Crexendo Inc (CXDO) 2008 Q1 法說會逐字稿

Welcome to the iMergent first quarter fiscal 2008 earnings conference call.

[Operator Instructions.]

I would now like to turn the conference over to Kirsten Chapman.

Please go ahead ma'am.

Thank you Janice.

Good afternoon and thank you for joining us for the iMergent fiscal 2008 first quarter conference call.

With me today are Don Danks, Chief Executive Officer of iMergent, Brandon Lewis, President and Chief Operating Officer, Rob Lewis, Chief Financial Officer, and Jeff Korn, General Counsel.

After reading a short safe harbor statement, I will turn the call over to Don Danks who will provide an overview of the financials in the business.

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.

With that, I turn the call over to Don Danks, Chief Executive Officer.

Don.

Don Danks.

Thank you Kirsten, and thank you all for joining us today.

Although we experienced some challenges in our business this quarter, we had some very positive accomplishments.

We continue to focus on growing our business and returning value to our shareholders.

During the quarter we grew revenue 12% to 35 -- to $32.5 million, and net dollar volume of contracts written, which is a relevant and meaningful statistic to the understanding of the operations of the Company, grew 10% to $35.5 million.

We were also pleased we positively resolved all outstanding legal issues in Utah and Louisiana.

Jeff Korn will tell you more about this in a minute.

Additionally, in August, StoresOnline was awarded the 2007 Service Excellence in Customer Support award by the Service and Support Professionals Association.

The honor recognizes technical support operations that effectively handle high volumes of inbound and outbound customer interactions with an emphasis on problem avoidance and streamlined incident handling.

As you know, one of the top priorities is exceptional customer support and this award validates our goal to customer service efforts and commitment to provide our customers with the best support in the industry.

Looking ahead, we are very well positioned for continued growth.

However, we have lowered our guidance primarily because of our inability to conduct business in California and North Carolina to date, which combined represented approximately 14% of the revenue and net dollar contracts of -- net dollar volume of contracts written during fiscal 2007.

Now we believe we can achieve 10% to 15% growth for revenue and net dollar volume contracts written over fiscal 2007 results, contingent upon marketing our products in California, North Carolina for the second half of fiscal 2008.

Nonetheless, we do not see this having a long-term effect on our business as our target market is still quite strong.

According to the retail indicators branch of the U.S.

Census Bureau, eCommerce retail sales in the United States has grown from $5 billion in sales in the fourth quarter calendar of 1999 to $33.6 billion of sales in the second calendar quarter of 2007.

Additionally, eCommerce retail sales as a percentage of total U.S.

retail sales have grown over six times from over 0.5% in the fourth quarter of 1999, to over 3.3% in the second quarter of 2007.

To capture additional market share, today we formally announced our new product, StoresOnline Express, a modified version of our extremely robust StoresOnline Pro software designed to potentially expand our market reach.

StoresOnline Express is a culmination of management driving new initiatives, our marketing team identifying opportunities to capture market share, and research and development team leveraging our technology and scalable eCommerce infrastructure.

Brandon Lewis will tell you more about StoresOnline Express later in the call.

With that brief introduction, I'd like to turn the call over to Jeff Korn for a legal update.

Jeff.

Jeff Korn.

Thanks Don.

As you are aware, we have just resolved a few of the legal issues the Company has been facing.

We are pleased to have reached an accommodation with the states of Utah and Louisiana.

These two settlements are based on settlement parameters, which I have enumerated previously.

Specifically, that we stand willing to make appropriate disclosures and, secondly, it made clear the belief of the Company that we do not in fact sell a business opportunity.

We will make disclosures relating to our software and our sales practices that are true, and assist in our desire to make our business practices transparent to our customers and to regulators.

The Company regularly reviews its disclosures.

We are always willing to adopt good ideas regarding our disclosures be they thought of internally or by regulators.

These two settlements do provide additional useful disclosures.

I have discussed previously our belief that we are not a business opportunity and since we do not, and cannot provide a product for our customers to sell, we believe it would be misleading to our customers to claim that we are selling them a business opportunity.

I'd now like to take the opportunity to address what occurred in Australia.

As you know, we previously agreed with the Australian Competition and Consumer Commission, the ACCC, to certain undertakings.

