Crexendo Inc (CXDO) 2009 Q4 法說會逐字稿

Good day.

Welcome to the iMergent Inc., calendar fourth quarter and six month transition period ending December 31st, 2009 conference call.

Today's conference is being recorded.

At this time I would like to turn the conference over to Steve Mihaylo.

Please go ahead.

Good morning everyone.

I'm Steve Mihaylo, CEO of iMergent.

With me today I have Clint Sanderson, the President of our two major divisions and Senior Vice President.

We also have Dave Krietzberg, our senior Vice President.

He's in charge of customer service and fulfillment.

We have John Erickson, our Chief Financial Officer; and Jeff Korn, our legal, our General Counsel.

Before I get started, I would like to have Jeff Korn read our Safe Harbor statement.

Could you go ahead, Jeff?

Yes, sir.

Thank you, Steve.

I want to take this opportunity to remind listeners that this call will contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934.

The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements.

All statements made this n this press release other than statements of historical fact are forward-looking statements.

Forward-looking statements include, but are not limited to, words like believe, expect, anticipate, estimate, will, and other similar statements of expectation, identifying forward-looking statements in this conference.

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

These risk factors are explained in detail in the Company's filing with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended June 30th, 2009, and the Form 10-Q for the period ending September 30th, 2009.

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

I would now like to turn call back to Steve for comments.

Great.

Thank you, Jeff.

Before I get started, let me just comment on some of the things that we accomplished this quarter.

As you know, we changed our year-end from a fiscal June 30th to a fiscal end calendar December 31st, year-end.

We also selected new auditors.

Our new auditors are [Dwight and Touche], which is one of the largest of the big four international accounting firms, and we are very proud of that, and I think it should give our investors another level of comfort as far as the accuracy of the numbers here.

Not that there was any need for it.

I am going to give a brief overview of a few high level numbers a small explanation, and I will also comment on some of the things that we pointed out in the Press Release, and then I am going to turn it over to John Erickson for a more granular look at the numbers, and then we will open it up for questions.

And Clint, Dave Krietzberg, John Erickson, and I will be all be available, and Jeff Korn of course, to answer any of your questions.

The first thing I want to comment on is the sales for the period.

We had $18.34 million in sales for the three months ended December 31, 2009.

That compares with a $26.85 million in sales for the same period in 2008.

But when compared to the previous three months, the September 30th, 2009 numbers, it is approximately $1 million more.

So it looks like we are starting to see some sequential growth over the previous period.

We had $35.7 million in sales for the six months ended December 31st versus $54.1 million.

Some of this is the result of having fewer workshops, and all of this is spelled out in our Press Release.

We had $0.06 in earnings for the period ended December 31, 2009 versus $0.06 for the previous three months, and a loss of $0.89 for the quarter in 2008, the December 31 quarter.

For the six months compared to the six months in 2008, we had $0.12 in earnings versus a loss of $1.55.

Our cash remains strong with about $21.5 million in cash, plus another $1 million in restricted cash.

Now, let me comment on some of the thing that were in the Press Release.

We have with been working now for several months with a company in India that has a large customer base, and we have been working with them with the idea of doing our -- a great deal of our fulfillment, not all of it but a great deal of it, as we scale up to bring on many more customers for day and per week.

They will be able to do this because of the automation tools that our engineers in Orem, Utah, are designing to make it more ready scalable.

And of course this will drive our costs down.

We expect to consummate this in the near future.

We are also working on a small boutique SEO company acquisition.

This is important because it allows us to have the template for direct sales offices around the country.

We are looking at small sales offices that will be manned with three to five people, that will be outbound direct sales to larger customers for all of the services that we offer.

Plus, we expect to have a small training area that we can bring customers in and train them in the various products and services that we offer.

We are also about to enter beta for our telecom products.

As you know, we've had three engineers in Phoenix and two engineers in Orem, Utah, working on this product now for just about a year.

It is very close to being launched.

This is important because it allows us to have a very nice stream of hosting revenue along with the hosting revenue from our Websites.

And finally, our board reaffirmed its decision back in 2006 to repurchase stock.

