Crexendo Inc (CXDO) 2009 Q1 法說會逐字稿

Welcome to the iMergent first quarter fiscal 2009 earnings results conference call.

At this time all participants are in a listen only mode.

Following managements' prepared remarks, we'll hold a Q&A session.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded November 5, 2008.

I would now like to turn the conference over to Kirsten Chapman, please go ahead ma'am.

Thank you, Christian.

Good afternoon and thank you for joining us for the iMergent fiscal 2009 first quarter 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 management, who will deliver prepared remarks and 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 result to differ materially from those described in the forward-looking statements, and from management's current expectations.

For a more detailed discussion of the factors that affect iMergent's operating results, please refer to its SEC reports including its most recent Form 10K and Form 10Q.

The company undertakes no obligation to update any forward-looking information.

With that, I will turn the call over to Don Danks.

Please go ahead Don.

Thank you Kirsten.

Welcome and thank you for joining us today.

We appreciate your continued support and we are excited to be speaking to you today about iMergent.

Revenue of $23 million came within our expectations for the first fiscal quarter of 2009, it decreased approximately 16% compared to the same period of last year, reflecting the December 2007 reduction in sales force by about one-third.

Since that realignment of goals and resources, we have been focused on improving the Company's performance in a variety of ways.

We continue to focus on expense reductions, we lowered costs at all of our preview sessions and workshops, and on a per attendee basis, and we reduced travel expenses on a per employee basis during the quarter.

Also we improved our operating metrics.

We increased workshop purchase rates to 32% up from 26% in the prior year quarter, and the average selling price grew to $5,400 for the quarter, up from $5,100 in the same quarter of last year.

As we have outlined on prior calls, we have been aggressively adjusting our advertising to improve performance.

I would now like to review some of our progress this quarter.

Responses to our advertising efforts continue to be high as we are consistently seeing a large number of attendees at our preview sessions.

As discussed last quarter, we made some adjustments to our infrastructure to better serve the large crowds we are drawing to our events.

In July and August the volume of attendees negatively impacted our preview session to workshop conversion rates, as we were not yet able to properly address these large crowds.

As a result, July and August operated at a loss.

However the measures we put into place late in the summer began to pay off, and in September we posted an operating income and demonstrated we were headed in the right direction.

As such we expect to introduce a new seventh workshop team later this month to further our progress, and to build on the momentum we've gained over the past two months.

We reiterate our projections that our actions will begin to deliver growth in the March 2009 quarter.

Throughout the years investors have asked how economic trends impact our business.

We've been selling our software since 1995, our answers have been consistent.

We serve small businesses and entrepreneurs, providing them with software that enables and enhances their online presence.

During the periods of times that are impacted by economic pressures, businesses need to become more competitive or they will not survive.

In fact, while industries may have seen growth stall or deteriorate over the last several months, due to the economic environment, the e-commerce market is still growing.

Forbes research analysts recently projected a 12% increase in e-commerce spending in 2008 over the previous year for total sales of $44 billion.

In our experience, one of our first actions is for stronger existing small businesses to increase their online presence and improve marketing.

In fact, many cost conscious businesses will cut back on brick and mortar outlets in lieu of cost effective online sales.

We have witnessed this first hand through increased response rates to our advertising and increased workshop purchase rates, as well as increased sales of ancillary products.

Of course there are existing businesses that do close shop, however in our experience typically the online presence is the last element to be cut.

Further, we often see an increase in new businesses that are interested in building an e-commerce presence.

Lastly, whether existing or new, stronger or weaker, we typically see small businesses hold cash longer, and take advantage of our financing plan, which impacts our levels of revenues and increases our deferred revenue.

For the first quarter of fiscal 2008 approximately 40% of customers financed their purchases from iMergent.

By the fourth quarter of fiscal 2008 this shifted to approximately 50%, and this quarter financing increased -- excuse me, it's just the opposite.

From a year ago the financing rates were about 60%, this current quarter they reduced to about 40%.

Consequently deferred revenue increased and our revenues, operating income, and cash flows from operations for the quarter were negatively impacted.

