Crexendo Inc (CXDO) 2008 Q3 法說會逐字稿

Welcome to the iMergent Third Quarter Fiscal 2008 Earnings Conference Call.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, May 6, 2008.

I would now like to turn the Conference over to Ms.

Chapman.

Ma'am, please go ahead.

Thank you, Tina.

Good afternoon, and thank you for joining us for the iMergent Third Quarter Fiscal 2008 Conference Call.

With me today are Don Danks, Chief Executive Officer; 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 a review of the business.

Then Jeff Korn will provide a legal update, Rob Lewis will review the financials, Brandon Lewis will discuss the operations, and then Don will open the call for questions.

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 will turn the call to Don Danks, Chief Executive Officer.

Don?

Thank you very much, Kirsten.

And thank you all for joining us on our call today.

We are implementing our plan to ensure a long-term viable business that will drive profitable growth, and we are very excited about our progress.

In fact, for the past two quarters, we have posted sequentially better financial results, with increased cash from operations and improved profitability.

Before I go into detail, I'll summarize some of our financial results.

Our total revenue for the third quarter of fiscal 2008 was $27.6 million.

Net dollar volume of contracts written, a relevant and meaningful statistic to the understanding of the operations of the Company, was $26.5 million.

As we are in the rebuilding phase, after intentionally reducing our sales teams, as projected, both figures are lower than last year.

Our 2008 goals are to appeal to a wider audience, improve sales via enhanced conversion rates, build new and recurring revenue streams via ancillary products developed both internally and with partners, and maintain our commitment to superior customer service, while continuing to explore new additional channels of distribution for our e-commerce products and services.

As such, we introduced a new business model based on integrating StoresOnline Express into our preview sessions and continuing to offer StoresOnline Pro at our one-day workshops.

We are driving long-term change and recognize that implementation takes some time.

Since we started in September 2008, we have improved each quarter.

When comparing the second quarter 2008 to the third quarter of 2008, we increased our close rates from 27% to 29%, we grew our average selling price from $4,800 to just over $5,000, we improved operations from a loss of $143,000 to income from operations of $737,000, and we grew cash provided from operations from $2 million last quarter to $4.6 million this quarter.

Also during the third quarter, we met our target of introducing StoresOnline Express at all preview sessions by March 31st.

The initial results were positive, as close rates and average selling prices increase, which we believe validates the StoresOnline Express business model.

Then in April, we were pleased to hold two StoresOnline Express preview sessions and one workshop in California.

The market continues to grow.

Our StoresOnline Express model is gaining momentum, and investments made to training our sales teams and material refinement are paying off.

However, as updated on April 1st, the rollout was more expensive than anticipated.

Additionally, the percentage of customers paying with cash decreased from 60% to about 50%, which we believe is attributable to the economy, as consumers are tending to use credit over cash.

All considered, we have narrowed our guidance for fiscal 2008 revenue and net dollar volume of contracts written -- both to be between $127 million and $132 million.

Nonetheless, our commitment to deliver shareholder value to our investors is steadfast.

We continue to repurchase shares of our common stock.

Since the program's commencement in August 2006, we have purchased over 1.586 million shares for approximately $26.1 million.

We also continue our quarterly cash dividend of $0.11 per share.

Our most recent payment of March 10th brought the total amount paid to shareholders to date of $6.3 million.

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

Jeff?

Thank you, Don.

First, I wanted to comment on questions we get from time to time on certain litigations, and why from time to time we either file motions to continue or file objections, which may seem to delay matters.

I normally do not discuss individual motions or actions in litigation that we take.

I do, however, want to indicate that motions to continue or objections are done as part of a comprehensive litigation or settlement strategy.

I do not and will not discuss the rationale behind each and every step we take, as it's not a good idea to disclose to our opposition what our specific strategy is.

I meet with and hold discussions on a regular basis with states who have actions or otherwise have questions about the Company.

We stand ready to act in good faith and to make appropriate accommodations.

As you now know, I was engaged in meetings with both the AG and DA in California last year while the litigation proceeded.