We feel that our stock is undervalued at its current price, and we expect to be in the market acquiring stock in the open market when and if there's stock available.

Obviously, two of the things that we have mentioned here are pending.

The relationship in India, and the acquisition of the small SEO company.

We felt that we were close enough to mention these in the Press Release, and we wanted full disclosure so it allow us to take advantage of the approximately 30 day window we are going to have to repurchase stock in the open market.

At this time I would like to turn this over to Jon Erickson to go through the numbers in more detail.

And after Jon finishes with his comments, then we will open it up for questions, Kim.

Jon, would you like to comment?

Yes.

Thank, Steve.

I think the results of this quarter really illustrate the changes in progress we have made over the past year.

Over the past year we have focused our efforts on becoming more efficient by lowering our operating expenses in many categories, which has allowed us to obtain profitability and lower sales levels while at the same time investing in our Crexendo division.

The initiatives we implemented enabled us to reduce costs of revenue as a percentage of revenue by 6% from 35% of revenue for the quarter ended December 31, 2008 to 33% for the quarter ended December 31, 2009.

Selling and marketing expenses were reduced by 29% from 65% in the prior year quarter to 46% in the current year quarter, and we reduced general and administrative expenses by approximately 43% when compared to the prior year quarter.

These improvements resulted in pretax income of $866,000 for the quarter ended December 31, 2009, compared to a pretax loss of $5.68 million for the quarter ended December 31, 2008.

Despite a 32% reduction in revenue to $18.3 million for the quarter ended 31, 2009 from $26.9 million for the quarter ended December 31, 2008.

In order to provide more specific insight into our revenue, I would like to briefly review the different components of our revenue.

Revenue from our StoresOnline division, which currently represents the majority of our revenue, is generated primarily through three avenues.

First, cash collected on a sale of StoresOnline software licenses at our events; second, the collection of principle on our extended payment term arrangements; and third, third-party commissions and other revenues.

Products and other revenue for the fourth quarter of 2009 was $13.2 million.

Of that, approximately 39% or $5.2 million is related to the collection of principle on our extended payment term arrangements, with the remaining $8 million coming from cash sales at our various StoresOnline events.

Product and other revenue for the fourth quarter of 2008 was $20.1 million.

Of that, approximately 39%, same percentage, or $7.8 million was related to the collection of principle on our extended payment term arrangements, with the remaining $12.3 million coming from cash sales from our various StoresOnline events.

The 33% decrease in revenue related to the collection of principle on our extended payment term arrangement is primarily due to a decrease in the dollar volume of gross contracts written over the past year.

As we reduce the number of sales teams from six to four in December 2008, as well as an increase in the amount of uncollectible accounts, which is we believe is due primarily to the poor general economic conditions which has had a negative impact on our StoresOnline customer base.

The 35% decrease in revenue from cash sales at our various StoresOnline is primarily due to a 23% decrease in number of workshops held from 244, including 73 held internationally in the previous year quarter, to 188 including 17 held internationally in the current year quarter.

In addition to the decrease in number of events, we also had a decrease in number of buying units per event, down from 87 in the prior year quarter to 74 in the current year quarter, as well as a decrease in the percentage of buying units making a purchase, down from 27% in the prior year quarter, to 23% in the current year quarter.

The decrease in number of buying units and close percentage per event, is an anticipated and natural byproduct of our direct to workshop and sales channel test which had a goal of streamlining our marketing efforts to allow us to be profitable at lower levels of revenue.

Commissions from third parties and other revenues decreased 24% to $5.1 million in the current year quarter compared to $6.8 million in the prior year quarter, primarily due to a decrease in number of leads sent as a result of a reduction in sales.

For the six months rendition period ended December 31, 2009, we had pretax income of $1.97 million compared to pretax loss of $7.3 million for the comparable period last year.

The improvement in pretax income was driven by a 28% decrease in selling and marketing expenses as a percentage of sales from 64% in the prior year period to 46% in the current year period.

As well as a 33% reduction in general and administrative expenses in the current year period as compared to the prior year period.

