred.

As Don mentioned earlier, in addition to revenue recognized each period in the income statement, management believes the net dollar volume of contracts written each period is a relevant and meaningful statistic to the understanding of the operations of the business and represents gross dollar volume of contracts written during the period, thus estimates for bad debts, discounts incurred on sales of trade receivables and estimates for customer returns.

For the quarter ended December 31, 2006, total revenue was $35.7 million compared to $120.5 million for the quarter ended December 31, 2005, which included the recognition of product and other revenues of $108 million due to the change in our business model in December 2005. For the quarter ended December 31, 2006, net dollar volume of contracts written was a new high of $37.6 million compared to $25.1 million in the quarter ended December 31, 2005, representing a 50% increase. The increase was primarily the result of the increase in the number of workshops conducted during the quarter.

Total operating expenses were $30.8 million for the current quarter compared to $21.6 million for the comparable period in the previous fiscal year. The increase in cost of products and other revenue and selling and marketing expense was primarily attributable to the increase in net dollar volume of contracts written. General and administrative expenses were $3.8 million for the current quarter which included an expense of approximately $500,000 related to options granted to our new board members.

General and administrative expenses were $3.1 million in the comparable period -- in the comparable prior year period. Income tax benefit for the three months ended December 31, 2006 was $5.2 million compared to a benefit of $11.7 million for the same period in the prior year. Due to the Company's increased taxable earnings projections and discrete event developments and the resolution of certain contingencies during the quarter ended December 31, 2006, the Company determined that it was more likely than not that its remaining deferred income tax assets of $7.7 million would be realized. The benefit resulting from the removal of the corresponding valuation allowance was partially offset by income tax provision of $2.5 million, resulting in a net income tax benefit of $5.2 million during the quarter ended December 31, 2006. Net income was $11.7 million or $0.90 per diluted common share in the second quarter of fiscal 2007 compared to net income of $111.2 million or $8.92 per diluted common share in the second quarter of the prior fiscal year.

For the quarter ended December 31, 2006, non-GAAP net income was $5.5 million or $0.42 per diluted common share compared to non-GAAP net income of $2.5 million or $0.20 per common share diluted common share for the quarter ended December 31, 2005.

For the first six months of fiscal 2007, total revenue was $64.7 million compared to the $131.9 million in the same period of the prior fiscal year, which included the recognition of product and other revenues of $108 million due to the change in our business model in December of 2005. For the six months of fiscal 2007, net dollar volume of contracts written were $70.1 million compared to $42.1 million in the same period of the last year. Operating expenses for the first half of fiscal 2007 were $57.3 million compared to $38.8 million in the same period in the prior fiscal year. For the six months ended December 31, 2006, general and administrative expenses were $7.9 million compared to $6.5 million in the same period of last year. The income tax benefit for the first half of the current fiscal year was $3.6 million compared to $11.5 million for the same period of last year.

For the six months ended December 31, 2006, net income was $14.0 million or $1.07 per diluted common share compared to net income of $105.7 million or $8.46 per diluted common share in the same period of fiscal 2006. For the first half of fiscal 2007, non-GAAP net income was $9.5 million or $0.72 per diluted share compared to $2.6 million or $0.21 per diluted common share in the first half of the prior fiscal year. Net cash provided by operating activities for the three months ended December 31, 2006 was $5.1 million, bringing the six month total to $8.1 million. As of December 31, 2006, we had $37.1 million in cash and cash equivalents.

Trade receivables net of allowance for doubtful accounts increased $4.3 million during the quarter to $29.5 million. As of December 31, 2006, we had working capital of $28.9 million and a current deferred revenue balance of $23.6 million. The deferred revenue balance represents historical sales for which the Company cannot immediately recognize revenue. The cost and expenses we incur as these deferred revenue amounts are recognized as product and other revenue are expected to be insignificant. Consequently we do not consider deferred revenue to be a factor that impacts our liquidity or future cash requirements. Working capital net of current deferred revenue as of December 31, 2006 is $52.4 million.

Now I will turn the call over to Brandon who will provide you with a review of the business. Brandon?

