Crexendo Inc (CXDO) 2009 Q3 法說會逐字稿

Good afternoon, my name is Abigail, and I will be your conference operator today.

At this time, I would like to welcome everyone to the iMergent fiscal third-quarter 2009 earnings conference call.

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

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

I would now like to turn the call over to Mr.

Steve Mihaylo, CEO.

Good afternoon, everyone.

With me here today I have Clint Sanderson, our Senior Vice President; Jon Erickson, our CFO; Jeff Korn, our Chief Legal Officer; and we have the privilege of having Dr.

Anil Puri with us as well, one of our Board members.

And we are coming to you today from the business school which is the largest in the western United States, with nearly 9,000 students, at Cal State Fullerton, the second-largest university in the state of California, with nearly 38,000 students.

I am going to give a brief overview of the numbers here, but before I do, I'm going to get Jeff Korn to read the forward-looking statement.

Let me remind you that this call will contain forward-looking statements.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor to such forward-looking statements.

Investors should be aware that any forward-looking statements are based on assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today.

The risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission.

iMergent does not undertake any obligation to publicly update, revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Before I get started with an overview of the numbers, I'd like to remind you that we were very busy this quarter.

We launched our Crexendo business solutions division in Phoenix, Arizona.

We actually hired initial employees.

We opened offices in Phoenix, Arizona.

We announced that we are moving our corporate headquarters to Phoenix, Arizona.

We've had a very intensified program of reducing costs within the Company, and our numbers show it.

And we've -- settled the litigation in California.

So we have been very busy.

That's just the highlight of some of the things that we have been able to do.

For the third fiscal quarter ended March 31, we had operating income of $1.2 million, compared with 737 million -- $737,000 in the third quarter of 2008.

That's an increase of 65%.

We also had net income before taxes of $2.8 million, compared to $3 million in the same period last year.

That's a decrease of 7%.

Our tax provision for the third quarter was $1.2 million, versus $1.3 million, and the net income was $1.6 million, or $0.14 cents a share, versus $1.7 million, or $0.15 cents per share, in the previous year.

But if you look at Q2 of 2009, we had a significant improvement in the numbers.

A large loss versus a nice profit.

Saleswise, we had $15.1 million in the third quarter of this year in products and other revenue, compared to $19.1 million for the third quarter of last year.

We also had $5.9 million in other revenue, compared to $8.4 million.

Now this is a decrease of 25 -- actually 30% on the other revenue.

And a decrease of 25% on products and our normal services.

This comes to a total of $21 million for the third quarter of '09, versus $27.5 million for the third quarter of last year.

But as you can see, we've had a significant increase in profitability due to the -- a more focused approach to our prospecting -- and a more focused approach to cutting other costs.

We ended the quarter with $24 million in cash, which includes free cash versus -- and also our restricted cash.

That's over $2 per share in cash.

At this time, I'm going to turn this over to Clint Sanderson, who is going to talk a little bit about his role in getting these results, then we are going to turn it over to Jon Erickson, who will give you some granularity in the numbers, and then we will turn it over to you, Abigail, for questions.

We are obviously very encouraged with the results of this quarter.

As a result of the cutbacks we made at the beginning of the year in our sales teams, we saw an improvement in our overall sales rates for the quarter.

In addition, we saw definite results from our cost-cutting initiatives, and also saw results in our efforts, as Steve mentioned, to reduce customer complaints.

And we have been able to get traction in several different programs that we are testing to accomplish that goal of reducing complaints.

We also made significant progress with our Crexendo brand.

That's where we are using value-added resellers to sell our e-commerce and SEO products, so we are really excited about our ability to grow our business through both our workshop go-to-market strategy with StoresOnline, and through the relationships with Crexendo that we are establishing, selling those products through value-added resellers.

So we are encouraged and look forward to continue with these initiatives into the coming quarter.

As has been mentioned, we did see significant results in our cost-savings initiatives that we implemented.

These cost-saving initiatives were focused on reducing advertising cost per buyer, event cost per attendee, and travel cost per employee.

Cost of product and other revenue decreased 23%, to $5.8 million for the quarter, compared to $7.5 million for the same quarter last year, outpacing the reduction in product and other revenues, which decreased 21% to $15.1 million, compared to $19.1 million for the same quarter last year.

Selling and marketing expenses decreased 36% to $9.3 million for the quarter, compared to $14.5 million for the same quarter last year.

This reduction is due primarily to improvements made in our data modeling.