Products and other revenue for the six months ended December 31st, 2009 was $25.89 million, of which approximately 41% or $10.65 million is related to principle collection on our extended payment term arrangements, compared to product and other revenue of $39.48 million for the six months ended December 31, 2008.

Of which approximately 40% or $15.89 million is related to principle collection on our extended payment term arrangements.

During the six months ended December 31, 2009, we conducted 342 workshops, including 21 internationally compared to 452 including 81 internationally in the comparable period last year.

Average number of buying units for the six month transition period was 76 compared to 87 in the comparable period last year.

The percent of buying units making a purchase decreased to 23% compared to 29% in the prior year, for primarily the same reasons mentioned in the three month period.

Commission and other revenue decreased 33% to $9.8 million compared to $14.6 million in the prior year period.

Revenue from our Crexendo business solutions division was in line with our expectation at $127,000 for the six months ended December 31, 2009.

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

Cash provided by operating activities was $1.615 million for the fourth quarter of 2009 compared to cash used for operating activities of $5.57 million for the comparable period in 2008.

Cash provided by operating activities was $2.57 million for the six month transition period compared to cash used for operating activities of $6.083 million for the comparable period last year.

As of December 31, 2009, cash and cash equivalents were $21.54 million, working capital was $17.6 million, and working capital excluding deferred revenue was $33.4 million.

Total current and long-term net trade receivables were $20.4 million as of December 31, 2009, which included additional reserves taken for the six months period of $8.7 million as we continue to see deterioration in our accounts receivable portfolio.

I will now turn the time over to Steve for closing comments.

Thank you, Clint.

One thing that I should say, thank you, Jon.

One of the things that I forgot to mention is the Crexendo revenue.

The bulk of the $127,000 of revenue came in the fourth quarter for Crexendo, and that's important because as you know, we have been investing heavily in that division.

We have got direct sales force.

We have a number of bars we have put on and we've been making our products ready for larger enterprises.

So there has been a lot of moving parts both from an engineering standpoint, a logistics and fulfillment standpoint, and from an outright sales standpoint.

That's important we are starting to see revenue.

We expected revenue to increase as we go forward.

I am not going to make any predictions as to how much.

But over time, and especially by the end of this year, we expect it to be a meaningful percentage of our overall revenue in the Company.

We also changed from as I mentioned earlier, June 30th to a December 31st year-end.

That's significant too because a lot of preparation and work is necessary in order to do that.

And we have been working diligently on this small SEO acquisition and the relationship in India.

At this time, I would like to open it up, Kim, to questions from the participants, and we'll be happy to answer those in the order received.

Go ahead.

(Operator Instructions).

Our first question will come from Neal Goldman from Goldman Capital Management.

Morning, Neal.

Morning.

First of all, what you mentioned the -- you are going back to the buy back.

What is still authorized to buy back in terms of number of shares?

Jeff, do you want to cover that?

I don't have the exact number open.

As you recall, we had a two buy backs that the Board had authorized.

The first was fully subscribed, and the second I think still has over $10 million.

Jon, is that about accurate?

It is.

Let me get the exact number for you.

And that was the buyback Steve was referring to, the prior authorized one that the Company still has money available for.

So even if you got it up to 7.25%, close to 1.4 million in term of shares, right?

$10 million remaining.

I'm sorry.

What was that --

Based even at 7.25% it is close to 1.4 million shares that you could buy back if you paid up to that price that you mentioned.

Right.

I was looking for Jon's actual answer.

Okay.

It is $10 million.

Number two.

I guess this is for Jeff.

Are there any legal issues still currently outstanding, in terms of the prior stuff with AG or Australia et cetera.

Yes, sir, as you know, there are two issues pending, one you mentioned was Australia, and most of the issues in Australia are resolved.

There were two issued raised by the ACCC.

The first and primary was violation of the former declarations which the Company had admitted it had done some of.

We had resolved with the ACCC that we would continue to operate under what were previously temporary injunctions which we have sold in Australia on several occasions, and we have resolved all potential financial aspects.

We made a payment to the ACCC which involved payment to them and payment to any people who may make a claim.

There's one issue open, and that was whether the prior sales practice of the Company, which has not been used in years, which was comparing the workshop price to say MSRP which was what we called the 90 day offer was accepted.