Thanks, Rob. As Don commented earlier, we are developing a track record of consistent execution, and we are very encouraged with the positive trends we're seeing in our business. We continue to invest in our products, refine our marketing and increase our workshop potential. Just last month we announced an exciting new product. On February 15 we will be launching AVAIL, a new telephone, voicemail, e-mail, fax service product to complement StoresOnline Pro. Basically this is a virtual attendant that provides a small business with a big business feel, in essence giving the small-business large phone system features. AVAIL will be introduced to potential customers at the Company's training workshops in the United States.

In addition, the product will be offered to all existing StoresOnline Pro customers three ways.

First, through the StoresOnline Pro website; second, through our newsletter, and third in the new feature section of our merchant services section on our website. We believe this is a great tool for our small businesses and entrepreneurs as it delivers a Voice over IP Web-based solution that provides a highly professional phone interface. This is essentially an automated communications center that will help our customers better manage their time and ultimately their businesses.

Importantly, our solution is a fraction of the cost of similar stand-alone products. This is another great example of our commitment to consistently provide our customers with products to improve their business efficiencies. Additionally such solutions increase customer satisfaction, as well as drive reoccurring revenue for iMergent.

Our goal is to sign up 20,000 to 30,000 AVAIL customers by the end of fiscal 2008 via StoresOnline Pro. In addition, we are evaluating other distribution channels.

Our workshops will proceed on a great pace. During the quarter we conducted 297 workshops. This increase was in part enabled by strong response to our marketing campaigns. For the six-month period, that brings our total to 540 workshops. This quarter our workshops we achieved an average number of buying units of 99 and a close rate of 25%. As expected, these rates are slightly lower than last quarter because we were integrating two new sales teams and testing in the Spanish-speaking markets.

We reported an average sale price in North America of $5300 and $4800 internationally for a weighted average sales price of $5100.

Finally, our cash sales reached 60% of total sales. Leveraging our domestic experience, we are also working to gain market share internationally. In this quarter we had 82 international workshops. For the six-month period, that brings our total to 103 international workshops.

Our marketing partnerships with financial institutions are moving forward. Currently we're testing our marketing partnerships with financial institutions, and we are very encouraged. However, for reasons Don discussed, we have determined we must be very discrete as we found that when we disclose more information about our partners, our competitors and others have attempted to disrupt our relationships.

Furthermore, we continue to test marketing partnerships with three additional well-known financial institutions. We are very encouraged with what we're seeing, and we expect to gain some traction from these partnerships in the second half of the year.

Finally, we continually evaluate vertical markets such as dentists, doctors and other professionals, and we are currently planning tests with a channel partner.

And with that, I will turn the call back to Don. Don?

Thank you very much, Brandon. In summary, I can emphasize once again our talented team and business model has delivered strong financial results -- revenue of $35.7 million, 50% growth in net dollar volume of contracts written over the prior year period and net income of $11.7 million. Although we have again been challenged by external forces, we're confident we will prevail. Regardless, we are prepared to defend our Company and take a proactive approach with attorneys general and Better Business Bureaus. Our team, our outstanding products and consistent execution have positioned iMergent for further growth in the second half of fiscal 2007, and as such, we have increased our annual guidance.

We're committed to our share buyback. We're in the enviable position of being able to sustain high growth rates while still generating substantial levels of cash and liquid receivables, enabling us to buy our shares back. This will serve to benefit long-term investors as this should improve earnings per share over time.

So far we have committed $20 million to this effort, and we will continually evaluate increasing that amount. As always, I am very pleased with the way iMergent team is executing on our growth strategy. We remain focused on providing excellent products and services to our customers.

Looking to the second half of 2007, we will continue to enhance our technology, refine customer service practices and training and leverage our core business to expand into other segments and regions. Additionally I am very excited about the launch of AVAIL and the prospects that it brings to our customers. As a result of the strong response to our marketing and increasing demand for our products, as I said, we have raised guidance to expect net dollar volume of contracts written to grow approximately 40% compared to fiscal 2006.

I would now like to open the call up for questions. Operator?

(OPERATOR INSTRUCTIONS). Neal Goldman, Goldman Capital Management.

Rob, just again for comparative purposes, you had $0.42 in this quarter, and then you mentioned there was stock-based comp on top of that, and also if you can give me the number of the non-recurring in the sense of the non-cash for stock-based comp and also extraordinary legal costs that the Company incurred in the second quarter? And also if you can give me last year's number.