The ACCC claimed we failed to abide by that agreement.

The ACCC specifically claimed we failed to notify them of seminars we were holding in Australia, failed to provide a tape requested, failed to give notice of the three day rescission right, and failed to provide disclosures on the use of our software.

We have publicly admitted that we failed to notify the ACCC of seminars.

That was an oversight.

It was an error I do not expect we will make again.

We previously had a system in place where the notification of seminars and the cataloging of tapes were handled by an employee who did not report to me.

As best as we have been able to tell, the information simply did not get to Australia.

We have changed our reporting structure and the responsibility of reporting falls to our VP of legal, who is responsible to me.

And he also notifies Brandon that notifications have been made.

Secondly, we could not provide a tape of the seminar that the ACCC requested.

I do not know if this was a cataloging error or the tape did not get back from Australia.

We tape over 1000 workshops a year, and despite our continual best efforts there will be both human and system error and from time to time tapes will be missing.

We offered and provided other tapes to the ACCC of the same day they requested and of the same team.

We disputed that we failed to provide information on the cooling off period.

We had agreed in the undertakings to provide that information twice, which we in fact did.

We gave notice of the three day right during the preview and had it in the preview disclosures.

We gave notice of the three day right in the workshop and we pointed it out to the customers where the right was enumerated in the business-to-business order form.

We also believe we properly pointed out other required disclosures under the undertaking suit.

The court, as you are aware, did decline to enter an injunction prohibiting us from transacting business in Australia.

However, particularly in light of our admissions and proof that we did fail to abide by at least two of the undertakings, the court did enter orders requiring disclosures be made and that we abide by the undertakings previously entered.

The court still has jurisdiction to enter a permanent order and we expect the court will permanently enter at least some of the things that have been temporarily entered.

We do have an injunction in place in both North Carolina and California.

We believe we unquestionably do not sell a business opportunity under the laws of North Carolina.

We believe, as a matter of law, we do not make the required representations and we do not provide a marketing plan.

We also believe that under any circumstances, the North Carolina statutes provide an exemption to companies like us that provide a trademark license.

We have filed a motion with the court to lift the injunction based on North Carolina law.

We do not have a hearing date yet on that motion.

The injunction in California prohibits us from selling any product with an initial required investment of $500 or more without first registering under the California SAMP Act.

We are, as you know, fighting that injunction but we do not have a trial date set yet.

We believe that we do not sell a SAMP as defined in the California statutes.

And we also believe that the Act is unconstitutional.

We also feel that because of the vagueness of the Act it was -- we were unable to show at the preliminary injunction hearing that we in fact do not sell a SAMP.

At this time, we are continuing to litigate the injunction while studying what we may be able to do to conduct business without violating that injunction.

I will not discuss the specifics of any discussions we may or may not be having in any particular state.

While I have made clear that we are welcome to open and honest discussions with any regulator, and we attempt to negotiate with regulators, we have found that negotiations are much more effective without any public discussion.

And with that I will turn the call over to Rob Lewis for a financial review.

Thank you Jeff.

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

During the quarter we conducted 291 workshops, including 13 internationally, compared to 243 workshops, including 21 internationally in the same quarter of last year.

The average number of buying units in attendance at our workshops during the current quarter was 91 compared to 94 in the prior year quarter.

The percent of buying units making a purchase at the workshop was 26% during the first quarter, consistent with last year's quarter.

The average purchase during the first quarter was $5,100, compared to $5,400 in the prior year quarter.

Finally, cash sales at our workshops was 50% of total workshop sales in the quarter, down from 61% last year, which we believe is partly attributable to the current credit crisis in the United States and negatively impacted revenues as buyers were reluctant to use cash to purchase the software and chose financing arrangements instead.

For the three months ended September 30, 2007, total revenue was $32.5 million compared to $29.0 million in the same quarter last year, representing a 12% increase.

Net dollar volume of contracts written was $35.6 million, compared to $32.4 million in the 2007 quarter, representing a 10% increase.

Total operating expenses were $35.9 million for the current quarter, compared to $26.5 million for the same period of the previous year.

The increase primarily reflects increases in selling and marketing expenses incurred with the goal of driving greater revenue, which did not occur due to the low response rates at the preview conferences.

Consequently, during the quarter fewer buying units attended our Internet training workshops where we sell our software.

