Crexendo Inc (CXDO) 2009 Q2 法說會逐字稿

Good afternoon.

My name is Krista and I'll be your conference operator today.

At this time I would like to welcome everyone to the second fiscal quarter financial results conference call.

All lines have been placed on mute to prevent any background noise.

(Operator instructions.)

Mr.

Mihaylo, you may begin the conference.

Thank you, Krista, and good afternoon, everyone.

Before we get started here I'd like to introduce the people that are on the call with me.

We have Mr.

Clint Sanderson, our Vice President of Sales; we have Mr.

Jeff Korn, our Chief Counsel; we have Mr.

Jon Erickson, our new Chief Financial Officer; and we have Mr.

Rob Lewis, our retiring Chief Financial Officer.

I'm going to give a brief overview of the financial results, and then we're going to have Rob and Jon give us some more granularity on it.

But before we do that I'm going to have Jeff Korn read the Safe Harbor information.

Thank you, Steve.

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 belief of the management of iMergent, and are subject to a number of factors and uncertainties that could cause actual results to different 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 10-K and forms 10-Q.

The Company undertakes no obligation to update this forward-looking information.

With this, I'll turn the call back over to Steve.

Thank you, Jeff.

Let me just go through the high level numbers here.

For the fiscal quarter ended December 31st, 19 -- I mean 2009, we had $26.9 million in sales compared with $38.9 million, and this was after provision of $650,000 for refunds that we expect due to various legal matters.

Had those not been factored in, the numbers would have been $27.5 million compared to $38.9.

Revenues were also negatively impacted by the number of cash sales we had in our workshops compared to the previous year.

We had 42% in the '09 quarter versus 57% in the '08 quarter.

For the second quarter we had a loss from operations of $6.9 million, compared to a loss from operations of $143,000 in the same quarter last year.

The loss before income tax provisions for the second quarter of '09 was $5.7 million compared to income before income tax provisions of $2.5 million for the second quarter last year.

Excluding significant charges of $2.6 million mentioned above, the loss before income tax provisions would have been $3.1 million for the second quarter of fiscal 2009.

Finally, after all of the provisions mentioned above, our net loss for the second quarter of fiscal 2009 was $10.1 million or $0.89 per common share, compared to $1.6 million or $0.14 per common share in the same quarter last year.

For the six months ended December 31, 2008 compared to 2007, we had revenues for the six months ended December 31, 2008 of $54.1 million compared to $71.4 million for the second quarter in the same period last year.

The total operating expenses during that period were $64.3 million compared to $74.9 million for the same period last year, so you can see we're already chipping away at that metric quite nicely.

For the six months ended December 31, 2008, net loss was $17.6 million or $1.55 per diluted share, which includes a $10.3 million tax provision.

Net income for the six months ended 2007 or December 31, 2007, was $846,000 or $0.07 per diluted share.

Cash used in operations during this period was $6.1 million compared to generating $2.4 million.

I'm not going to sugar-coat the pill here.

Obviously we're very disappointed in the results.

We had what I would describe as a perfect storm between the IRS and various legal matters and plus the economic conditions, which generated these results.

We've already, as you know from press releases, we've taken significant steps to mitigate these results going forward, which include a reduction in approximately 20% of headcount, and we're also reviewing additional opportunities in the marketplace for additional revenue streams as well as our go-to-market strategy, which we'll discuss later on.

Before I turn this over to our financial people to discuss the granularity, what I'd like to do is turn it over to Jeff Korn for a moment because we did have a press release just recently about the situation in California.

I'm going to have Jeff discuss that.

Then we'll go through the granularity of the numbers, and then we'll open it up to a Q&A.

So Jeff, would you like to go through the information in the press release of just a few days ago?

Yes, actually, I'll expand on that, Steve, and thank you.

I do want to take this opportunity to update everyone on the status of the negotiations with California.

As you're aware, there's a temporary injunction which prohibits us from selling any product with an initial consideration in excess of $500 without first registering as under the state's SAMP Act.

We had appealed that determination of the trial court, seeking a ruling that the SAMP Act is unconstitutionally vague, as it requires registration based on a representation that someone, quote, "can make more than their initial investment," close quote.

As you also know, the court of appeals denied our appeal and ruled that the statute was, in fact, constitutional.