Sure. The onetime extraordinary item or I would not call it extraordinary, nor was it onetime, but as far as an unusually large expense that we had during the period, was about $500,000 stock-based compensation expense for options granted to the new board members in November.

As far as the expenses go, legal expense was significantly down from our prior year quarter. It was down about $290,000. Accounting services, as you would imagine due to the fact that we completed our restatement back in March of last year, our accounting services were down about $300,000. All other fees are relatively -- are consistently up just with regards to the normal growth as far as the operations of the business, but otherwise everything is fairly --

But if you take the stock-based comp and the extralegal fees, not versus a year ago, that would be a total of how much, 500,000 to 300,000 AT?

As far as the total stock option expense, let me pull that up for you real quick if I may. It is -- it will be disclosed in our form 10-Q. For the period it was $847,000. Now some of that is spread throughout cost of revenue and research and development, some marketing expense, but in G&A it is $752,000 in G&A expense alone for a total stock option expense of $847,000. You compare that to the three months ended December 31, 2005, it was only $251,000 in total. So it's about a $600,000 increase from last year.

That is a pretax number or an after-tax?

That is pretax.

So let's say it is a 350 increase, right?

Yes, but it would have been about 525 net of tax compared to 157,000.

525 divided by -- so it's like $0.04 a share?

That is correct.

Okay. And the legal costs, while you said they were down from a year ago, they are still running about what extra?

Nothing extra as far as -- it is actually down from periods in the past, historical periods.

It would have earned $0.46 from an operating basis without the stock-based comp round numbers on the GAAP. And a year ago, it would have been closer to $0.30 given the extra cost of accounting and so far?

Extra cost of accounting, it is hard to do that as far as come up with a GAAP number, but yes, that is not an unreasonable amount.

And if one looks at from a cash standpoint, you generated $5 million plus in this quarter, taking my assumptions not because the Company does not make forecasts, and I am assuming calender '07 225, okay, which would be like $47 million pretax, right?

That is your projection.

Like I said. But if I take that number, how much of that -- you said 7 million 7 is going to be -- is going to reduce the tax cost?

Yes. We probably have enough deferred tax assets to eliminate most of our tax exposure for the next couple of years.

But it goes directly against the tax itself, right?

That is exactly right. (multiple speakers)

So if you paid 7 million in taxes, that is 7 million you don't have to pay, right?

Right.

So if you earn just $20 million pretax essentially and on a cash basis, that would be $20 million in cash? I guess what I'm asking, there is no reason to assume, assuming we continue to grow that the cash will continue to grow in excess of $5 million plus a quarter for the next year. So we can add another $20 million to $25 million in cash to the balance sheet?

We won't give forecasts, but I understand your logic.

Okay. Brandon, while you have raised guidance, and that is a great number, it almost appears that the second half would be equal to the first half. But you made comments, one, the branding will continue to grow. It looks like the international sales will grow decently. Because I thought you are out of Australia in the second half of last year. You talk about higher cash payments and the new AVAIL product. So I am not trying to put words in your mouth, but it almost sounds like your guidance is very conservative at this point.

Well, we feel good about that 40% number, but we are optimistic and working hard to build our business, and I am always optimistic.

Okay. But on the branding side, it's a much higher cash payment, right?

Yes. Historically we have said that we do get a higher cash payment as a percentage of our sales when we do these branded workshops.

Okay.

And that continues to hold true with our current testing as well.

And you made a comment on the AVAIL that over the course of the next year, you expect to add 20,000 to 30,000 of your -- new and existing clients to the AVAIL system, right?

Yes, throughout fiscal 2008. We are launching the product on February 15. We will be getting that out to several of our customers. We're planning on taking the next few months to kind of ramp that into our sales model, and so in fiscal 2008, our goal is to sign up in our StoresOnline model 20,000 to 30,000 customers. That does not include any other channels that we may move that product through.

Okay. Do you have David on the line?

Yes, we do.

David, could you describe the technology and the competitive products that are out there today? (multiple speakers) -- you can gain some traction with this product?