As a result, we incurred a net loss of $800,000, or $0.07 per share, in the first quarter of fiscal 2008, compared to net income of $2.3 million, or $0.18 per diluted share, in the same period of last year.

Regardless, this quarter we had cash flow from operations of $426,000.

This compares to $3.0 million in the prior year quarter.

Onto our balance sheet review which remains very strong.

As of September 30, 2007, we had $32.9 million in cash and cash equivalents, compared to $36.8 million at June 30, 2007.

During the quarter the Company repurchased 165,607 shares for approximately $2.9 million.

At September 30, 2007, we had working capital of $31.1 million and current deferred revenue of $33.4 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 deferred revenue, as of September 30, 2007, was $64.5 million.

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

Brandon.

Thanks Rob.

We're very excited to unveil StoresOnline Express, a new version of our StoresOnline software.

StoresOnline Express is a simplified single website product at a lower price point.

By leveraging our technology and scalable eCommerce infrastructure, we expect to be able to deliver our solutions to a larger segment of the market, which we have not addressed in the past.

StoresOnline Express also enables us to consider new distribution channels, including online direct sales, and provides a clear path to StoresOnline Pro upgrades.

Entrepreneurs and small businesses have used eCommerce to become a key part of the economy worldwide and the Small Business Administration reported there are nearly 27 million small businesses in the United States and millions more worldwide.

Recent polling suggests that 90% of the small businesses in the United States either had no website or had a website with no eCommerce functionality.

Our goal is to expand our reach into this huge entrepreneur and small business marketplace.

And StoresOnline Express leverages both our distribution model and our years of product development, as well as targets entrepreneurs and small business managers who want a basic eCommerce site.

As a result of years of extensive potential and existing customers surveying, which we intend to continue to do, we developed StoresOnline Express, which we began selling on a test basis at a limited set of workshops in September and at preview conferences in late October.

The results to date have been very positive and consequently we hope to roll out the StoresOnline Express offer in all of our conferences by the end of March 2008, if not sooner, as well as offer it online through various channels including the new feature section of the StoresOnline website.

The software will initially retail for $199, which may be discounted at the previews and workshops.

And hosting and customer support can be purchased for $24.95 per month retail and also may be discounted at the previews and workshops.

The StoresOnline Express includes a website with features such as our award winning 24/7 chat support, professional customizable page designs, WYSIWYG drag and drop page editor, Verisign security commerce environment, and integrated Paypal payment processing and much more.

StoresOnline Express customers will have the option to upgrade to StoresOnline Pro licenses so that they can access the full power of our eCommerce solutions.

And testing to date has shown this to be the case.

StoresOnline Express creates direct access to the online community who doesn't want or require all the functionality of our more robust StoresOnline Pro software.

This product competes directly with online website tool alternatives and we believe our suite of software and services is better.

All in all, we leveraged our technology and scalable infrastructure to develop a highly competitive, cost effective yet user-friendly single site eCommerce solution that serves a specific niche and provides us greater access to our target customer base.

And with that I'll turn the call back to Don.

Thank you very much Brandon.

In summary, we started off the fiscal year with an exciting first quarter.

We executed on our strategy by enhancing our technology and in introducing new product offerings and resolved outstanding legal issues that will enable us to continue to execute on our business model.

Despite the challenges in the quarter, we delivered 12% revenue growth and 10% increase in net dollar volume of contracts written over the prior year quarter.

For fiscal 2008 we continue to be energized and will work to enhance our technology, refine our business focus on growth, and return value to our shareholders.

As previously mentioned, our target market continues to grow.

From what we have been experiencing in the marketplace, we believe this trend will continue and we believe we are poised to capture this growth with our best-of-breed software and outstanding customer service.

We are confident we are taking the right steps to continue to grow our business.

It is part of our culture to work hard to refine all aspects of our business to remain the leader in serving this rapidly expanding eCommerce market.

Contingent upon marketing our products in California and North Carolina in the second half of fiscal 2008, we expect fiscal 2008 revenue in net dollar volume contracts written to grow 10% to 15% over fiscal 2007 results of $151.6 million and $165.3 million respectively.

With that, I'd like to open the call to questions.

[Operator Instructions.] Neal Goldman of Goldman Capital Management.