It allows us to better identify and prospect potential buyers.

Total operating expenses decreased 27% to $19.7 million for the quarter, compared to $26.8 million for the same quarter last year.

During the three months ended March 31, 2009, the Company held 154 workshops with no workshops held internationally, compared to 204 workshops, including 10 internationally, in the same quarter of last year.

Revenues for the third quarter of fiscal 2009 were $20.9 million, compared to $27.6 million for the third quarter of fiscal 2008.

Revenues were negatively impacted by the lower number of workshops and an increase in the percentage of sales that were financed at our workshops, which increased to 62% during the current quarter, compared to 50% from the prior-year quarter.

During the third quarter of fiscal 2009, the average number of buying units attending our workshops was 86, up from 84 in the prior-year quarter.

28% of buying units made a purchase at the workshops during the current quarter, which was comparable to the prior-year quarter.

The average workshop purchase price increased to $5,250 during the current quarter, from $4,990 in the prior-year quarter.

For the first nine months of fiscal 2009, we conducted 606 workshops, including 81 internationally, compared to 806 workshops, including 119 internationally, during the nine months ended March 31, 2008.

Revenues for the nine months ended March 31, 2009, were $75 million, compared to $99 million for the same period last year.

Total operating expenses were $84 million, compared to $101.8 million for the same period last year.

For the nine months ended March 31, 2009, net loss was $16.1 million, or $1.42 per common share, which included an $11.6 million income tax provision related to the reserves and valuation allowance associated with the ongoing IRS audit.

Net income for the nine months ended March 31, 2008, was $2.6 million, or $0.22 per diluted common share.

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

Cash used for operating activities during the third quarter was $76,000, compared to cash provided by operating activities of $4.6 million during the same quarter last year.

As of March 31, 2009, cash and cash equivalents were $21.5 million, working capital was $16.7 million, and working capital excluding deferred revenue was $42 million.

Total current and long-term net trade receivables were $33.4 million on March 31, 2009.

I'll now turn the time back over to Steve before the Q&A session.

One of the things I'd like to mention, as well, we -- as you know, we reduced the number of workshops significantly as a result of better qualifying customers.

And this is in -- as part of our program to reduce complaints.

But also, sales were affected by the general economy.

At this time, Abigail, I'd like to open this up to questions and answers, if you would, please.

(Operator Instructions).

[Jeff Bash], private investor.

Congratulations on a solid start to your management of the Company.

Thank you.

Thank you very much.

It is correct, isn't it, that a number of the cost-cutting initiatives that you implemented have not had time to be in effect for a full quarter, isn't it?

That's correct.

We're -- this is an ongoing process.

We expect incremental improvement as we go along here.

At some point in time, we are going to get to the point of diminishing returns, but I think there is still room to make good improvements.

On receivables reserves for doubtful accounts, which don't affect the income statement directly, last quarter the reserve was raised from the low 30% range to the 37.3%.

This quarter, it's 29.4%.

Am I correct that this lower number reflects a relatively lower proportion of new finance contracts (technical difficulty)

That's certainly part of it.

Obviously, there's less financed contracts because we had lower sales, but we've also improved the quality of the customers that we are selling to.

It's a combination of a lot of those things.

We did start to see improvement in our receivables towards the second half of this quarter, which was an encouraging sign for us.

I think, personally, and this is just my gut reaction to this, I think we are seeing incremental improvement in the economy as well.

[Alan Cohen, Special K Capital].

I had (multiple speakers).

The fact that you did no international workshops, as compared to, I think you said the number was 80 for the prior six months, 81 or something like that -- is that a trend as part of your new initiative, or was that something that was just -- because of the way it worked out this quarter?

There's a lot of issues involved.

It's partly a trend.

It's partly a proactive initiative on our part.

It's not to say that we won't be in international markets, but as you know, we are still trying to resolve the situation down in Australia.

Right.

So it's a combination of a lot of things.

Perhaps Clint Sanderson could add a little bit of color to that.

The -- we will eventually go back to those markets.

Right now, with the cost-cutting initiatives we've had, and with the other initiatives, it makes most sense for us to stay here domestically.

And some of the programs that we are working on right now will allow us to go to those markets, to overseas markets, and actually be more profitable.

Until we get those dialed in, we are going to wait to go to those markets.

(multiple speakers) As you retrench and then build a solid base.

The other question (multiple speakers) the amount of contract finance jumps to 60% from 50%.

But at the same time, you believe that you're getting a higher quality customer.