Sure. There are a number of products out there right now that have individual features for the number of e-mail programs, the number of products that have phone systems. What we bring that is unique is that we combine both the e-mail and the phone and the fax in one place. The other thing that we have done is made it very simple for a small person to use the feature without installing new hardware or anything like that. It follows the exact same model that the StoresOnline software does. So we believe this product will fit nicely into the existing customers that we have and will fill a niche that most competitors have not even looked at yet, which are the small customers.

And your pricing, although you are offering more features, how does that compare to competitive products out there?

It is very competitive. You can do some research yourself and go online and Google a bunch of other companies, and you can find out that our pricing is very competitive. In fact, there is just really nobody out there that combines all the features that we're putting together in AVAIL. That is why we are really excited about it. We have also spoken in the past -- in years past where were we had tested kind of a similar product on our seminar circuit. This was a number of years ago, and we had some real traction with it. The problem with that company, we had some problems with that company financially not being able to meet their commitments. And so that kind of fell apart on us. So we're really excited about this new product, and I really enthusiastic about us being able to move that through our general.

Okay. One last questions and then I will come back if other people -- to give other people a chance. I guess this is for Don and Brandon. When you look out over the next two to three years between the AVAIL product, okay, between the Web hosting and other products like your payroll and stuff like that, what kind of recurring revenue or customer base and what kind of average pricing for all this stuff?

Well, we historically have not given out those numbers, but we internally have some goals in mind. I would like to see us pushing near 100,000 customers over the next two to three years that are paying some sort of residual fees to the company.

When you say 100,000, let's say it is two and a half years from now, what would be the average? Because the AVAIL is looking at $49.99, but then you have other products that are lower-priced like hosting, which is 25 -- (multiple speakers)

I will be honest with you. I actually have not -- I have not run the analysis on that and I could not give you a number. But currently the products that we are offering start anywhere from $24.95 and will be going up to $59.95. We also have some products in our professional services that are $75 a month. So (multiple speakers) I could not really make an educated guess at this point in time (multiple speakers) what that mix would be.

(multiple speakers) -- $40 times 12 times (multiple speakers)

You are a professional at this.

You end up with $48 million. I have to assume this is an 80% margin once it is done?

On the AVAIL product, it is a high margin product. This is Don. But it's a high margin product, and doing the estimates right now, Brandon gave a really good goal of $100,000. We have put the 20,000 to 30,000 in AVAIL clients through our existing StoresOnline channel.

So I would say if you take $24.95 to $70, if you take any kind of average in there, it would be substantial recurring revenue. I just want to reiterate to everybody on the call, that while our license business or StoresOnline core business is growing and we are very, very excited about that, we're really focused on the recurring revenue. That is higher activations, more hosting fees, higher hosting fees, getting multiple sites up from each of our clients, and get the AVAIL product sold and attached to all of our clients into new channels and into several other products that we have talked about.

So recurring revenue is where our focus is. It is high margin business, and it will add great contribution and growth, and that is why we are so excited about our forecast.

Don, I just wanted to maybe clarify something. Because with a couple of our current residuals like MRN and Tax Club, the margins are not that rich to us. But we're really optimistic on the AVAIL product because the margins do at this time look really good.

Yes, but my point would be if you did 50% pretax margin, you would still have like $1.25 plus recurring revenue on a yearly basis. (multiple speakers)

Yes, I can see where you are coming up with (multiple speakers) that.

(multiple speakers) 100,000. That is the numbers. Anyhow I will get off right now.

Mike Shonstrom, Emerging Growth Equities.

Good quarter. Well, I just had a little shot of fear out there I guess. I don't know. Yes, Neal sort of bludgeoned the AVAIL situation a little bit in terms of questions, but are you providing this service yourself, or is this coming through a third-party?

This is David Rosenvall. We have developed all the technology for the product, and we are hosting and servicing that out of our data centers here. So we're doing that.

This is typically a very low margin and very competitive business for a lot of the players out there. What gives you an opportunity to look at higher margins? I mean what is your --?

One of the things that we have is that we're building this on existing technology that we have proven through StoresOnline. So all of the Web hosting technology we have already written. We have done that. It is proprietary to us. And so once that infrastructure is in place and we are using the same infrastructure of hosting that we used for StoresOnline, we can build off of that, and that is probably the greatest source of the higher margin.