The court also refused to find the injunction was stayed pending a final hearing of the trial court.

With all due respect to the court of appeals, we disagree that the statute is not vague.

The term "can" removes the statute from the specific and into the infinite and vague, as almost any representation about our software would include the vague possibility, no matter how remote, that you could possibly be successful and therefore fall within the realm of "can."

It is clear that we would not have a trial for an extended period of time and as such we would be precluded from selling any product in the state of California, also for an extended period of time.

We also, as you know, advanced the argument that our express software is outside the scope of the statute.

The initial required consideration there is considerably less than $500.

We, however, offer to our customers the ability to upgrade to pro, which is at a cost in excess of $500.

Both I and our counsel believe that this model is outside the scope of the statute.

The state, however, contends that the upgrade sale is part of the initial sale, and therefore would be covered by both the statute and the injunction.

The state had made it clear that if we were to hold any upgrade seminar sales, they would seek a further injunction and seek to hold us in contempt.

While we believe we ultimately would prevail on that argument that express and the upgrade is outside the scope of the injunction, it is probable that the court would include that in the injunction and leave us with the real possibility of being excluded from California for a substantial number of years in the future.

The case with California also includes claims for damages for violating consumer protection law and for alleged violation of the SAMP Act.

Considering all of the forgoing, we have been negotiating with California on a global settlement.

The parameters of the settlement would be:

One, we would agree to register as a SAMP.

This would not change our model, as we would be able to invite people to an express preview, which would be outside the scope of the injunction and the SAMP, and if they purchase at the preview we would then provide them with the necessary disclosures which would allow them to upgrade and purchase at the workshop.

We already provide most of the disclosures required by the SAMP Act.

We would agree to pay costs and refunds totaling $850,000.

We would still have notification and other ancillary requirements, but this would provide finality to the litigation and allow us to begin very shortly transacting business in California.

If for some reason the final terms cannot be agreed to, we still reserve the right to immediately hold express seminars and the right to consider holding upgrade pro seminars.

I don't want to give any more information at this point so as not to compromise our finishing the negotiations.

Steve?

Thank you, Jeff.

At this point I'd like to turn this over to Rob Lewis, our retiring CFO, and Mr.

Jon Erickson, our incoming CFO.

Rob?

Thanks, Steve.

Revenues for the second quarter of fiscal 2009 were $26.9 million compared to $38.9 million for the second quarter of fiscal 2008.

Revenues were negatively impacted by additional reserves of $650,000 in customer refunds associated with various legal matters.

Revenue for the second quarter of fiscal 2009, excluding the charge for customer refunds, was $27.5 million.

Revenue was also negatively impacted, as Steve mentioned, by approximately $4.2 million due to a decrease in cash purchases for 42% in the second quarter of fiscal 2009 compared to 57% during the second quarter of last year.

Because the Company records revenue as cash as received and not at the time of sale, the decrease in percent of cash purchases negatively impacted revenue, operating income, and cash flows from operating activities during the second quarter of fiscal 2009.

During the second quarter of fiscal 2009, the average number of people attending our workshops was 87, up from 82 in the prior year.

The average purchase price increased to $5,050 during the current quarter from $4,850 in the prior year quarter.

Total operating expenses were lower at $33.8 million for the second quarter of fiscal 2009, compared to $39.1 million for the second quarter last year, primarily as a result of the lower number of workshops conducted.

Total operating expenses were negatively impacted by significant charges of $1.9 million for reserves for outstanding legal matters, probably losses of excess office space, and write-offs of certain advertising and other assets.

Total operating expenses for the second quarter of fiscal 2009, excluding these significant charges, were $31.9 million.

Selling and marketing expenses as a percentage of revenue were negatively impacted by low response rates at our preview seminars and low response rates to our advertising incentives internationally as a result of the softening economy.

Selling and marketing expenses were also negatively impacted by increased costs for advertising incentives.

General administrative costs increased primarily due to the significant charges previously described and an increase in accounting fees of $115,000 associated with the IRS audit.

For the second quarter of fiscal 2009, the Company had a loss from operations of $6.9 million compared to a loss from operations of $143 in the same -- $143,000 in the same quarter last year.

Other income was $1.2 million for the quarter, which included $1.8 million in interest income, compared to $2.6 million of other income for the second quarter of last year, which included $2.4 million in interest income.