Good afternoon guys.

Jeff, you made a comment about under $500 doesn't apply to the SAMP Act in California.

And in my knowledge as I've gotten to know knowledge of the Small Business Opportunity Act laws around the country it seems to me there's a price point where if you sell under a certain price you're not required to even deal with the Business Opportunity Acts in these states.

Well, I'm sorry; that's correct.

But let me start with -- and I assume your question is does this give us the right to go in California?

And unfortunately that's not necessarily an easy answer.

But let me first make clear that this new business model was not a reaction to California, it's something that's been in the work for some time.

So I can't tell you that it was designed specifically with the intent of not violating the California injunction.

Now, you are correct, the California SAMP Act requires an initial required investment of $500 or more.

No, to register as a SAMP requires an initial investment of $500 or more.

It is my expectation that if we were to transact business in California it would be under this model and the initial required investment would in fact be $199.

Obviously, I've reviewed the SAMP Act and we've reviewed it with our counsel and we, at this time, believe that this model may prevent us from having to register.

But we, of course, are going to study this further and there's always the possibility that the state of California would think differently than I do.

I understand.

But is it true that it also applies to virtually every state in the country?

Almost every business opportunity statute has a minimum required investment and they tend to range from $300 to $500.

There are some a little more, some a little less.

And California is the most convoluted of all the statutes.

I think in most states if the initial required investment were the $199 that Brandon spoke about, we would not be required to register as a business opportunity in those states.

Notwithstanding the fact that we don't sell a business opportunity under any circumstances.

Brandon, can you describe the base $199 versus a $5100 product and also compare both of those to the Yahoo!

product that's offered on the net?

Yes sure, Neal.

The primary differences between our Express and our Pro software, it's actually quite extensive but in a nutshell the Pro version has more of the SEO optimization tools, has more of the customer service management tools, has more payment processor integration to it, and has an upgrade support feature in it called our merchant services, and our phone support.

In terms of comparing it to a Yahoo or any of our other online competitors, Express is going to compare to those people's kind of mid level offerings.

And our Pro version is going to be comparable -- although you can't compare it exactly feature to feature, but it's going to compare to their higher-end packages.

I think Yahoo's is somewhere in the neighborhood about $3600 a year.

Which includes the hosting, right?

Yes.

I think it's -- they have an initial offering up front and then it's about $300 a month.

And they also take, I think, about 0.75% of sales.

I'd have to check their website if they've made any recent updates but I think that's about what it is.

You don't intend to take any percentage of sales?

We are considering that but at this point we don't have that in our Pro or our Express offer.

Where you've tested it, do you have all the same people or more people showing up at the all-day seminar and buying the upgraded product?

Maybe just before I answer that I will say that in the testing that we've done at the previews what's been really nice is that we have much more excitement about the opportunity to purchase our Express offer with the opportunity to go to the workshop, get the training and look at upgrading to Pro than we typically have had in just our -- what we would normally refer to as kind of a ticket promote that we do at our current preview which previews the Company and the software offer and then leaves the sale up to the workshop.

And so there has been a lot more enthusiasm.

And I will say that I am really positive about the initial results at the preview selling Express and at the workshop where we've offered Pro as an upgrade.

And I assume -- I mean historically when you ran a preview you would like charge someone 20 bucks and offer the free lunch.

Correct?

Actually, we would allow the customer or the people to come for free and give them the free lunch.

The $20 was charged to attend the full-day workshop.

Attending the full-day workshop essentially they're paying the $199 or whatever discounted number, okay, so you're getting the revenue and you're reducing expenses because you're eliminating the free lunch I assume.

Well, essentially what we've done is just -- assuming all things being equal in our advertising and in our preview, what we've in essence done, or will do, is we acquire the customer at the preview and upgrade the customer at the workshop versus really acquiring the customer through the workshop which has been our current model.

So, the neat opportunity, the upside of it is that we would have the opportunity to acquire many more customers.

Albeit some of them may just stay Express customers we acquire many more customers through this model.

And the exciting part is that the customers seem to be receiving this new offer at the previews very well.

And you also sell -- it sounds like, all things being equal, you have -- you eliminate the bulk of the legal issues based on business opportunity laws, you lower your costs at the preview by getting this $199, and you also get the recurring revenue model started in a more significant way with the hosting at the preview model.