Got you. A question on the seminar activity. I am just sort of looking at the numbers, your overall dollars per contract was down a little bit sequentially. Despite the fact, and I'm just curious about this, you have these tests going on with the various bank credit card companies that this has not pulled it up a little bit higher. I was surprised at the weakness there. Should I look at anything beyond the fact that you just have new seminar teams out there?

Well, as far as -- are you talking about the conversion rates at the seminars? Are you talking about the average sales price of the seminars?

The conversion rates are 25%, 26%. That is sort of not a big discrepancy, but going from 53 to 51, I thought was sort of a slide in the direction I did not expect.

I mean if you look at it domestically, we have been maintaining it domestically $5300 average sales price for quite some time. Last quarter I believe we had an average sales price of $5400 during the September '06 quarter. But the reason behind that is it was slightly higher than our domestic average of $5300 because we did several workshops in the UK, because of the foreign exchange rates in the UK that pulls up our average sales price.

So we really have not slid at all domestically on our average sales price. It is just we did a lot of international events in such places as Canada and South America for our tests, in Australia as well in our tests that we did -- our marketing tests back in October, and also, as I mentioned, the few in South America. Those currency conversion rates are much lower than, say, the UK and the United States, and so that pulls down our average sales price down to -- the average sales price internationally was $4800, and when you look at the blended rate, that brought us down to $5100 average sales price. So it is really nothing more than the fact that we were in a lot of international markets this quarter, almost a third of our workshops were held internationally, and that is what brought our average sales price down.

On the other income side or the other revenues and commissions, that shot up quite a bit. You talked in the first quarter about the fact that you had put in this 30, 60-day lag period deform before third marketers went back to the original -- to the software purchasers. Is what we are seeing there the impact of that catchup occurring in the quarter, or is there incremental business coming from your additional workshop services?

It is really a combination of both. This is Brandon speaking. But you hit the nail on the head. We're having our partners wait 30 to 60 days, and so we just began that time period in the quarter or that time period lapse in the quarter. So we started getting more revenue or commissions from those partners. But also some of the other strategic partners like our Tax product and our MRN began to increase their commissions as well to us. So it is a combination of both.

And, as we look at seminar activity, can you give us any feel for where you were in terms of the full utilization of the seminar teams in the second quarter, and what does it look like in the third and fourth quarter as far as number of teams? Is that going to increase at all? Are you going to add or did you have what, 7.5, real effective teams in the second quarter? Any color on that.

Yes, sure, because that is a really good question. Sometimes it is difficult to determine how long it will take a team to really be functioning at the rate we need them to function at. And we had let's say maybe a couple of hiccups. I think it is probably a fair assessment to say that we realistically only had 7.5 teams functioning. I feel really good as we start the year January 1 with those eight teams moving forward and fully functioning. We're constantly looking at adding new teams, and I think we will be talking about that in the near future.

Any color you can give on you talked about the fact that you're about to initiate a test with one of your vertical markets. You are very encouraged with your progress with your financial institution customers. Any more detail that you can offer on those two fronts?

I don't think I would add really anything to that other than the test that we have been doing. I'm very optimistic about the future because of those results, and we are really excited about this test with a partner in the vertical markets, the professional services markets. We plan those tests, and those should be happening in the very near future. So I don't know that we can add anymore other than just my enthusiasm.

You mentioned in some of these marketing partnerships you're going after, you're running into competition and/or some noise I guess from the short seller is (multiple speakers)

(multiple speakers) specific on that. On December 18 we put out a press release raising guidance, and in that press release, we mentioned that we had started our marketing partnerships with Bank of America and American Express. In American Express and New York their office was inundated with telephone calls from people that were extremely aggressive, and then they found somebody who had not heard about our relationship and started spreading a rumor that it reached virtually every one of our existing long shareholders that we had fabricated that, and that we did not have a relationship with American Express. After it got back to us, we calmly had our contact at AMEX contact the person in New York. They educated themselves internally. It is a very large organization you know, larger than ours, and we're able to solve that issue.

But we just don't want as a practice to be putting this information out there because it is just an easy target for the people who are short the stock, who have a company who is executing its plan with growing fundamentals, growing cash, expanding margins. I believe that they are up to a lot of activity to try to disrupt our business, and that was a prime example of it. So we're going to try to stay as mum as possible below the radar screen, and as they roll out, the financial results will speak for themselves.