We are happy to work with regulators and hopefully resolve any open issues.

We have never admitted to any wrongdoing, and we are steadfast in our belief that we have acted properly and we never mislead customers.

We make decisions on settlement based upon the reasonableness of the settlement offer, what is expected, and what the expected cost of settlement relative to the cost of proving our position would be in court.

If necessary, we stand ready to take any pending action to trial and present our position to a court.

Nonetheless, when faced with state personnel who act in good faith, we strive to resolve matters.

Our most recent resolution in Connecticut is proof of that.

The investigation there started almost two years ago, and we've been engaged in discussions ever since.

Connecticut, like most states' investigations, stem from customers of years ago, before we made the substantial and quantified improvement to our customer service and prior to the StoresOnline Express model.

Let me now discuss California.

This is a very important part of our business, and our being able to transact business there is important to the Company and to me.

I want to make clear -- it is also important that we do business in compliance with the law and follow the court order which has been entered.

As I indicated, I've personally had meetings with the state, where our business model was discussed in great detail.

I made clear at that time and subsequently that I believe our StoresOnline Express model did not violate the injunction and was also not in violation of the Sellers Assisted Marketing Plan Act.

The injunction prevents us from selling a product that has an initial required consideration of more than $500.

The StoresOnline Express software we sold in California had a price of $50 when it was sold at two previews held on April 19th.

The people who purchased StoresOnline Express, which is a standalone, fully functioning tool, were invited to attend a workshop on April 25th.

And those who purchased were allowed to upgrade to StoresOnline Pro and StoresOnline Platinum.

I will not discuss the results of those seminars in light of the pending litigation.

The state was fully appraised of our actions and was invited to attend.

I saw nothing at the seminars which has led me to change my belief that we are allowed to hold the StoresOnline Express seminars in California.

The state has not rendered its opinion but has made clear that its failure to act is not an admission that it has acquiesced to my position.

I believe it is important to continue to tread carefully, as I want to show the AG and the DA, as well as the court, that we are operating in nothing but good faith.

I intend to continually inform the AG and DA of what actions we are going to take.

I have, however, asked Brandon to set four more previews and two more workshops.

They will probably be set in July.

I will at this time not provide any further detail, as I want to fully provide the information first to the state when the dates are set.

On all other matters, we are proceeding expeditiously and, where appropriate, aggressively.

We will continue to work with states to both resolve pending actions and try and prevent future actions.

We believe as a company it is in our best interest, the interest of our customers and, for that matter, the interest of regulators, for us to be transparent and fully open and honest.

We strive to do that every day in every transaction.

With that, now I'll turn the call over to Rob for a financial review.

Rob?

Thank you, Jeff.

As mentioned earlier, in addition to revenue recognition each period in the income statement, management believe 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 period less estimates for bad debts, discounts incurred on sales and trade receivables, and estimates for customer returns.

During the quarter ended March 31, 2008, we conducted 204 events, including 10 internationally; compared to the third quarter of 2007, with 320 workshops, including 91 internationally.

The decrease in the number of workshops conducted is primarily attributable to the decrease in employee base which occurred in late December 2007 in an effort to effectively launch StoresOnline Express.

Total revenue was $27.6 million compared to $42.6 million for the quarter ended March 31, 2007.

Net dollar volume of contracts written was $26.5 million compared to $49.1 million for the previous year's quarter.

Total operating expenses were $26.8 million for the current quarter, compared to $36.7 million for the same period last year.

The decrease reflects the fewer workshops and second quarter cost reductions, which were partially offset by increased training expenses associated with the rollout of StoresOnline Express.

General and administrative expenses were $5.0 million for the current quarter, compared to $4.1 million for the third quarter of last fiscal year.

The increase was attributable to additional customer support costs of $241,000 due to an increase in volume of customers utilizing our software, an increase in financial servicing fees of $265,000 resulting from the increase in collections from trade receivables, and an increase of $107,000 in legal expenses.

The remaining increase is attributable to an increase in general and operating expenses associated with the launch of StoresOnline Express.