A couple of things, let me respond to each one of those.

First, on the legal side, I think I'd just defer that piece of it to Jeff.

As I've looked at it I've formed my opinion and I think that it's not going to hurt us there.

If anything it does help.

In terms of the recurring revenue, which is the last part of your question, I'll come back to the middle, but I am excited about the opportunity to acquire many more customers at the preview and to begin the recurring billing beginning shortly after our workshop.

And so the opportunity will be there for us to build more recurring revenue.

Now, we don't have any real experience with that recurring revenue model as of yet, but yet I am excited about the opportunity.

The other thing that's been nice in the testing, and again we've just began testing as I said in our earlier script, just recently but the people who are attending the workshop are much more enthusiastic about learning more about the software that they've purchased and are more enthusiastic about learning the details of our upgraded software StoresOnline Pro.

So it's changed the environment.

There seems to be, at this point, some real positive feedback.

Again, we're just in some early testing but I remain optimistic.

And one last question then I'll get off.

In terms of you said early March or earlier, is that a function of training you and sales teams under the new Express model and then the upgrading type of thing?

Yes, well the major difficulty is that we have over 30 preview teams that travel around the world for us.

And so training those teams will take significant time.

And so that's one of the pieces.

And then, again, our presentations at the workshop will change a little bit and so we have to train the nine sales teams as well.

My primary concern is training the preview teams.

Just one last comment.

Assuming the stock weakens because of the earnings shortfall in the quarter, at least from my expectation and others, I would assume -- I would hope you would get very, very aggressive on the buyback and really shrink this cap down.

Okay?

Neal, this is Don.

I just wanted to comment on that.

We have, I think, probably $53 million left of our stock buyback and we -- if the stock comes in we will be aggressively buying the stock back.

But just as a point of reference, I just checked the last filing that came out tonight on shared interest and, again, you were up by another 1.92% to $6.302 million.

So you continue to do it despite the buyback and then the Halo investment, et cetera.

Anyhow, good luck guys, thank you.

Mike Shonstrom with Emerging Growth Equity.

Question on the -- I realize you continue to characterize where you are at with the Express product as being early, and you still have to look at the impact of that business, but what are you assuming in terms of costs of customer acquisition?

You have a known cost right now that gives the $5000 purchase on average.

If you're going to $199 or less, all of a sudden that equation is out the window so you must have to get much, much better penetration, much higher acceptance rates.

Any comments on that?

Sure.

Sure, Mike, this is Brandon.

Well, what we've found is that, yes, in fact what's been interesting in our testing -- I do want to reiterate that we've done just some preliminary testing, but in our testing what we've found is that there's been more excitement at the previews when we've offered the Express package than when we just offered the $20 package.

And so our conversion through to the workshop has been better.

And we hope that that trend continues and we'll roll that out steadily and make sure that that proves out.

But that's really the key is we're acquiring more customers, but also we expect that our conversion rates will be better at the previews and at the workshops.

That's what we're shooting for.

You're shooting for that but I mean it would seem to me you'd need a quantum leap.

No, not really because the customer acquisition costs remain really pretty much the same.

And, again, I'd just remind you in my script I'd said Mike that we would potentially be offering a discount at our conferences to the $199 retail price.

And so with those discounts we've been able to see some pretty neat excitement and some pretty good sign up levels.

So all the other costs being equal, if we're signing up more people in the end for Express and for Pro then it's a net positive.

In the equation that you're looking at are you seeing any cannibalization overall?

In other words, if you get 100 people in historically at $5000, are you seeing x number coming in at the $199 level that does not compensate for the loss of those that don't go on to the Pro purchase?

No, so far we haven't seen any cannibalization.

So far we've really just seen the opposite.

What's happened is customers have been able to leave the preview, work with the Express software, and come really more prepared to ask questions, come more prepared for the training, and more excited about upgrading to Pro.

Now, how does that process work?

You have somebody who's spent the $199 for the Express, he comes in, can he buy pieces of Pro or is it a one-step upgrade?

It is.

It is a one-step upgrade.

Is it still a minimum of three websites?

No.

No, that offering is different.

It's a one website upgrade.

And it's just an upgrade in their Express website to Pro.

We do give a discount for them to sign up the day of the workshop.