Great. Just one more question on the legal front. Anything you can add to what has been released so far about Utah and Illinois?

We will let Jeff talk about that.

Utah, as we discussed in the 8-K, we're discussing settlement with the state. The state has agreed, however, that even if we cannot reach a settlement and we were to go to a hearing and lose, they would stay any enforcement whatsoever until we had exhausted all rights to appeal. And that is very important to us. Because we are fundamentally convinced as a company that under the law we do not, have not and will not sell a business opportunity. We fully intend to aggressively defend that position and exhaust all possible remedies to prove that. (multiple speakers) but we do (multiple speakers) of course, are always hopeful to settle.

And in Illinois any (multiple speakers)

The status of the case is as we detailed in the 8-K. There's a motion before the federal judge by the state to move the case back to state court, and no ruling has been made.

And you did file in the federal court in Utah to get a declaratory judgment vis-a-vis the status as a business opportunity?

Well, it is not particularly the status of the business opportunity in federal court. We raised the action in federal court, which we believe as a constitutional issue the state of Utah does not have the right to regulate us as a company for a variety of reasons, primarily because we do not transact business in the state of Utah. Secondarily, and equally as important, because they entered into a previous agreement with us in which they admitted and agreed that we were not a business opportunity, and there are various other important constitutional reasons that we believe the action should be stayed by the federal court.

Got you. And any thoughts as to timing as to resolving any of these?

The state of Utah set a hearing before their commission, so we obviously would like to try and settle it before then. We are in discussions now, and I don't want to go into any more detail because that could impact our settlement discussions.

Got you. Okay. (multiple speakers)

(multiple speakers). None of these legal proceedings are having any impact on our business whatsoever. I just want to make sure -- there is a lot of noise that has been created. A lot of the reasons these attorney generals and these issues have been brought up have been based on an unprecedented number of complaints, anonymous complaints, ones that we cannot tie back to any customers, and every complaint that we have been able to identify and there has been very few of them relative to the thousands of clients we have have been resolved. So again, it is a lot of noise created by people that have some ulterior motive. So I just wanted to reiterate that.

Jeff and his team have done a phenomenal job in working with the attorneys general and with the state of Utah. They have done a great job of communicating, being very open and very transparent, and we are very, very confident that we're going to get through these things and favorably for all the shareholders. But it is not distracting Brandon Lewis and his team from anything that they are doing domestically or internationally, and we've got a real good handle on it.

Final question. In the first quarter, you talked about demand was very strong, particularly in some of the international markets. You mentioned Australia and New Zealand, the strong demand you had down there and domestic demand that some of your metrics as far as consumer responses to mailings and such were improving. Is this holding up? Obviously the results in the second quarter are suggesting that it was strong in the second quarter. Is it holding up as we look at the third and fourth quarter?

Sorry, this is Brandon. I hit the mute button. Yes, like you said, the response was really good in the December quarter. We maintain our optimism here in this third quarter. We think we're doing a real good job on the marketing and advertising side.

[Jim Dowling], Jefferies Capital.

My question has been answered. Thank you.

Brian Laden, Bonanza Capital.

A couple of questions. Can I drill down a little bit on commission and other revenue line? Can you give us maybe the top five contributors to those line items and then maybe talk about the deltas quarter-over-quarter what is growing?

Well, as far as quarter-over-quarter goes, you are talking September quarter to December quarter? I just want to clarify.

Yes.

Okay. A lot of it has to do with the commissions that we receive from our third parties that approach our customers, now 45 to 60 days afterwards. As you recall, during our first fiscal quarter of '07, we asked these companies to delay contacting our customers for a period of 45 to 60 days so that customers could understand exactly what needs that they truly had as far as the services of these other companies we are going to be offering to the customers. So our first quarter of '07 was artificially low because of that implementation of that new policy. So, during the second quarter, that 45 to 60-day policy had kind of played itself out, and the lead flow was normalized again and back on track during that second quarter.

Can you maybe give me some of the different services that comprise the top five? I mean it is Mserve, ECI Corp, Money Resource Network? What is it -- what is driving that line item?