Does some of that have to do with the fact you did no international workshops, which tended to be a higher percentage of cash buyers, or -- ?

There's a lot of factors involved there.

Certainly, the higher number of domestic over international had something to do with it.

The economy had a little bit to do with it.

But, also, the fact that we are doing a better job of qualifying our customers -- our ultimate goal is to have 100% customer satisfaction.

In order to do that, we need to be working more to help our customers become successful through additional training and other ways to do that, helping them select the right products to sell and so on.

But do you consider that something -- like that jump, I don't know how you want to look at it, seems pretty significant, from 50% to 60%.

Is that a trend, or are you going to monitor that and watch (multiple speakers)

We monitor everything in our business.

We measure all the processes.

And that's certainly one we have our eye on.

The international markets definitely do have an impact (multiple speakers)

I kind of remembered somewhere in the past, in talking about a higher percentage of cash (multiple speakers)

Historically, we have a higher percentage of cash in those international markets, than we do in our domestic markets.

That is definitely the case.

We've also seen -- Q2, we had a higher percentage of contracts versus cash sales, so it's been a trend over the past six months that we are working on.

We are working on increasing our cash percentage, but it has been a trend over the past six months to see the contract sales increase and the cash sales decrease.

The last question I have, I don't know whether it's a comment, which is actually pretty positive.

The average sale jumped quite a bit.

What do you attribute that to?

The average sale, with the comparison between last year and this year, we did, between then and now, we did increase the price.

But also, it just comes down to the efficiency in our sales process, and selling more individuals what we call our platinum package of our workshops versus the single package.

Right.

I know you did increase the price, but at the same time you introduced a lower-priced item at the same time.

That's correct.

We are trying to address the needs of the market.

And as time goes on here, you're going to see more training revenue as well, because we are finding that a well-trained customer is also a happy customer.

Now your margins on that are pretty high, on the training, correct?

The margins on training -- the gross margins are similar to software.

Obviously, you have additional costs over and above the software, so the net margins are about the same, or maybe a little bit higher because you don't have some of the marketing costs associated with it.

It's an add-on sale.

Exactly.

Keep up the good work.

(Operator Instructions).

[Robin Lochner], private investor.

Thank you for taking the question, and congratulations on what I think most people think, will conclude was a much stronger quarter than was anticipated.

(multiple speakers)

In recent months, iMergent has temporarily stopped buying back stock on the open market.

It has also cut the dividend.

And due to the financial environment, I think everyone would agree that those were appropriate decisions.

Going forward, as the business potentially gains more momentum and generates more cash flow, how would that hypothetical cash flow be divided between reinvesting in the business for additional growth, versus share buybacks, versus larger dividends?

I can tell you that that we've got a set formula here.

The most important thing going forward is reinvesting in the business.

And as I mentioned at the beginning of this call, we launched our Crexendo business solutions division.

We have plans to launch a telecom division, hosted telecom, and we have plans to launch a network services division, and eventually an educational division within the next year or two.

So a significant portion of our free cash or our profits will be reinvested into the business for growth.

Having said that, we're always looking at the ability to purchase stock and increase our dividend.

And that is something we review on a regular basis.

I can tell you right now, unless we can buy stock in a fairly significant block, that would be the way we are going to purchase it.

Not in the open market.

And as far as the dividend, that's something we'll look at.

We reviewed it this quarter.

There was no decision made to increase it, but we will be reviewing it every quarter going forward.

That sounds good.

With regard to the relocation of the corporate headquarters, what are some of the advantages in making that move?

We expect to have a significant portion of our business in Arizona over the next several years.

Crexendo business solutions is the division that will be selling our products to established businesses through value-added resellers.

We launched that division just literally a couple of weeks ago.

We've already signed a couple of value-added resellers.

There's training issues.

There's a lot of support issues that we have to get in place.

The encouraging thing is the potential business partners that we have spoken to so far, there hasn't been much in the way of negatives.

They are all very excited about the prospects for our Web building software, our e-commerce software, and our search engine optimization capabilities.

But as you can appreciate, it's -- you have to go from point A, which is where we are at right now, and get to point B before you start seeing sales.

We are hopeful that we will see a minimal number of sales this quarter, the quarter that we are in.

But I don't want to raise anyone's expectations.

We would be happy with $50,000 or $100,000 in sales this quarter.

But you're going to see exponential growth as we go forward.

So that's taking a lot of our endeavors here, and a lot of what we do from a planning standpoint.