Net income was $1.7 million, or $0.15 per diluted share, in the third quarter of fiscal 2008; compared to net income of $4.7 million, or $0.36 per diluted common share, in the third quarter of the prior year.

For the first nine months of fiscal 2008, we held 806 workshops, including 119 internationally; compared to 860 workshops, including 194 internationally during the nine months ended March 31, 2007.

Total revenue was $98.9 million compared to $107.3 million in the same period of fiscal 2007.

The income tax provision for this period was $1.9 million, compared to an income tax benefit of $676,000 for the same period of last year, which resulted from a non-recurring benefit that was recognized upon the removal of the valuation allowance against $7.7 million of deferred income tax assets.

For the nine months ended March 31, 2008, net income was $2.6 million, or $0.22 per diluted common share; compared to net income of $18.7 million, or $1.45 per diluted common share in the same period of fiscal 2007.

Regarding the balance sheet -- as of March 31, 2008, we had $25.2 million in cash and cash equivalents.

During the quarter, the Company repurchased 328,053 shares of its common stock for $3.5 million.

Additionally, from April 1st, 2008 through May 6th, 2008, the Company has repurchased over 112,000 shares for $1.4 million, bringing the total shares purchased since the program's commencement in August 2006 to over 1,586,000 shares for $26.1 million.

As of March 31, 2008, we had working capital of $20.9 million and current deferred revenue of $33.9 million.

The deferred revenue balance represents historical sales for which the Company cannot immediately recognize revenue.

The costs 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 influences our liquidity or future cash requirements.

Working capital net of current deferred revenue as of March 31, 2008 is $54.8 million.

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

Brandon?

Thanks, Rob.

As Don mentioned, we're in the process of evolving our business model and improving our marketing.

Our decisions and actions are to deliver a long-term viable business, and we're very excited about our progress.

During the fiscal third quarter, we increased our close rates from 27% in the December quarter to 29%, and the average selling price from $4,800 in the December quarter to just over $5,000.

We do believe the StoresOnline Express model is positively impacting the buying unit conversion rate.

The percentage of cash purchases was around 50%, which was lower than the prior year, which we believe continues to reflect buyers' uncertainty about economic conditions.

The average number of buying units attending the workshop for the quarter was 84, compared to 82 during the December quarter and 95 for the fiscal third quarter of 2007.

We attribute the decrease to response rates to our advertising and to attendance at our preview sessions.

We are encouraged, however, by the sequential increase in these statistics.

Additionally, we continue to train our speakers with the new curriculum this quarter.

In an effort to train salespeople and speakers, we did send out more salespeople to our preview seminars.

This brought on more expenses for both travel and salaries.

We are quite pleased, however, we met our goal of rolling out StoresOnline Express to all preview sessions by March 31st, 2008.

We have started the StoresOnline Express rollout in the U.S., and our goal is to emulate the launch process internationally, which we expect will require some adjustments to serve those markets appropriately.

In addition, we conducted, as Jeff said, two StoresOnline Express preview sessions and one associated workshop in Orange County, California in May.

As noted, we've been reengineering the Company with management's efforts focused on delivering the best experience for our customers.

We believe we will have dialed in our marketing and new preview presentations in the coming months.

Then we will direct our full attention to increasing customer activations and continuing to build our recurring revenue.

We have differentiated our software offerings.

First, StoresOnline Express offers our customers an outstanding Web site builder with minimal marketing and processing integration.

StoresOnline Pro, on the other hand, provides the customer with a one-Web site license, access to AVAIL, and all of our excellent marketing tools, processing and other integration.

Finally, we expanded and updated our premium offering, now labeled StoresOnline Platinum.

Platinum provides all that Pro offers, plus drop-shipping integration and the ability to receive unlimited site keys, which allows the customer to activate unlimited Web sites when needed.

AVAIL, as you may recall, is our automated virtual telecommunications e-mail and fax management system that enables customers to manage their customer inquiries.

AVAIL is now bundled with the software but requires a monthly hosting fee, which we hope contributes to our future recurring revenue growth.