While this may be a symptom of the current economy, we are all evaluating measures that we anticipate may reduce the percent of customers financing their purchases.

We are encouraged by the growth in our recurring revenue, and other commission revenue.

We have a steadfast focus on improving operations of the Company, continuing to monetize our growing customer base, and managing all our costs as well as possible.

As always, we will constantly be evaluating cost reduction measures to further improve our performance.

I'll now turn the call over to Rob Lewis for a review of our financials.

Thank you Don.

During the three months ended September 30, 2008, the Company held 208 workshops, including eight internationally, compared to 291 workshops, including 13 internationally in the same quarter of last year.

Revenues for the first quarter of fiscal 2009 were $27.3 million compared to $32.5 million for the first quarter of fiscal 2008, reflecting the lower number of workshops.

Net dollar volume of contracts written was $28.7 million for the quarter, compared to $35.6 million for the first quarter of last year.

Total operating expenses were $30.5 million for the quarter compared to $35.9 million for the first quarter last year.

General and administrative expenses were $4.5 million for the quarter compared to $4.8 million for the first quarter last year.

For the first quarter of fiscal 2009 operating loss was $3.3 million compared to an operating loss of $3.4 million in the same quarter last year.

Other income was $1.6 million for the quarter, which included $1.9 million in interest income compared to $2.4 million of other income for the first quarter of last year, which included $2.3 million in interest income.

In October 2008 we received notice from the Internal Revenue Service contesting the deductibility of 50% of the cost of meals that we provide to attendees at our preview seminars and workshops.

We contend that these meals are excluded from the deduction limitations of IRS Code Section 274.

The IRS has also challenged our ability to utilize more than $460,000 of our net operating losses per year.

We contend the limitations are significantly higher than $460,000 per year under IRS Code Section 382.

While we believe in our ability to defend our positions, based on FASB interpretation #48, accounting for uncertainty in income taxes, we have established a reserve of approximately $6.6 million as of September 30, 2008, for the potential tax, penalties, and interest costs.

For the first quarter of fiscal 2009 operating loss was $3.3 million compared to an operating loss of $3.4 million in the same quarter last year.

As a result of the income tax reserve, provision for income taxes for the first quarter of fiscal 2009 was $5.9 million compared to a tax benefit of $238,000 in the same quarter last year.

For the three months ended September 30, 2008, net loss was $7.5 million or $0.66 per common share.

This compares to a net loss of $800,000 or $0.07 per common share in the same quarter last year.

Now for a review of our cash and balance sheet; as Don noted, cash flow was significantly impacted by a year-over-year reduction in revenue of 16%, and an increase in finance purchases of our workshops from 50% during the first quarter of fiscal 2008 to 60% during the first quarter of fiscal 2009.

Consequently cash used by operating activities during the first quarter was $513,000 compared to cash provided by operating activities of $426,000 during the same quarter last year.

Consequently, we did not repurchase any shares during the quarter.

As of September 30, 2008, cash and cash equivalents were $25.3 million; working capital was $19.2 million; and working capital excluding deferred revenue was $51.1 million.

Total current and long-term net trade receivables were $39.8 million at September 30, 2008.

Now I'll turn the call back to Don.

Thank you very much Rob.

Demand for our products remains strong.

We show small businesses and entrepreneurs that during this entrenching economy there is an opportunity to differentiate their businesses on the web by enhancing their online approach.

We offer our customers the tools to help them develop a competitive advantage during this difficult economic period.

We're very proud of our StoresOnline software.

StoresOnline Express offers customers a simple and affordable e-commerce solution.

We provide additional value to our customers with our StoresOnline Pro package, which provides them with tools such as enhanced marketing, seamless product listings, search engine optimization, amongst many other features.

The new business model we've implemented is working, and each improvement we make is delivering better performance, which we believe is building the foundation for a solid calendar 2009.

As Rob discussed, while this is disappointing news, we need to address the IRS's audit.

We believe its position is in error, and we have the facts to support our position and intend to defend it vigorously.