We discount that from -- somewhere from around $3000, which is our retail pricing on Pro for one site, down a few hundred dollars.

We also throw in some additional offerings and services to kind of sweeten the workshop offer that day.

So what happens in that instance?

What kind of conversions do you see or what kind of percentage of the $199s go to the 3?

Well, we've found that our conversion rate so far, just our initial testing Mike, that those conversions have been better than our current model.

Than the 25-ish percent?

That's right.

Yes, we're getting better conversions in our initial testing on that.

Again, I think one of the things that we've done in some extensive surveying of our customers and our prospective customer -- our customers, our perspective databases, is that the people are coming to our previews really looking for a solution and what we were delivering to them was a preview that offered them a ticket to the workshop.

Now we're giving them really what they came looking for which was a solution.

And then we add on to that what no one -- none of our other online competitors do is an opportunity to come and experience some really solid good live training and an opportunity to learn more about the upgrade to Pro.

It just -- it changes the mindset because I mean, again, we've been able to deliver what they were looking for in the first place and then our offering is just -- is really what differentiates us from any of the other offerings out there with the training component to it.

So, it's just been a positive experience.

Now, we're -- I'm excited as we continue to roll this out, roll our testing out, and be a little more aggressive with our testing to see how those results continue.

And I am just hopeful and real positive based upon what I've seen.

And just one final question.

Equate for me -- I'm trying to remember how you characterized the 20% growth rate guidance you gave at the beginning of the year.

Now you're at a 10% to 15%.

But there was -- you were assuming under the 20% that California was in.

Just go through those comparisons.

Yes sure.

Well, yes, when we gave our original guidance, of course, we assumed that California and North Carolina were in.

And the change in guidance really reflects the fact that we will -- we don't expect that we will go to California or North Carolina in the first half of the year.

It's already November, the first half of the year's up in a month and a half.

Any comments on Australia, activity there, affected by the comments coming out of the--?

No, we had -- I think we had a positive experience while we were in Australia.

And so I don't think we'd say anything other than that.

We're anxious to work with the ACCC and provide any of the documents or disclosures that they're looking for.

And so we're -- I maintain my optimism there as well.

Okay, thanks.

Eric Fisher with Broadmark Asset Management

Good afternoon gentlemen.

Just got a quick question here, actually a couple of them.

The settlement agreement with the Utah Division of Consumer Protection, there are some extension disclosures it appears.

I was just wondering if you guys plan on proactively including any of these disclosures and solicitations to potential customers before you have to.

It looks like you have to do it by December 7, '07, is that right?

That's correct.

This is Jeff.

Our intention is to do that as quickly as we can.

As you know, some of the marketing materials are already in the Q.

But these are discussions we've had with Utah for some time and these are some ideas we've been kicking around.

So we're prepared to enact them and as soon as we can have them done they will be done.

And then just lastly, the California SAMP Act.

If they do rule that you are selling a SAMP, what would the next step from there?

Do you appeal to -- would it be California Superior Court or would it be the U.S.

Superior Court?

No, at current the matter is in a district state court in California so if, in fact, when we would have a trial and the court were to rule and grant an injunction claiming we were SAMP, we would appeal that decision.

And the appeal would be on two grounds.

One, factually that we are not a SAMP and we believe we are not a SAMP, and, two, as we've indicated all along we believe that the statute is unconstitutionally vague.

And we would appeal on both of those grounds to the state appellate court and from there there is a higher state appellate court and then we would assess what we have to do if that did not go properly.

Okay, great thanks guys.

[Chuck Spinid with Cheney].

I have a couple of questions.

First thing, individual by the name of Steve Mihaylo.

Are you familiar with him?

Steve Mihaylo?

Yes, that's the one.

Does he have any affiliation with your company at all?

He is a reporting shareholder of, I think, 2.2 or 2.3 million shares.

And besides that he has no affiliation with the Company.

Okay, I just thought it was kind of strange but in the last 45 days he's gone from being a 10% owner to an 18% owner.

Any idea why he just woke up one day and said hey, I'm going to do this?

I know that Steve's done a lot of diligence on the Company and I don't know the personal motivations for their investment but I'm -- we're just glad to have him as a shareholder.

He seems to be a very committed shareholder.

I see.