Also, we're establishing a special task force to evaluate additional means of distributing our software.

All in all, we continue to be proud of our award-winning customer support, but we're not resting on our laurels.

And we promise that we will continue to work to improve that area.

And now, Don, turn the call back to you.

Thank you very much, Brandon.

In summary -- by adjusting our business model and reengineering our company, we have positioned our company for future growth.

Although our revenue is down year-over-year, we have bettered our financial performance sequentially.

I'd like to compliment the management team on delivering two quarters of profitability during this transition process.

We're very proud of that.

We are not done yet.

We continue to refine our curriculum and improve our marketing.

And we are optimistic that in the fourth quarter of 2008 we will continue our trend of improving our financial results sequentially.

We're very excited about our results and progress.

And as Brandon noted, we continue to drive forward to increase customer activations and recurring revenue.

Now with that, I would like to open the call open to questions.

Operator, I'll turn it over to you.

(OPERATOR INSTRUCTIONS) Neal Goldman, Goldman Capital Management.

Good afternoon, guys.

Couple of quick questions on the extra costs in the third quarter -- you said it was $107,000 incremental legal.

Was that over the second quarter?

And what was the total legal cost associated with all these historical --?

Rob, why don't you go through the legal, and maybe some of the reserves?

As far as the legal costs -- the $107,000 is above and beyond the third quarter of last fiscal year.

We were -- my script was comparing this quarter compared to last year's quarter.

And how much was that in total?

In total, historically, we haven't -- let me see -- we've got that here; just one second.

As far as total legal expense, it was about a little over $500,000 this past quarter.

Okay.

And for the year overall -- nine months?

For the nine months?

Just one moment -- about $1.7 million.

Or, excuse me -- no, $910,000.

Sorry.

Okay.

And all this is associated with these prior legal things, whether it's California, etc.?

Correct.

It's primarily --

Okay.

-- associated with these items here.

And what was the incremental cost related to training and sending people in, and extra airfare, etc., in this last quarter?

It's difficult to quantify that, because with the number of teams that we sent out -- and some had additional people; some did not -- we didn't actually segregate that out in our financial statements this time, but we did have additional team members out with a lot of the teams throughout portions of the quarter.

Okay.

But -- because there was one -- you said additional customer support of $241,000.

Was that --

Right.

That didn't have anything necessarily to do with the rollout of StoresOnline Express.

Okay.

It's just we have a lot more customers utilizing the software.

And so that's how much our costs increased during the quarter compared to last year's quarter.

Okay.

But is it fair to say between the legal -- which hopefully one day goes away -- and the customer support, it was probably at least a nickel a share after tax?

It probably could be said that, yes.

Okay.

What was the recurring revenue in the third quarter as a percentage of overall sales, when you talk about hosting and AVAIL, and things of that nature?

We historically have not given that number out, and we continue to believe that.

But I will say that it's been less than 10%.

Okay.

But as the new model rolls out, I assume the whole purpose is to have a significantly greater percentage?

It is.

While revenues are decreasing, those recurring revenues are increasing.

So despite the fact that we've had decreasing revenues, we have had increasing recurring revenues throughout this process.

Brandon, when you talk about a range for the fourth quarter, it sounds like somewhat up -- $28 million versus $27.6 million, to as much as $33 million.

Right?

Yes.

What are those -- what would be the differences?

Because you know pretty much how much you've planned.

Yes.

Well, ultimately, I think there's a nice comfort level in our conversion rates at the workshop and our new packaging of our product.

And we're really, really confident and comfortable the way that that's progressing.

One of the difficulties, Neal, that we've had -- as have many training companies, I think, in our space -- is that people have not been responding as well to our marketing pieces as they have in the past.

And so that range is really attributable to those marketing response rates, and that's where that range comes in.

And besides the economy, what would be the other variables in that (multiple speakers) --

Well, you know what, it's hard for me to say, because I've talked to a number of people in the training industry, and they're all experiencing it.

I think most people have concluded it is the economy, and people are hunkering down and are not as interested in spending money and time on training as they have in the past.

And so they're just not responding quite as well.