The ACCC claimed that it was not, we claimed it was simply comparing to and not much different from a car dealer who could do the same.

The court has taken that matter under advisement.

There will be no further hearings or trial work.

So there should be no substantial attorneys fees.

If we were to lose that and no additional fees which would be paid either to claimants or the ACCC even if we lost that, which we certainly believe we are on the right side of.

And there's the open issue, in North Carolina, which involved refunds of claim which is we in fact believe to be fraudulent.

We had a hearing where the trial court ruled we would have to pay them even if we were fraudulent and our redress would be to sue them.

We had repealed that.

When we looked at the cost and the expense involved and the potentiality of winning, we continue to negotiate with the AG and have come to a resolution where we will pay the face amount of the claims, retain our rights to take any action against the claims that we believe are false and we will make a determination if that's worth while or not.

The AG has waived any additional fees, costs or interests they may be entitled to.

We are in the final throws of negotiating that and getting it approved by the courts.

But that should be done shortly.

The numbers which were commented on by Jon includes the full accrual for that expense.

In the fourth quarter.

Yes, sir.

Okay.

And Steve, can you tell me what the current burn, your spending on Crexendo, what's the burn, until we get it to profitability?

Yes.

It's probably better for Jon Erickson to give you those numbers.

I would have to give it to you in round figures.

He can give you actual numbers.

We spent about $1 million in the six months ended December 31, 2009.

We had revenue of $127 million.

So currently a burn of about $400,000 per quarter.

Okay.

And do you see that increasing, or just, or starting to decline, obviously a function of sales, but in terms of the actual spend, is that continuing to climb now, or --

Yes.

We are -- that's sort of a double edged question, Neil.

We have got the acquisition of the small SEO firm, and if that gets consummated this quarter it's going to add revenue to the Crexendo division, but it will also add expenses.

So the burn rate will go up but the revenue will go up with it.

Will it be enough to make the division profitable?

It will be be close, but we don't know yet.

Okay.

We will also be adding sales people.

We would like to open at least one more direct sales operation besides the acquisition in the next two to three months.

But that may be delayed depending on how the acquisition goes.

We will definitely add at least two or three more sales people.

Okay.

And excusing my lack of knowledge, what's the term for SEO, what does it stand for?

That's search engine optimization.

That allows companies that is have with Websites to get a higher page rank, and once they're put into it, the products or service they offer, when that's put into a search engine like Yahoo or Google or Bing, the results will hopefully get them higher in the pages and allow people to see them on the first page.

Wasn't that part of the Crexendo offering also?

It is, but this adds another layer of expertise to what we are already doing.

Okay.

How many bars do we have now that are marketing?

It is somewhere in the neighborhood of 20 bars, but the issue there, and this is one of the reasons why we are particularly interested in the SEO company, the issue there is getting their attention and getting mind share.

They all sell other products and although we've had some traction, it hasn't been as good as we would like.

We are adding additional types of bars.

They have been mostly telecom bars.

I am going to let Clint Sanderson talk about that because we are widening the net here to go after additional types of bars, and we have added some affiliate programs and other things.

Clint, can you comment on that?

Yes.

Thanks, Steve.

First of all, we established, as Steve said, we have -- actually right around 25 value-added resellers right now, and all of those are in telecom space, and they're trained and are starting to get traction, but as Steve said, it is just taking time to get them wrapped up and get them effective.

So the strategy there is to also diversify that to where we are going beyond telecom bars and establishing relationships with businesses that are more apt to be able to move our products the SEO products and web design, web development products we offer in the Crexendo division to their customer base.

So that is the first on the bar front.

We are also establishing a direct sales team and establishing an affiliate or referral program for businesses so they actually -- it is a less formal relationship than a value-added reseller, but it allows us to leverage relationships with those businesses, and that combined with our direct sales force, we expect to see better results and more traction.

In the coming quarters.

Okay.

One last question, I know you haven't signed it yet either, but can you give us more information on the potential of the Indian operation?

The Indian operation is really exciting.

We have been working on automation tools in our engineering group to automate the process of implementing a Website, in other words, when we get a new customer, we want as much of that to be automated as possible.