We have also hired the first couple of engineers that are doing the preliminary work on our hosted telecom services.

They happened to be in Phoenix.

Our network services division will be there.

So even though it's a very tiny piece of our business right now, we expect it, at some point in the future, to eclipse our StoresOnline revenue.

And I would say that's potentially possible in the next couple of years, certainly no more than three or four years.

As far as our employees that are in Orem, Utah, we have a tremendous core competency in Utah.

So all of our support services will remain there, and as we add more support services, they will be in Orem, Utah.

But the bulk of our sales, over time, we expect to transition into our operations in Phoenix.

That's the reason we moved our headquarters.

Thank you.

Final question.

Prior to your substantial investment in the Company, you obviously did a large amount of due diligence.

What is it that you saw in iMergent that convinced you to invest in this Company as opposed to the other alternatives that were out there?

There were two things.

Number one, I was really impressed by the product itself, our software.

We have software that's pretty much a set program that can be, through database manipulation, can be made to look like just about any website that's out there.

And it's scalable.

The industry itself is scalable.

I've never seen an industry where you can have minimal amount of channel conflict when you're dealing with VARs, because they are selling into their existing customer base as opposed to competing with every other VAR that's out there in the field.

Obviously, it's taken me a while to get this cranked up.

I had spoken to the management prior to becoming part of the management, and was frustrated by the fact that we didn't see any traction in that area.

However, since I've come onboard, as you know, the CEO is no longer with the Company and the president of the Company is no longer here.

We've made significant cuts at the beginning of my tenure, and all of those things are behind us now.

We have a team that's committed.

We are all reading off the same sheet of music here.

We are all singing the same tune.

We're all heading in the same direction.

We are all pulling on the oars in the same direction.

We are all pulling on the rope in the same direction.

In other words, we all know where we are going and we are doing our level best to get us there.

So I am encouraged, and even more so than I was when I made my initial investment.

Thank you very much.

[Bruce Seymour], private investor.

Good afternoon.

I was just wondering, with all of the expenses involved in training and the cutback in previous teams, sales teams, what kind of expenses do you anticipate in training new sales teams, and how many of them, and when do you expect them to be online?

We have -- we've had an initiative, which we have tested, and we're encouraged by it to bring our potential customers directly into a workshop where we not only train them, but we sell them in the workshop.

And that means that we are going to have plenty of trained employees that will be able to transition into other functions in the business from our preview teams.

That's not to say that we are immediately going to stop the preview teams.

We are not.

But we do think we will have a significant number of people, probably in the range of 10 or 15 people, that we can transition into support functions and selling functions in our Crexendo business systems area.

So we feel good that we've got enough -- enough people to get the job done here without having to go outside.

It's just a case of cross training and reassigning a few people.

Do you want to add to that, Clint?

Yes.

We also -- as we are moving into -- with our Crexendo brand and leveraging value-added resellers, the expense for us and for them is not as great because they already have the channel, they have the customers, and they already have trained salespeople.

So we really pick up a lot because we can leverage the talent they already have.

So it's just a matter of us providing support to them and working with them as we work with their customers and offer their customers our products.

So it's not like we are starting from scratch, training all new salespeople.

It sounds like there will be a reduction in our own salesforce for StoresOnline.

No, that's not true.

There may be a reassignment of some of our preview people, but the sales occur in our workshops.

And we see no reduction occurring there.

Okay.

Just to maybe add some clarity, it's two different go-to-market strategies.

The StoresOnline go-to-market strategy, we do workshops, training workshops, and then give customers at our workshops the opportunity to buy there.

We're going to continue doing that, as we always have, and just continue improving on that model.

The Crexendo go-to-market strategy is through value-added resellers, and that's going to be running parallel to the StoresOnline go-to-market strategy.

Frankly, as the economy improves, and as we re-enter foreign markets, we will probably be adding to the workshop teams.

Going forward.

That sounds like a continuation of the progress you've already started and are making.

I thank you, sir.

You're welcome.

Thank you.

This concludes the question-and-answer portion of today's call.

I will now turn the call back to management for any additional or closing remarks.

I want to thank all of you for your continued interest in our progress and support as shareholders, and tell you that we look forward to seeing you in the fourth quarter, which will end June 30, and we'll probably be announcing it when, Jon?

Towards the end of July, because it is our year-end?

It will be around the first part of September.

Okay, the first part of September.

Thank you, all, and have a good summer.

This concludes your iMergent conference call for today.

You may now disconnect.