Interestingly enough, I'm -- if you compare our results in terms of marketing, in comparison to what I'm hearing is going on out in the marketplace, I think we're doing real well, but not well up to our standards.

And we just need to improve there.

Now we have seen some really nice trends in a lot of our testing of our new marketing pieces and with some of our data modeling that we've been doing.

And I'm optimistic that we're going to see some of those results go in the right direction.

Okay.

Also, when you look at -- now you have six teams down from -- what was it, nine teams at one point?

Yes.

What is the potential on a quarterly basis on the upfront sale between the Express and then the Pro?

Because you used to -- you got as high as, what, $45 million I think, in the last year sometime, or --?

Yes.

I actually -- I guess I actually don't have -- I wouldn't have that number just off the top of my head, in terms of the potential revenue off of those six teams.

One of the things, as you saw in our -- or heard in our script, was that we saw an average of 84 buying units --

Right.

-- per workshop, which is down from 96.

It's really -- that's kind of in our sweet spot, that 90 to 100, 105 buying unit range.

And so I think you could probably do the numbers.

If you gave me a minute, I could probably get to that number as well.

But that's kind of the sweet spot.

Once we start going above that, there's just some diminishing returns.

It doesn't mean we couldn't figure out how to be efficient to those larger crowds.

But that's typically or historically been kind of in our wheelhouse, so to speak.

But there's no reason that you won't get back to those 90 type of thing (multiple speakers) --

No, no.

Actually, that's -- yes, in the month of January, for example, we were actually in that range.

And it just slipped because of response rates in February and March.

And so, yes, there's no reason why we couldn't.

And in terms of that incremental volume -- you bring down, what, 70 -- 50% to 60% of sales on the incremental volume of sales in the new model?

I'm not really sure that I -- I don't really know that I understand --

[I'll give you] like an extra -- the range of 28 to 33, right?

Oh, yes.

On every incremental dollar of sales because it's the same number of seminars and the same number of --

Yes, the closing rate, as we talked about in the script, was up a couple of points over last quarter.

And although we haven't broken out what the difference between the Express closing rates and our past closing rates are, you can conclude that our Express closing rates were over 29%.

Because probably a little more than half of all of our events for the quarter were under the old model, not the new Express model.

Okay.

But therefore, the incremental volume should bring down round numbers -- $0.50 on the bottom line.

Is that right, Rob?

What was that again, Neal?

Would it bring down an incremental 50% on an incremental dollar of sales?

He's basically --

Yes, because that's all margin to us.

Right.

Because the fixed costs associated with the workshops -- the only thing I would also add to Brandon's comments is that our workshop teams aren't quite at capacity yet, so there's additional capacities at each workshop.

Okay.

There's more workshops to be conducted for each team.

Our teams are not only not seeing the maximum number of buying units, but they're not doing the maximum number of workshops that they could do on a monthly basis.

Great.

The size of the tax loss carry-forward, Rob, at this point is how much?

Let me get -- let me pull up the balance sheet here real quick.

As far as the tax loss carry-forward, it is -- it's about a little over $10 million; about $10.1 million, $10.2 million.

Is that against pretax or against the --

That's after tax.

After tax.

-- it's tax affected.

Okay.

And in terms of -- okay, I think I've gotten everything I need.

Thank you very much, guys.

Thanks a lot, Neal.

Bye.

Bye.

(OPERATOR INSTRUCTIONS) [Jeff Bass], [Private Investor].

(technical difficulty) -- quarter, guys; rather impressive.

Thanks.

I want to follow up on the guidance a little bit.

Brandon had said that the range really was related to the response expected from the marketing pieces, and -- that's what he identified, anyway.

However, I think the point he subsequently made -- that when we go from maybe 50% on the Express model basis, with 27% buy rate at workshops, to the full Express model -- that in itself could add roughly 10% of highly profitable sales to the mix.

So wouldn't it be fair to say that the range should also reflect the incremental that you would expect to get from the Express model?

Yes.

I mean, definitely the margins will improve.

And so, I think that's a valid point.