We are also automating the ability to SEO the site, in other words to search engine optimize the site, and to do the link building on the site, which is all part of the process.

We have people in India, currently as we are speaking, training our partner there in building Websites and implementing all of the various options and other services that we offer.

The thing that's exciting about this customers, I don't want to tell you the business they're in because if I did you would be able to figure out who the company is and I think that would be something that has not been disclosed, but the company has, we believe, somewhere in the neighborhood of 50,000 to 70,000 customers and they have a very large sales force of around 1,000 sales people.

They are adding customers on a daily basis, all of which it is their intent to migrate into an electronic form, so that they can have greater access to the worldwide web and also allow their customers to sale more of their products and services.

It is an exciting thing, that will allow us to add customers to our web hosting, we expect to host all of the customers that are put onto our software platform.

The software itself, as part of the joint venture, we would allow them to have ready access to software licenses so that the hosting revenue is the main thing we are going after.

And hosting can range from as little as $29 a month up to several hundred a month.

What this will allow for us as we get more and more hosting customers both in the telecom space and in the web hosting space, is a more predictable revenue stream.

Currently our hosting is between $4 million to $5 million a year of our overall revenue.

I would like to see the hosting with the telecom space, and the web tool space be the lion's share of our revenue over the course of the next several years.

So that our analysts and our shareholders can more predictably predict where we are going, and this is more like a model like a cell phone company or other companies that have recurring revenue.

Does that answer your question, Neal?

Yes, it does.

Thank you very much.

You bet.

Moving on, our next question is from [Robin Locknear] a Private Investor.

Good morning.

Morning.

I had three quick questions and I will rattle them off and then I'll get off the line to give you a chance to answer them.

The first one, just to clarify something you answered when Neal asked, was I correct to interpret what you were guiding us toward is that Crexendo would probably be break even or maybe slightly profitable in the June quarter of this year?

I don't -- okay.

That's -- you go ahead.

You go ahead and then I will answer all three at once.

Then the second one is for the buy back, how was the figure $7.25 chosen?

And then finally, for your marketing efforts, in calendar 2010, what do you see kind of as the balance between domestic efforts versus international efforts?

I'm writing these down.

Let's start with Crexendo.

I feel we will have more profitability whether that gets us to break even or not I am not really sure because we are ramping expenses as we are ramping income.

We want to be in a position to be able to provide these services to larger enterprises, anywhere in the United States, to start with.

But as you know, if we consummate our relationship, our joint venture relationship in India, we will also be providing those services and products to that market as well.

I think we will be closer to break even, but I'm really not sure, Robin, whether we will achieve that or some slight profitability.

There's certainly, the chance of that happening, but no certainty to it.

As far as the $7.25 buy back, we chose that number based on several factors.

We think it is a more reasonable price for our stock based on the dynamics, and what's happening, we have right at $2.00 in cash on our balance sheet, no debt.

Very strong balance sheet.

We also would like to acquire as much of the stock as possible.

And that's why we would like to do it at lower amounts instead of higher amounts.

And last but not least, on the marketing end, even though we can can go into markets outside of the United States, and we are doing that.

We have been holding workshops in Canada, we will probably confine our marketing to Canada and the United States, primarily the United States, as we make the transition more into the Crexendo side of our business.

Once we get everything up and running the way we would like it to be running, then we will move into other English-speaking markets.

That's one of the nice things about India, even though there are three primary languages there, English being one of them, most of the advertising, most of the Websites, in fact just about all of them are in English.

So that makes it a very easy market to attack and one that we would have a very strong partner in.

I hope that answers your questions.

It does.

That was very helpful.

Thank you.

You bet.

We will take our next question from [Jeff Bash] a Private Investor.

Good morning.

Morning.

I have a couple of questions.

Let me attack the Crexendo thing slightly differently.

You said you expect it to be a meaningful percentage of annual revenue by the end of the year, so I assume if you ignore whether it is this quarter or next quarter a year from now, Crexendo is going to be something that is clearly visible in financial results.

Yes.

It is interesting on these other initiatives and anything else, but I have a couple of questions with respect to the past quarter.