Loss before income tax revision for the second quarter of fiscal 2009 was $5.7 million compared to income before income tax provision of $2.5 million for the second quarter of last year.

Loss before income tax provision, excluding charges, was $3.1 million for the second quarter of fiscal 2009.

In October 2008 we received notice from the Internal Revenue Service contesting the Company's deduction of 100% of the cost of meals that we provide to attendees at our preview seminars and workshops.

The IRS contends that only 50% of these costs of these meals provided to attendees is deductible.

We contend that the 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.

In November 2008, the Company received an examination report from the IRS which also contests that the Company's ability to utilize its NOLs during its fiscal years ended June 30, 2004 and 2003 under IRS Code Section 481.

The Company believes the IRS' assertion that the NOLs should be limited during those years is without merit and beyond the statute of limitations.

While the Company believes it will be able to defend its positions based on settlement discussions with the IRS and the analyses performed in accordance with FASB interpretation number 48, the Company has established a reserve of $9.3 million for the potential tax penalties and interest costs and evaluation allowance of $3.6 million against certain deferred income tax assets as of December 31, 2008.

As a result of the income tax reserve resulting from the IRS audit previously described, the provision for income taxes for the second quarter of fiscal 2009 was $4.5 million compared to an income tax provision of $844,000 in the same quarter of last year.

Net loss for the second quarter of fiscal 2009 was $10.1 million or $0.89 per common share compared to net income of $1.6 million or $0.14 per common share in the same quarter of last year.

Net loss for the second quarter of fiscal 2009, excluding non-recurring significant charges and assuming an income tax benefit of 40%, was $1.9 million.

For the first six months of fiscal 2009 revenues for the six months ended December 31, 2007 were -- or for December 31, 2008 were $54.1 million compared to $71.4 million for the same period last year.

Total operating expenses were $64.3 million compared to $74.9 million in the same period last year.

For the six months ended December 31, 2008, net loss was $17.6 million or $1.55 per common share, which included a $10.3 million income tax provision related to the reserves and valuation allowance described earlier.

Net income for the six months ended December 31, 2008 -- or 2007 -- was $846,000, or $0.07 per diluted common share.

Now for a review of our cash flows and balance sheet.

Our cash flow during the quarter was negatively impacted by a reduction in revenue of 31% and a decrease in cash purchases from 57% during the second quarter of fiscal 2008 to 42% during the second quarter of fiscal 2009.

Consequently, cash used by operating activities during the second quarter was $5.6 million, compared to cash provided by operating activities of $2.0 million during the same quarter last year.

As of December 31, 2008, cash and cash equivalents were $18.8 million.

Working capital is $14.1 million, and working capital excluding deferred revenue was $42.2 million.

Total current and long-term net trade receivables were $37.7 million at December 31, 2008.

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

It has been my pleasure to have worked for iMergent for the past five years.

I have very much enjoyed working with the dynamic and talented management team here.

I have accepted an opportunity that I simply could not refuse.

While I will miss the people here, I know I leave the Company in very capable hands.

I also believe that change within an organization is good.

I firmly believe in Steve Mihaylo's vision for iMergent, Inc., and that the changes he and his team are making will benefit the Company, its customers, and its shareholders.

I also believe that these changes will produce long-term, sustainable growth and profitability over time.

I'm excited that Jon Erickson will be assuming the position as iMergent CFO effective February 7th.

Jon has been a very talented, knowledgeable, and integral part of the management team at iMergent.

I am confident that he will continue to be a valuable asset to iMergent in his capacity as CFO.

With that, I'll turn the call back to Steve Mihaylo.

Thank you, Rob.

At this time, Krista will open us up for Q&A.

Any of the questions can be directed at me and if I feel that there's somebody else that can give a more detailed answer, I'll turn it over to them.

Go ahead.

(Operator instructions.)

Your first question comes from the line of Neal Goldman from Goldman Capital.

Your line is now open.

Good afternoon, Neal.

Hi, Steve.

First -- and maybe this is for Rob -- on the receivable side, it looks like you set up a high reserve against the current receivables while the long-term receivables looks like pretty much the same reserve as last year.

Yes, let me first make sure that you understand -- we're on a cash basis accounting, and we don't report any revenue unless we actually have the money in hand.