Next question is with respect to receivables.

I noticed that reserve on gross receivables dropped over 1% from the last quarter, when, under the more challenging credit conditions, you might have expected to go up.

Is there any particular reason for that?

Yes.

The reason why is because our sales volume has actually come down.

We're actually pumping less receivables into our pool.

But the receivables that are there from our past are actually performing well.

We've been getting --

Yes.

I got it --

-- as things have defaulted, it's --

Yes, I got it -- you're pumping less of the higher-risk initial month's receivables in.

Exactly.

On the other hand, I notice long-term receivables dropped nearly 25% from 12/31.

Is there any particular reason for that?

Yes.

Once again because of the decreased sales volume, all of our historical receivables are now getting into -- if you recall, we did a lot of volume in the March quarter of last year.

Those are now beyond 12 months, or within the 12 months -- zero- to 12-months they are going to mature.

And so, that pool basically became current.

So that's the big reason why the decrease.

We're not pumping in as many receivables as we did last year's quarter.

And so that's the reason why you've got more current now than you do long-term.

And finally, I note a 41.8% tax rate for the current quarter.

Have you ever given any thought to retaining a consultant to examine whether there are any tax strategies that the Company could use that would be helpful in getting that rate down to (multiple speakers) --

A little bit more reasonable amount?

Yes --

Yes, we are looking at that.

The big things that drive our rate right now is the expense we recognized for incentive stock options that were granted to employees in the incentive stock option expense.

And then, we have other permanent-difference items, such as business meals and entertainment, for which we're only able to deduct 50%.

But we are going to be looking at -- we have already talked to some tax consultants about trying to help us strategize to help us reduce that tax rate.

But it's those permanent items, like incentive stock option expense, and business meals and entertainment, that are really impacting our rate this year.

One more question -- I notice that you only did 10 international workshops, which was down considerably from the prior quarter, and also I think from the quarter a year ago.

Does that affect this 84 average buying units any?

And what I'm getting at is my recollection is that historically, having the international workshops had better results than the domestic ones in some respects, and --

Yes, you're dead-on, Jeff.

With respect to cash -- with respect to both the cash pain and the size --

Yes, you're dead-on.

Historically, our experience has been we've gotten better response rates to our marketing internationally, and they have paid with more cash.

And that's -- you're dead-on there.

Now I can see that you wouldn't have necessarily wanted to do a lot internationally if you were focusing the Company's efforts on getting Express rolled out properly.

But can we assume that we will get back to more normal levels of international workshops in the current quarter?

I think you'll see us start to ramp, Jeff.

I don't think you should expect that we would get back to the normal levels.

In particular, maybe outside of Canada, I think you can expect us to ramp rather quickly to kind of our past levels.

However, outside of Canada, I think you'll see a slower ramp.

Is there any particular reason for this?

Because the economic (inaudible) (multiple speakers) --

The main reasons -- the main reasons, Jeff, is that, in particular in Australia, we have had some issues, as you know, with the ACCC.

And we wanted to try to resolve as many of those as we can, and deal with some of the PR issues.

The other thing that is a little bit concerning to me -- and I want to make sure that we have our marketing dialed in -- is that, in particular over in the UK, postal rates have gone up quite dramatically.

They had a huge rate increase that is going into effect here in the next few weeks.

And as well as there was a rate increase in Australia.

But we just want to make sure that we have it, as I mentioned in my script, dialed in before we start investing too heavily back in there with this new model.

Okay, thanks.

Thank you, Jeff.

And we have no further questions at this time.

Please proceed with your presentation or any closing remarks.

Yes, I'd like to thank everybody again for joining us on the call today.

I'd like to thank the shareholders for their questions that they had.

We remain very committed to the growth of our business, and we're very excited about our prospects.

Our positive changes over the past few months have already delivered results.

And we believe with more refinement, we will drive sales growth, recurring revenue, increase and improve profitability.

And with that, we look forward to talking to you after the end of our fourth quarter.

Thank you very much for attending the call today.

And ladies and gentlemen, that does conclude your Conference Call for today.

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