The way we used to look at this accrual basis, we would figure out (inaudible), which would take in to account the changes in deferred revenue from one quarter to the next and if you look at the September quarter where deferred revenue dropped by $4 million and the December quarter where it dropped by $8 million.

It looks like the contracts written relative to current operations dropped in the December- quarter versus the September quarter.

Could Clint or someone who's familiar with this comment?

I will make a few comments first, and then I'll have Jon Erickson and Clint will both address it.

A lot of this has been planned.

We are trying to get a higher quality customer, one that's more able to pay for our products and services.

We are also starting to direct our marketing into specific areas so that we call out any potential customers that really have little or minimal need for the product.

And then some of this has to do with the economic situation.

A lot of it is directly related to the customers' ability to pay.

So you are going to see an acceleration as the economy drags on.

In legacy, receivables, going forward, we think we have a better chance of collecting those receivables.

I am going to let Jon comment further ton financial aspects of it, and then Clint, if you would be kind enough to go over our strategic initiatives in that area.

Jon?

Yes.

Thank, Steve.

So just the majority of the reason for that decrease is related to the additional reserves for bad debt that we took in a six month period.

As I mentioned earlier, we took $8.7 million additional on top of what we normally take related to deterioration in accounts receivable.

Like Steve mentioned, most of that comes from customers who have been with us a year, year and a half.

Older customers dropped off like they hadn't in the past.

What we have been seeing in accounts receivable statistics is that new contracts that are written from a perspective of first payment defaults and things like that are actually slightly improving if not stabilizing, but where we see the deterioration is older customers who have been with us nine months, a year, sixteen months, et cetera.

So that is a big reason for the decrease in the deferred revenue, and your net dollar of contracts written you spoke of earlier.

I will turn it over to Clint for a insight into

On the sales side of it, Jeff, we notice or we know -- you notice the smaller sales percentage this year compared to last year, and that's driven primarily by the direct workshop test we have been doing.

We thought going into it we would be able to eliminate major expense and doing our previews by sending people directly to our workshops and moving from there.

Without the previews we knew we would have a lower close rate when it comes to a workshop sales close rate.

That was expected.

What we found is we did have that lower close rate, but what we found is that our previews are an essential part in our business model and qualifying our potential buyers ultimately on the direct workshop test that we did.

We found that the mix of our buyers was not what we needed it to be.

In other words, we were not getting as qualified a buyer to those workshop events.

So what we found is that the preview event allows us to better qualify the buyers or attendees that come to our workshop events, and we get a better mix of buyer in that model, and that's why we have ended the direct workshop test that we have done moving forward.

Out of the cash payer percentage compare in the December quarter with the preceding quarter the September quarter?

It is about the same.

It was 42% in the September quarter, 43% in the December quarter, which incidentally is higher than it was a year ago.

A year ago it was upper 30s, low -- 39%, 40%.

So we are up slightly in that.

That being said, that is really a market by market statistic.

Some markets pay cash better than others, particularly Canada has been a high cash pay market for us which we had a descent amount of workshops in the quarter.

That's part of the contributing factor to the higher cash percentage.

Okay.

The last question I have has to do with the tax rate.

I know for a period of years every quarter you would see 40% or something like that.

Now we have 29.4%, and it looks like it is something that is varying by the quarter, is there a reason for this change, does that has to do with the settlement with the IRS and something has occurred with respect to that.

An appropriate expectation for a tax rate on go forward is about 40%.

We had some trickle through on the IRS as well as an issue we were having in Canada trickle through as well in the six month period.

That's why you see the lower tax rate.

So NOLs, you have some left?

We do.

We have -- we are able to use $462,000 per year, related to the IRS settlement.

Incidentally, we did lose $233,000 in this six month transition period because we were limited to half of that.

So we lost a little bit this transition period but we are still able to utilize $462,000 on a go forward basis through that, I believe it is 2015.

So if we get past this transition period we are in now and the Company is -- becomes materially more profitable then we should look to a 40% tax rate.

That would be my expectation.

Okay.

Thanks a lot.

Thank you, Jeff.

(Operator Instructions).