The receivables on our balance sheet is somewhat of a guideline, and even though the reserve is bigger or smaller it doesn't impact the P&L until the revenue's recorded.

I understand.

With that, I'll let Rob give you the rest of the details on it.

Hi, Neal.

As far as the -- that is correct, as far as the percentage goes.

When we ran it through our calculation, we did set up a higher reserve percentage for our current receivables based upon where things are currently at.

We did also establish extra reserves for our receivables, as you probably noticed.

Our allowance as a percentage of total AR is now at about 37%, and that reflects the deteriorating conditions in the marketplace these days, and so we felt that the additional reserve was necessary during the period.

Okay.

I assume those available to sell securities, which is now current, is the auction rate securities?

That is correct, and those have all been collected as of today.

Okay.

So if I add up -- that's like what, $22.8 million of cash?

That's correct.

And then you have the income tax receivable of $786,000?

Correct.

So it's like $23.5 million?

Correct.

Less the tax liability of $9.4 million, right?

That's correct.

Which you've paid out, or are going to pay out?

Well, we're looking at that right now.

We're in the final stages of making that determination.

Okay.

What is -- from an operating standpoint now with the cost cuts, and obviously not all of them have been reflected, at what level are you cash flow break even in terms of revenues?

In terms of revenues, it's actually pretty close to where we are.

But I'm going to let Rob go through that because we just did some new modeling today, but I don't want to get into a forward-looking situation here.

We're just going to do this in a broad overview, Neal.

Rob, can you handle that?

Yes.

We believe that based upon the current statistics that we're currently seeing as far as at our previews and workshops and the cost-cutting measures that we're doing, unless there's another significant deterioration we should be able to -- we think that we can generate cash at these levels.

But it's really dependent upon various factors that could change over time, so we're pretty confident that we can do well at these current levels, but we want -- there's a lot of caveats to that as far as the expenses and everything else would go.

I understand.

If cash went from 42 to 32, it's a different story, but basically this has been the lowest level.

Right now you're essentially at that cash flow break even.

Yes.

There's so many mitigating factors, though.

We're bringing our costs down at a faster clip than the sales have deteriorated here, so yes, the answer to your question is yes, we feel we're close to that right now.

Steve, I've known you from my prior days at Inter-Tel.

Could you give me what your vision is for the Company going forward?

I know you're focused on the SMB market and the recurring revenue side, but I'd like to hear you give your overview of where you think this Company will be somewhere down the road in terms of (inaudible—multiple speakers).

Well, without making a giant forward-looking statements here, Neal, I'll do that.

As you know, my entire career has been spent in telecom and data and software, focused on the small and mid-sized business market -- B to B, in other words -- and I think there's a tremendous opportunity here to use some of that knowledge, if not all of it, to leverage what we have.

We have software which is designed to condition websites for e-commerce.

As you know, we've been selling it mostly to entrepreneurs and in some cases very small businesses, but mostly entrepreneurs through a group sales approach.

I think there's a huge opportunity to expand on that through additional training, to really start focusing more on the small and mid-sized market as opposed to the entrepreneurs.

Not that we're going to abandon the entrepreneur market; we certainly won't.

But we're going to figure out ways to get more qualified entrepreneurs into our group sales atmosphere.

We're also driving down the cost by looking at eliminating such things as meals and other things that are very expensive and of course have created the current situation with the IRS.

We think we have a good, solid position there, but one way to make sure you don't have a problem going forward is just to not provide meals.

So that's bringing our costs down.

On expanding the products, we think there's a great opportunity to do such things as hosted telecom and to resell our current e-commerce software and the implementation and the integration of the software through some of the same type of dealers or VARs that we had in the telecom business at Inter-Tel.

A lot of these things are in the exploratory stage; others are more concentrated and we're in a better position to pull the trigger.

In fact, I'll talk about -- I'm going to have Clint Sanderson talk about what we're doing as far as selling to the SMB market through a modified version of our current sales model, which will be group sales, but doing it in such a way that we've got highly, highly qualified prospects.

Clint, could you talk about that for a minute?

Sure, thanks, Steve.

Yes, one of the directives from Mr.

Mihaylo to us as a sales organization is to expand from our model selling to entrepreneurs and grow that model into the SMB space.

And it's something that we've tested several times for the past couple of years, moving into that space, and with several different approaches.