I noticed -- I don't know if these numbers are right, it just doesn't add up, 98% of your stock is actually held by institutions, is that correct?

I believe it's a little bit higher than that.

I don't have it in front of me but I think it looks like it's been as high as 125% institutional ownership.

The insured interest is over 6 million shares and your share count is about, what, 12 million, maybe 13 million shares.

Right around 12 million shares.

How does that work?

How can you have more shares out there than you own?

Well, when you -- when somebody sells short, they're borrowing shares and actually increasing the float.

So if you do the math, with 6 million shares outstanding if there were 6 million shares available to borrow, that those shares could be sold short and it could create a float of the 12 million plus the ones sold short.

I'm not aware of exactly how many of the 12 million shares outstanding are available to be borrowed though.

I do know that there's a considerable amount of that stock that is not available to the (inaudible).

I mean you're looking at -- I'm not a genius at math, but half your stock is short or more.

That's correct.

It's more than half the float.

Management insider or something I think it's a little over a million, 1.5 million shares.

So there's a significant portion of the float that is short.

What are you guys doing?

You're making money, your P/E is low, you're paying a dividend, wouldn't you be better off not being public anymore?

That's not something that we have discussed publicly.

But one of the things that we -- some of the things that we've done, we've continued to focus on business fundamentals.

Notwithstanding the September quarter that we just announced, but we have been very profitable, we've been generating cash.

Even in this last quarter we generated $426,000 in operating capital.

And we believe that we're -- with our share buyback, our dividend, and continued execution that in the long run we'll be able to achieve a true multiple for our company.

And we're going to continue to focus on that.

[Alan Lauschenbaum with Skimmel Partners].

One question and maybe I didn't hear it at the beginning.

If you look at the income statement, it looked like sales and marketing expenses are kind of out of whack with the rest of the increases in revenue and cost of sales.

Can you just comment on that?

Is that a one-time event?

Something's happened there.

Yes, this is Rob Lewis, I'll go ahead and answer that.

We had incurred a lot of sales and marketing expenses that were anticipated to drive a lot more revenue, but because people didn't respond at what we call our sales and marketing events called preview conferences, it didn't drive the revenue that we had anticipated.

So we had incurred a bunch of expenses and we just expected that it was going to drive a lot more revenue than it eventually drove.

So the expenses were expected but it just didn't drive the revenue that we had anticipated it would drive.

And is that because of the problems in California and some of the other states or that's--?

It's partially attributable to that because we had to go back into markets, as we had mentioned, a little bit sooner than we had wanted to and were not as quite as profitable markets as our planned California markets.

But also we just didn't get the response rates at our preview conferences that we had anticipated that we'd normally get -- have gotten throughout our history.

And going forward you don't think -- you assume that that would not be an issue any further?

Well, we continually work on those preview response rates and we -- we're working hard to make that change.

That has been one of our struggles over the last year with the expansion of the preview teams.

We have had some difficulty in getting all of our teams operating at the same level.

So we are working hard on that.

There were two real main drivers to our disappointment for the quarter.

That was one of them and the second was the fact that we had essentially 10% difference in cash collected.

We financed more people than we typically have.

So you add those two together and I think that was really the major difference year over year.

Thank you very much.

Carl Wilk with NorthPointe Capital.

Can you just comment on the AVAIL product, how that's working out for you?

Yes, AVAIL.

We didn't talk about this in the script but I will say that our -- we have been changing our approach.

What we found is that offering the AVAIL product at the workshop as a separate offering really Carl was hurting our sales rates at the workshop.

It was causing confusion, things that we just were having a difficult time overcoming.

And so what you'll see going forward here in the next month, next four weeks, is that we will be putting AVAIL into our Pro offer and including that as part of the software.

There will still be the residual aspect of that for the phone service side of it and it will not deter us from taking that product outside and distributing it through other channels.

But in terms of going through our current channel, I think you're going to see us -- I don't think you're going to see us, you're going to see us put it into our Pro version of our software.

That's fine thank you.

Jeff Silver with Iridian Asset Management.

Yes, hi, I have a question about the new program.

And I know this is a hypothetical question, maybe it doesn't make much sense, but with respect to California, for instance, if you decided that you wanted to sell the product in the new format at $199, how would you do that?