We will take our next question from [Ronald Fall] a Private Investor.

I would like just a follow up on Jeff's question about meaningful.

And we are talking a year out by your statement that would be meaningful.

In -- could you just quantify that.

Is that meaningful being 5% to 10% or being 20% to 30% or some broad range, whatever you would feel comfortable?

My crystal ball, generally, when it comes to making predictions, that's a lot of snow in it I guess, is a good term.

You should be in Pittsburgh.

I was going say, especially for you folks in the Northeast.

But I would expect somewhat exponential growth, quarter-over-quarter, that's not to say it will double every quarter.

At some point you get to the point of diminishing returns on that, but I think it would be, with the acquisition of this company, if it occurs, and the natural growth in our Crexendo division, I think it would be easy to say that probably 2% to 4% of revenue this year will come from that division.

Next year it could be as much as 5% to 10%.

Okay.

We will see it continue to grow as we move forward.

Our goal here, and part of the reason why we are seeing fluctuations in the StoresOnline division is because of the fact that we are testing a lot of different methods of selling.

We are selling more training as opposed to software licenses, and we expect that trend to continue, but again, it is going be choppy.

We will start introducing our hosted telecom services into that channel first.

And at best, our hosted telecom services will be a basic, very basic business type of service or a very high level type of residential service.

It will certainly be a lot more than a Vonage for instance, but it will be less than your traditional PBX, but we see in the neighborhood of 5,000 to 6,000 prospects on the StoresOnline side every single week.

And of those 5,000 or 6,000 we think that a high percentage of them, even if we don't buy our traditional products will sign up for our hosted telecom, which will be, starting we think at $29 per month.

And it doesn't take much to ramp that, and the telecom division, even though it is -- we might be selling into the StoresOnline channel, it is part of Crexendo.

So there's a great opportunity, but until we start seeing actual sales, it is hard to predict.

Okay.

Just one more.

You -- the North Carolina settlement, it has been all fully reserved.

Are we talking, $200,000 or more or less than that?

I mean --

Less than $200,000.

No Steve it was -- we had already reserved $750,000, and there was some additional pay with that.

Well, I meant the additional reserve.

Was less than $200,000.

Is that correct, Jon?

Correct.

Okay.

But we would have then the ability to go against the original $700, 000 or -- case by case whether it is worth it or not?

I think the way this settlement is written, and I will let Jeff give you the absolute answer, but I think whatever is left over goes to the state of North Carolina.

Is that correct, Jeff?

No, sir.

What we in fact paid was what the claim amount, what we agreed to pay is the claim amounts.

The state of North Carolina has agreed not to accept any fees or costs.

To answer your question, we could on a case by case basis determine if in fact we wanted to sue the individuals, and maybe cost prohibitive because keep in mind the average sale is in the range of $4,000.

So it would be a lot of lawsuits.

A lot of ambulance chaser.

We don't think that's a good area to be spending our time and money.

Right.

Good enough.

Appreciate it.

Okay.

Thank you very much.

You bet, Ronald.

Our next question is from Michael Shonstrom from GVC Capital.

Good morning, Mike.

Hi.

How are you doing?

Doing well, thank you.

Good.

A question on -- I didn't hear a comment on the purchase per unit, the dollar volume per unit purchased in the quarter.

It was fairly consistent.

There wasn't much change in the average purchase price.

It was $5,170 in the September-quarter.

So it was around there.

Yes, around $5,200.

Great.

Just elaborate a little bit on if you could on the deferred revenue side of the equation going forward.

First quarter was $5.4 million contribution and $5.2 million in the September quarter.

$5.4 million and then $5.2 million, and as we look forward into the upcoming calendar year, what do you see that number being?

Is that going to continue to decline?

Well, that's difficult to state with certainty.

We believe -- you go from $5.4 million to $5.2 million.

We have started to see some stabilization.

That being said, that could change.

We have seen deterioration in our accounts receivable primarily from oldest customers and it is also dependent upon what our cash percentage mix rate is at the workshops as we sign up additional contracts, the more A buyers we sign up versus B and C, the more likely we will add to the cash collected in the quarter.