Sure, this is Brandon. Let me give you a few of those. As Rob said, we have our partners with EMS and PMI who sell ongoing training to our customers either live or over the phone. We also have our [Tax Vantage] product, which would be one of our top ones, as well as our eBay products that we sell at our follow-up workshops. And then there is our database rentals that we have where we use our database and rents, our non-buying data out. Those are just a few examples of some of those.

Okay. Great. Can you give us a little more color on the marketing partnerships? What exactly are you marketing, and if I was to go to a seminar that was Bank of America branded or American Express branded, what would be different than a regular seminar?

The main difference is that it is a customer acquisition model for both us and the bank, and Bank of America is getting a merchant solutions customer, essentially a merchant account customer, and we're getting a software customer. So that is really the relationship. There is not much of a difference in terms of the curriculum that is given to the small business or entrepreneur, but it is mostly just that partnership on the back end, the merchant solutions.

I would just add to that. This is Don. On the marketing front, it is because we do most of our lead generation through direct-mail, the partner isn't as featured as the brand inviting along with StoresOnline the potential small business owner or entrepreneur to the workshop. So we're getting greater response rates to the mail pieces, and then they are very prominent at the workshops themselves, our copartner and then again the merchant services solution that we sell. Right now we sell a generic version of that, and we just put the branded version through that. So from the front end marketing, all the way through the workshop, it has just had a very, very positive impact on the metrics all the way through.

What markets have you guys cobranded successfully in?

I don't think we're prepared to give that information out. We have done more than a couple of dozen different markets with the different partners.

In these relationships, are you guys -- do you receive like a customer acquisition fee from BofA or American Express, or are you paying them some type of a bounty for each customer? How do the economics work?

The relationships are different with each bank. But typically the way that it works is that they get a fee for every customer that activates.

Okay.

So they are paid a fee for every customer that activates or is acquired.

Great. Thanks, guys. Appreciate it.

Jay Harris.

You guys are running a cash flow machine. You have an unencumbered balance sheet. How much cash do you really need to run the business on a quarterly basis?

We actually have -- well, more than enough cash to run it, but we would always like to keep at least $25 million on the balance sheet. With that amount of money, you could grow the business at the rate we're growing it for the foreseeable future. So if you're just going to say with the minimum amount of cash you're going to have on the balance sheet, that would probably be it.

Well, how much cash could you throw at a project like an acquisition?

Well, you have to understand we have $37.1 million in cash. We also have $29.5 million in liquid receivables --

That is why I asked the question.

Yes, there is like $66 million that is liquid. If we found the right accretive acquisition, we could use any portion of that I guess above $25 million to do it.

One of the things that we have found, though, with our distribution model, our channel, and especially with our incredibly talented product development team, is when we look at potential acquisitions for new products or services to put through our channel, partnering with somebody or having David Rosenvall and his team build a solution that we could sell makes a lot of sense. But there are a number of smaller companies with good technologies, good customer bases that we're looking at evaluating, and we're very, very active in doing that. As we get -- we will make the decision to do that if it can be immediately accretive, and we can buy it for a good price, and it will bring great value to the Company.

But again with the scale that we're generating, the partnerships, number of workshops with this channel, we have a unique ability to reach hundreds of thousands of small businesses and entrepreneurs, and so it gets more and more interesting, and there is more potential products and services or customer groups that we could look at acquiring. But we do have the resources to do it, so we're in a great spot, great position.

What is the magnitude of the unused share buyback authorization?

We have used about $1.5 million of the $20 million. So we have about $18.5 million, and as we said in the prepared remarks, if necessary we would add a second stock buyback program if we thought it would be appropriate and a good investment. (multiple speakers)

And that would be related to the multiple at which you were buying earnings?

Yes, there would be a number of factors. We have not done the analysis on whether acquiring our shares is accretive or not, so we know where to be buying shares. We are always weighing the balance between buying shares and looking at what other useful things we could do with the cash. But again, we're in a great position because we have no debt, and we are generating lots of cash. We have access to like I said an additional $30 million if we were to liquidate our receivables. So it gives us lots and lots of options, and we have only used $1.5 million of the $20 million we already authorized.