We continue to hold discussions with the California Attorney General's Office, and look forward to having a resolution before the end of calendar 2008.

I'll now review our outlook for the remainder of 2009 fiscal year.

Due to the momentum we have gained from our response to advertising, and the planned launch of our seventh workshop team in late November 2008, We are increasing our guidance in the second quarter of fiscal 2009.

we previously believed that revenue and net dollar volume of contracts written would decrease 15% to 20% from the same period of fiscal 2008.

We now expect revenue in that dollar volume of contracts written to be flat to a 15% decrease from the second quarter of fiscal 2008.

During the second half of fiscal 2009 we continue to expect revenue and net dollar volume of contracts written to grow up to 10% compared to the same period of fiscal 2008.

As a reminder, in late December 2007 we reduced our workshop teams by 33%, and introduced our new business model.

As such, during the first half of fiscal 2009 we'll have fewer workshop teams compared to the same period last year, and therefore we believe we will have a more comparable business model in the second half of fiscal 2009.

On a personal note, this will be my last conference call as the CEO of iMergent.

I am excited to announce that Steven Mihaylo will be joining iMergent as the CEO and Director effective tomorrow, Thursday November 6.

Steve's experience building Inter-Tel, a public company, into a $500 million company in annual sales in business communication and software, before it was sold to Mitel in 2007, makes him a perfect leader for iMergent at this point in its evolution.

Steve will help the company expand its presence in the small to medium enterprise markets, which has become an increasingly intriguing arena for us.

As well he will be evaluating alternative revenue streams for the Company.

Steve will be present at our fiscal 2008 annual shareholders' meeting on Wednesday November 19, in Salt Lake City, Utah, and we welcome you to attend and meet Steve as well as other members of the management team.

It has been my sincere pleasure working with this very talented management team and entire staff at iMergent for the past seven years.

I look forward to continuing my involvement with iMergent in a consulting capacity, and I am encouraged by our recent results, and I'm optimistic the company will continue to grow and be even more successful.

Now I will turn the call over to Brandon Lewis.

Thanks Don.

On a personal note I'd like to take a moment to thank Don for his seven years of service.

Don has been an incredible friend and business partner.

His interest has always been on building an exceptional business and delivering incredible shareholder value.

I've always admired his commitment to shareholders.

He worked for years at no salary, never took a stock option, bought all of his shares in the market with personal funds, and always looked for ways to improve the value for our shareholders.

The examples of his service to the shareholders are countless, and you've led the way on nearly $30 million of stock repurchases and the institution of a shareholder dividend, just to name a few.

The management team and employees admire Don's leadership and are grateful for all that he has done.

I will personally miss my current association with Don as CEO, but I'm grateful he will continue to consult with us as we work to improve our business.

We continue to be committed to perfecting our existing core business, and we look forward to Steve leading our team and exploring additional revenue opportunities in small to medium enterprise initiatives.

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

Operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS) One moment please for the first question.

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of Neal Goldman, with Goldman Capital Management.

Good afternoon guys.

Rob, I see you increased your bad debt reserve on the receivables to $14.8 million from $13.7 million despite the fact that receivables are down by $1.3 million.

Let's see; as far as the gross receivables go, the gross receivables are $59.6 million, as of June 30 of last year, as compared to $57.2 million.

Are you comparing that from last year or are you comparing that from June 30, Neal?

I'm just looking at the trade receivables; $27.4 million as of September, versus $28.7 million.

Oh, $28.7 million.

If you take a look at the overall balance, if you include the long-term portion as well, Neal, it's exactly about 33%, just as it was last year, as of June 30th, as a percentage.

Okay.

Now, that increased by that difference of the 50% to 40% also, despite the lower sales?

Correct.

The reason why it increased, basically it did increase a little bit, as far as the gross receivables grew about $2.5 million or so; $2.4 million.

And the reason for the increase in the receivables, despite the decline in sales is because we had a 10% additional that were cash sales, converted into financed sales.

So, that increased the financing.

Okay.