Would you run previews and sell it through the previews in California?

And then if you do that, are you then able to -- would you then -- is it your understanding that you would then be able to offer workshops after that at which you would be able to sell upgrades and still avoid being subject to the SAMP Act?

Well, I'll let Jeff maybe comment on the actual legal part of your question.

But to answer more of the logistics or operations side to make it real clear for you, Jeff, is that that's exactly what we would do is sell Express, sell our product at the preview.

And our workshop would become a customer fulfillment event, which is really what the new model does.

And it gives -- yes, we still make the upsell of our Pro software at the workshop, the fulfillment event, but it's obviously not a required upgrade, it's simply just an upgrade within the current solution.

So, operationally that's exactly what we'd do.

I'd rather let Jeff speak to the legal side of your question so that I don't misspeak.

Jeff.

And Jeff, as I indicated earlier, the California SAMP Act indicates that you are prohibited from selling a SAMP if it has an initial required investment of $500 or more.

It is our belief that the initial required investment of the current model would be $199.

But as I also indicated, and as Brandon just indicated, there would be the potentiality and our attempt to do an upsell and we are reviewing it.

We think the initial required investment is still only $199, but we are realistic enough to realize that the California AG may see that differently.

I see.

So when you say -- we could put initial in quotes and say that if indeed the initial investment is $199, then you presumably or you could satisfy the AG and then go on to upsell beyond that.

Let me just make one point.

The initial is not in quotes; the initial required consideration is, in fact, $199.

We will sell somebody the license for $199 at the preview and there's no requirement to purchase anything else.

They have the ability to purchase something else at the workshop and the full license at the workshop if they wish to.

But the initial required consideration is, in fact, only $199.

And I just wanted to say one thing Jeff, this is Brandon again, that that component, the initial required consideration, is just one component of the Act.

And that's the case really nationally in the 26 states that have a business opportunity law or act.

And there are other little components to it and I think that's why Jeff is really saying, hey, as we've looked at it, we think this would be a positive move but there's other pieces to the puzzle and that's why we're going to move forward cautiously and make the right business decision.

Regardless of the business opportunity issues, I believe that the tests that we've done are showing very positive results and it will -- and it can potentially be just a good business move regardless of the business opportunity statutes nationwide.

And that's really what I would want the shareholders to focus on, is that it's a good business decision, it's what our prospective customers are really looking for is this kind of a solution offering at our preview conferences, and that there's some real good positive excitement at the workshops for the upgrade to Pro.

One other question for Rob.

The average price, $5100 versus $5400 a year ago, if I just applied the $300 difference across the number of licenses sold, that's about $2 million there, which would presumably be -- would drop to the bottom line.

So it seems to me that that's a significant component of the miss or what appears to be the miss.

Why was the average price lower?

Well there's a couple of reasons for that.

Number one, last year we had quite a few events in the U.K.

that helped drive up that average sales price.

In the United States the average sales price last year was $5300 compared to $5100 in the U.S.

this quarter as well.

So it did come down about $200 in the United States because -- so it did come down.

We believe that a lot of that is due to the credit crisis in the United States.

People were more reluctant to buy the higher packages and so then our average -- that brought down our average sales price throughout the quarter.

And Jeff one other thing, this is Brandon.

And we talked about this on future calls but if you recall we made a change in our business model where we required certain credit scores to put larger amounts down and we wouldn't finance at our highest packages.

And so as we've instituted that over the last year and a half, we did see the average sales price come down a bit.

The philosophy there was that we're just getting better credit people in our portfolio.

And what we did see in this last quarter, although we did not sell as many cash sales, the people that we did put into our portfolio were better.

They were just -- they were choosing a financing route.

When we couldn't convince them to use their cash they wanted to use the financing route.

All right.

Thanks.

And this is all the time we have today.

I'd like to turn the conference back over to management for any closing remarks.

This is Don Danks again, and thank you very much for joining us today.

We are very excited about the evolution of our business model and all the things we have in the future and our prospects going forward.

And, as always, we are focused on driving growth and delivering shareholder value.

We look very much to updating you on your second quarter call -- second quarter 2008 conference call in February.

Thank you for joining us.

Ladies and gentlemen, that concludes your conference call for today.

We thank you for your participation and ask that you please disconnect your lines.