And we're trying some new approaches that we have not done in the past, and we're testing those coming up here in the next few months, and we're confident and optimistic that we're going to be able to get into that market and attract more of the SMB buyers and more people in that SMB space to our model and to the products that we offer.

And with that in mind, Neal, we're also expanding the way we go to market through a free webinar, which will reduce our costs even more.

In other words, instead of having the preview that we currently do, we're going to drive people to a landing page which will bring them into a free webinar and then we'll take them into our group sales or workshop environment.

But we think we'll have a much higher qualified prospect and a much better qualified prospect.

In addition, the webinar will offer a certain amount of training to see if they're really qualified before we get them into an actual selling situation.

Okay, thank you.

Great, thank you.

Next question.

Your next question comes from the line of [Jeff Basch], a private investor.

Good afternoon, Steve.

Hi, Jeff, how are you?

Fine.

Steve, Neal stole most of my questions, but I got a couple of them.

I got the impression from your response to him that you feel the Company has right-sized now?

Is that a fair statement?

Well, right-sized is based on where you think you're at.

Providing the economy doesn't slide more, I think we are right-sized.

Good.

Now what I'm getting at is Mr.

Korn's interesting comments about California.

Would it then be fair to say that California would represent the potential for positive upside if this materializes as you hope?

It does, but this is sort of like Star Trek.

Under the new rules in California, we're going where no man has gone before, so I say that with qualification.

Okay, I understand.

With respect to the new initiatives and related revenue streams, I understand the comments about some of them are more in the drawing board stage and some of them are more ready to go.

What kind of timeframe do you think it might take before we see something meaningful from the new initiatives?

Are we talking a year, are we talking two years?

Well, the initiatives that Clint Sanderson talked about, we should start seeing some revenue from those initiatives either late this quarter, like the third or fourth week of March, or certainly by the first or second week of April.

As far as hosted telecom services, reselling software through VARs and so on, I don't expect to see anything from that until third or fourth quarter at the earliest, and even perhaps first quarter of next calendar year.

Okay, that's all my questions.

Thank you.

And when I say third or fourth quarter, I was talking calendar year.

I'm still getting used to this fiscal year business here.

Okay, so we're really talking -- the VARs and so forth initiatives are really 2010 calendar year.

Yes, it's either late calendar -- in other words, the December quarter, late December quarter, or early in the new year 2010.

Based on your prior experience, do you have any feeling?

Once it gets going can it build rapidly, or does it really -- is there a lot of --

I don't want to speculate on what it's going to do, Jeff, but I think we're in a very nice position to attract a substantial VAR community before we add it into our current customer base, and the reason I say that, we should be able to offer them additional revenue streams through the e-commerce software, so they can go into their revenue base or their customer base, rather, and sell the e-commerce.

And then of course you've always got -- in the telecom business, you've got customers that have systems that are four, five, six, seven, eight, 10 years old that want to upgrade, and that's a possibility for selling hosted services to those customers.

So the way I would see this coming on once we start setting up VARs is having them sell our e-commerce solutions first in a one-on-one setting where they actually have salespeople on the street that go out and sell not only the software but the consultation and the implementation of that software, and then you've got continuing revenue streams for hosting and maintenance and so on.

This would be a model very similar to Oracle Systems, the big business software company.

That would be one revenue stream I'd see coming on first.

Then shortly after that, you'd see the VARs selling hosted telecom services, and all of the redundant or necessary hardware that goes with it -- the telephone instruments, the cabling, the routers, the data circuits, and so on.

And then we would provide the hosting -- in other words, the ongoing service -- for that.

That would come on shortly after the e-commerce sales start rolling in.

And then last but not least, you'd start seeing the software, the hosted telecom services, to our existing customer base, and new customers on the group sales or seminar approach to selling the product.

Okay.

Thanks a lot for your comments.

You bet.

(Operator instructions.)

Well, we'll give them just a couple of -- 30 more seconds, but it doesn't look like we have anyone, Krista.

With that in mind, I want to thank everyone for being on the conference today and remind you that from time to time we'll have press releases announcing new initiatives here, and that we look forward to being with you for the third fiscal quarter, which will be March 31st, and it'll be in approximately early to mid-May that we'll be having that conference call.

Thank you, everyone, and good day.

This concludes today's conference call.

You may now disconnect.