On those available for sale securities, the auction rate, have we gotten any sort of clarification on it, in terms of timing yet?

Yes.

As Merrill Lynch -- all of our auction rate securities are held by Merrill Lynch.

And as everybody has probably seen from the settlement that Merrill Lynch had with the Securities and Exchange Commission, those auction rate securities will be available for liquidation in January of 2009.

Okay, so three months from now?

Okay.

Correct.

Okay.

Brandon, could you give us some more color on what's happening?

You said October was a very good month.

You're increasing the work, the team.

Are we seeing any changes yet in the financing issues?

And, what're we seeing in terms of conversions, in terms of sales at the workshops?

Okay.

We did see a nice up tick in the October month in our preview conversion rates.

And that was really the number one difficulty we had in the September quarter.

The second difficulty was, as was pointed out, the amount of financing we did.

60% of our sales were financed in the September quarter.

We actually had a very strong sales quarter in September.

I was very, very pleased with our workshop sales.

But just that mix was off.

And had we even done 50% financing, the quarter would've looked dramatically different, from a cash perspective.

We're still, Neal, struggling with the financing side of the business in October; still a large percentage of our people are financing.

But we can offset that if we can continue to increase our performance on the previews.

And that's why you saw our guidance about adding the seventh workshop team.

We have seen an up tick and we're hopeful that we'll continue to see that in the coming months.

In terms of getting our cash percentage up, that's one of the things that we're also working on.

We've been doing, as we've mentioned before, a lot of data modeling and we're just looking to put the right mix of entrepreneurs and small businesses in our seminars.

And we're hopeful that we'll get more of them paying with cash than financing.

You had an additional charge, Rob, for the workshop refunds in prior years?

That's correct.

That had nothing to do with the California situation?

It had to do with all the litigation that is outstanding and that was also settled during the period.

Okay, so that's really behind us at this point, other than California?

Yes, just let me say something here, Neal.

We just specifically don't like to break that out by specific litigation.

And I think Jeff's spoken to that in the past.

But we do believe that we are reserved properly at this point, for any outstanding litigation.

Just to add to that, Neal, the open (inaudible).

Including in California?

Including in California, yes, Neal, to answer your question, including in California.

Correct.

And the open periods on all the other settlements are closed as well.

So, we believe that that should be it.

Okay.

Is there any issue in Australia at this point or not?

We are still in litigation in Australia, Neal.

There's no reserve taken for Australia because we are litigating it.

And we're not in the position of determining anything there.

But we continue to prosecute it still through discovery.

And we would be, of course, willing to sit down and discuss settlement if appropriate and when appropriate.

Okay.

On the assumption that October you start getting, you know, because of incremental new people signing, even if you don't get the cash portion up, do we go back to the buyback in this quarter?

Rob, do you want to talk to that, or a portion of it?

Yes, sure.

We're hopeful that we'll obviously have excess cash flows from operations to return value to shareholders.

But we want to actually include Steve Mihaylo, now that he's the new Chief Executive Officer on those decisions.

And he will also help.

Well, I mean I think it's also our intention to purchase stock.

Neal, we also have repurchased shares since the end of the quarter.

During October, we did repurchase some shares, (inaudible) under the 10B51 plan that the company had established.

Okay.

Is Steve gong to head up the [SMB] type of program?

Or, what's happening there?

I think, you know, I don't want to speak on his behalf but in my conversations with Mr.

Mihaylo I think it's his intention to build other products and services and other channels for the small business market.

And I think those are his intentions.

Okay.

That's all for now; thank you.

Thank you, Neal.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time.

Please proceed with your presentation or any closing remarks.

This is Don.

I'd like to thank everybody, once again, for joining us today.

iMergent is at a very exciting point in its evolution.

We've been improving our workshops and our efforts, as Brandon was just discussing.

They are beginning to pay off.

In addition, we've renewed our focus on exploring additional revenue opportunities in the small to medium Enterprise initiatives.

And with our addition of Steve Mihaylo we are all very excited about our Company's future.

Thank you very much.

Ladies and gentlemen that concludes your conference call for today.

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