It is dependent upon a lot of factors.

What we have seen though over the past two quarter is somewhat of a stabilization in the dollar volume we are collecting on a monthly basis.

One of the other things we are doing, Mike is we are selling a higher percentage and I can't tell you exactly what that is.

But our intent is to sell a higher percentage of training, and most of that will be cash because we don't want to give training and then have them owe us for it.

So that could impact this a little bit.

Maybe you would like to comment on that, Clint?

Well, what we are doing there, is we are in the initial testing stage of modifying our model to where our offered workshops is more heavily weighted toward training and services versus a software license, and that's what Steve is getting at, and we continue right now to test that and perfect that model and that offer.

It is a substantial change in our offer and it's a substantial shift in also the way our customers look at what they're purchasing from us.

We believe it also helps in the customers expectation of what we are delivering and also what's expected of them in the whole equation.

So it is something we continue to test, and over time, we feel like we will be able to get to where the bulk of what we are offering in our workshops is more training and service related rather than a software license.

And the whole intent here is to get every single training customers into a Website.

If we are able to consummate the relationship in India, we will be able to drive our cost of implementing that Website substantially lower, and that will allow us to get more of our customers published and ultimately to receive more hosting revenue as time goes by.

Yes.

Okay.

One other question on the workshop.

You went to five workshop teams in the most recent quarter.

Do you see that increasing, staying the same, the number of workshops given, trends?

Right now we are keeping those workshop teams busy.

But a lot of it is going to depend on how well the do whether we increase it or hold it where it is.

I don't expect for us to decrease it but, Clint, do you have any comments on that?

At this point we don't expect any decrease in that, and we also don't expect any increase.

Right now our focus is on generating profitable revenue, and a lot of our initiatives in both marketing and sales is trying to go into our markets with a more laser focus as to the marketing that we do, and getting the best return on the marketing dollars that we spend.

And so based on that, we don't have any plans right now to add a workshop team or right now to decrease.

It is just status quo right now, and we will continue with those initiatives and try to improve our profitability in that channel.

Right.

Thank you, Clint.

One of the things that we have done, Mike, is on our Crexendo side, we have used lower cost marketing methods to generate leads.

Some of it has been through webinars, and what we intend to do as that backlog of leads increases, or offers on our workshops on the Crexendo, I mean on the StoresOnline side, the ability to -- in their off week, as you know they go out on the road for a week and then they're off for a week.

In their off weeks we are going to allow them the ability to make sales calls over the telephone into that lead backlog, on the Crexendo side.

So we can get double duty out of the ones that want to increase their income.

You might want to give more color to that one, my comment, Clint.

Okay.

Thanks, Steve.

We see in our events at our preview events the number has been mentioned on average, 5,000 to 6,000 attendees per week we see.

Of those attendees, we see business owners who come to that event, see the services we are offering at that level, they need a higher level of service.

So we have a program where we are able to hold those leads out of the StoresOnline side because those individuals, their needs go beyond what we can offer on the StoresOnline side for their business, and so we can push those leads into the Crexendo side of the business, and those sales people that Steve mentioned can call into those leads.

In addition to that on the StoresOnline side, the sales consultants we have on the StoresOnline side will start engaging our attendees and doing our consultations actually before they come to the workshop.

So between the preview event and the workshop event our consultants will be able to begin the sales process before our attendees get to the workshop, and we feel that will better prepare the customer, give the customer a better experience, and improve our overall performance in that channel.

Great.

Thank you, Clint.

What we are trying to do is increase our productivity.

Right.

Understand.

Great.

I appreciate it.

Thank you.

You bet, Mike.

Thank you.

(Operator Instructions).

It appears there are no further questions today.

Mr.

Mihaylo, I will turn the conference back to you.

Thank you, Kim.

I want to thank all of you for participating today.

I noticed at least one additional shareholder that private investor that joined the call, and I want to thank you, Ronald.

We look forward to sharing our results with you for the March 31, which will be our first quarter, first calendar and fiscal quarter as we go forward.

And I appreciate your support.

Thank you very much and have a good day.

Good-bye, everyone.

That does conclude our conference call today.

Thank you all for your participation.