Do the board and the management team feel comfortable enough for certain projects you would leverage the balance sheet, or do you always want to run an unencumbered balance sheet?

Our preference would be to run an unencumbered balance sheet, but never say never if there were opportunities that were extraordinarily beneficial to the shareholders. That is something we would consider, but it would be our preference to keep a real, real clean balance sheet and be one of the unique high-growth companies generating cash that has lots of options from accretive acquisitions to stock buybacks and dividends. And we like to keep it that way. All the while going into new markets, new products, expanding margins and just got a great team here, and we have a lot of opportunity in front of us, despite all of the stuff that has been thrown in front of us. We're very, very excited about what we could do because of our balance sheet, cash resources and more importantly the intellectual capital we have with all of our employees and associates in the Company.

And then finally, would it be fair to assume that you would grow the number of seminar teams by a two per year kind of thing?

I will let Brandon answer that.

Well, we are only just constantly evaluating that. I would not want to limit us to two a year, and I would not want to say that there might be a reason why we would not go to two. I just would not want to limit ourselves either way. We're typically looking at our partnerships, looking at our marketing and advertising and evaluating how that fits into our current year's plan, and then we make the decision. But like I said a little bit earlier, I think hopefully we will be talking about additional teams here in the coming months.

Jeff Bass, private investor.

Solid quarter, guys. I gather from the conversation so far that you're considering eventually marketing the AVAIL product as a stand-alone product. Is that correct?

Yes, we are. Yes.

The reason I'm asking that is twofold. Number one, that market would be gigantic compared to your existing StoresOnline customer base, number one. And number two, it would seem to require possibly a different expertise market as a stand-alone product to customers who might already have some kind of phone service product. And my question is, do you think you have been marketing capabilities in-house necessary to pursue this possibly much larger market?

Yes, I think we do. I think we have a good solid team together. We are also talking to current partners and potential partners that may move this product as well either under the AVAIL name or in a branded version. So I'm optimistic over the next several years that we're going to get some real traction with this product, and we will be able to move it outside of our current model.

Great. With respect to cobranding, that is currently a relatively small percentage of your business at this time. Do you see that as becoming a large percentage over time?

Jeff, I'm really optimistic there. That is one of my goals for the business is to make that a bigger portion of our business, and we're working really hard to prove out these partnerships so that we can make that a bigger portion of our business. I really like the model. I really like the customers that we are acquiring, and I really like the margin that we're seeing. So I'm optimistic, and I'm hopeful that we can make that happen.

Good. Now, Don, I'm going to be a little bit of a pest on the dividend. The lack of one so far suggests that the Company might consider it sort of an either/or situation versus a stock buyback. However, considering that something like a dime per quarter would hardly make a dent in the new financial assets you generate each quarter, I don't see it that way. Would you please comment on the lack of one so far?

I won't comment on the lack of one so far. As you have probably noted, we do things very deliberately and with just a lot of research and evaluation behind it. But it would be a mistake to think that we would not do the stock buyback and even a more aggressive stock buyback with a stock dividend. We certainly have the capability to do both of those. (multiple speakers). The fact we have not done it so far does not mean we have not -- discounted it. But we're just being very, very cautious like Brandon is when he goes into a new market. He goes knowing exactly what is going to happen when we roll out. We just want to make sure we understand all the ramifications and what the other alternative of using the cash would be. But we certainly would have the ability to do a stock buyback and a dividend as well.

Cash dividend.

Pardon?

You mean a cash dividend?

A cash dividend, yes.

Thanks a lot, guys. That is it for me.

We have gone well over an hour, and I would like to close by saying, everybody, we are very, very excited about the results and the trends that we're experiencing in our business. To reiterate, I guess just to pound this in the ground, we expect our annual growth of net dollar contracts to rise approximately 40% over fiscal 2007, and as always, we are focused on driving growth and delivering shareholder value.

Thank you very much for the questions today. It was a great call. We look forward to updating you on our third-quarter results conference call in May. I'm going to be on the East Coast and in the Midwest meeting with investors throughout the next week, week and a half. In addition, Rob Lewis and I will be presenting the company at the Roth Partners 19th Annual Orange County Conference on Wednesday, February 21st in Dana Point, California. So if you're going to be out there, I would love to touch base with you. Thank you very much.

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.