Crexendo Inc (CXDO) 2010 Q1 法說會逐字稿

Welcome to the iMergent, Incorporated first quarter calendar 2010 financial results conference call.

Today's conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Steve Mihaylo.

Please go ahead, sir.

Thank you, Nancy, and good afternoon, everyone.

Before we get started, I'd like to introduce you to who is on the conference call with us here and also our General Counsel, Jeff Korn, will be reading a forward statement.

To start with, we have Clint Sanderson, our President of both Crexendo Division and the StoresOnline division.

We have David Krietzberg, our Chief Administrative Officer and Executive VP.

We have John Erickson, our Chief Financial Officer, and we have Jeff Jarvie, our Controller, as well as Jeff Korn, our General Counsel.

And Jeff, would you read the forward-looking statement, please, before I give a brief overview?

Certainly.

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 in this conference call 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.

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

These risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission, including the Form 10-K for the fiscal year ended December 31, 2009 and the Form 10-Q for the period ended March 30, 2010.

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

Steve?

Thank you, Jeff.

Before I get started here, I want to remind everyone that first of all, I'm going to be giving an overview of the highlights.

Then I'll have John Erickson give a more granular overview.

Then we're going to open it up to Q&A after that.

But I'd also like to remind everyone that we filed our 10-Q at the same time we filed our press release and I encourage all of you to go through the 10-Q for any additional granularity that you may be looking for.

I'm going to start with our revenue first and then I'll talk about net income, and then I'm going to turn it over to John Erickson.

Revenue for the first quarter of 2010 decreased 18% to $17,094,000 compared to $20,931,000 for the comparable period in 2009.

The lower revenue was a result of a 5% reduction in the number of workshops conducted during the first quarter of 2010 as compared to the comparable quarter in 2009, a decrease in the percentage of attendees purchasing products to 26% in the first quarter of 2010 compared to 28% in the comparable quarter of 2009, a 21% decrease in the number of preview buyers attending our workshops compared to the prior year quarter.

I might just give you a little bit of color here.

We actually had more people in the previews, but fewer people in the workshops as well as a 39% reduction in principal cash collected on receivables portfolio.

The remaining -- and that's a result of having lower sales.

The remaining decrease in revenue primarily related to commissions derived from third parties, which decreased 22% to $2,581,000 for the three months ended March 31, 2010 compared to $3,330,000 for the three months ended March 31, 2009.

The decrease was primarily attributable to the decrease in commissions from third parties as a result of fewer leads sent to the third parties due to a decrease in the Company's product and service sales.

The decrease in revenue from workshops was offset by an increase of $1 million as a result of the change in the Avail 24/7 contract and here again, John Erickson will go into that.

Revenue from our Crexendo Business Solutions division was $242,000 compared to $0 in the comparable period last year.

Total operating expenses decreased 9% to $17,975,000 for the first quarter of 2010 compared to $19,704,000 for the comparable quarter in 2009, primarily as a result of conducting fewer workshop events.

This netted the Company for the first quarter of 2010, $123,000, or $0.01 per diluted common share, compared to $1,552,000 or $0.14 per common share in the comparable quarter last year.

Income before tax provisions for the first quarter of 2010 was $248,000 compared to $2,778,000 in the comparable quarter last year.

The income tax provision for the first quarter of 2010 was $125,000 compared to an income tax provision of $1,226,000 in the prior quarter.

The higher the normal income tax provision in the current quarter is primarily due to the expiration of the federal research and development tax credit.

At this time, I'm going to turn this over to John Erickson who will go through the granularity, at which time we'll open it up for questions after he's finished.

All right.

Thank you, Steve.

So in order to give a better understanding of this decrease in revenue and our revenue in general, I want to put it in the context of our different components of revenue.

The StoresOnline Division, we have three main components of revenue.

First, cash collected on the sales of StoresOnline software licenses at the events.

Second, the collection of principal on our receivables balance, and third, third-party commissions and other non-event revenues.

Cash collected on the sales of StoresOnline licenses and other products at our events decreased approximately $700,000 year-over-year.

This is inclusive of approximately $1.3 million in legal refunds in the prior year, which reduced revenue in the prior year.

This decrease is primarily attributable, as Steve talked about, to the decrease in number of workshop attendees as a result of fewer preview buyers at our events in the current quarter, as well as a lower close rate.

The decrease in cash collected on the sale of StoresOnline software licenses year-over-year was offset by an increase in revenue related to the change in the Avail 24/7 contract terms, which resulted in a one-time recognition of revenue of $1 million for a total net increase in event revenue over the prior year of $300,000.

Collection of principal on our receivables balance decreased approximately $3.1 million from $7.9 million last year to $4.8 million this year.

This decrease in cash collected under our receivables is primarily due to a decrease in the balance.

The accounts receivable balance will increase or decrease depending on the number of sales team the Company has had in the prior two years, the number of customers financing and fluctuation in sales rates.

In the past two years, we have reduced a number of our sales teams and we have seen a decline in our sales rates, which has resulted in lower accounts receivable balance.

Third-party commissions and other non-event revenue decreased by $1.3 million.

As you see the top line decreases we have, you'll also see the commission decrease as fewer leads are sent to these independent third parties.

On the expense side, we continue to control costs with the increase in cost as a percentage of revenue primarily due to an increase in the percentage of revenue related to collections of our receivables, which have relatively little cost, approximately 10% cost to the collection of receivables revenue.

For the three months ended March 31, 2010, revenue related to principal collected on receivables was 28% of our total revenue compared to 38% of our total revenue for the three months ended March 31, 2009.

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

From a cash flow perspective, we used $493,000 in cash from operations for the three months ended March 31, 2010 compared to a use of $76,000 in the prior year.

As of March 31, 2010, cash and cash equivalence were $20.2 million, working capital was $16.6 million, and working capital excluding deferred revenue was $30.1 million.

Total current and long-term net trade receivables were $20 million at March 31, 2010.

As we discussed on the last earnings call, we have experienced deterioration in our accounts receivable over the past year.

This quarter we continue to see deterioration in our accounts receivable, but it's deteriorating at a slower velocity.

We haven't quite seen the bottom yet, but we're nearing it we believe.

With that, I'll turn the time back over to you, Steve.

Thank you, John.

At this time, Nancy, we'd like to open it up to Q&A.

Thank you, sir.

(Operator Instructions) And we'll go first to Robin Lochner.

Hi.

Thanks for taking the question.

It looks like Crexendo revenue approximately doubled, I think, from $127 million to $242 million.

What sort of growth trajectory would be appropriate for that going forward?

And looking forward into 2Q, what needs to happen for income from operations to be positive in the second quarter?

Well, first of all, as you know we don't give guidance on any of these issues.

But with respect to the revenue in Crexendo, at this point we're just -- we're still in the process of developing our direct sales force.

We're still in the process of developing the VAR channel, which has been slow to develop, I might add.

Most of these sales in this quarter came from our CastleWave acquisition, as well as direct sales through the direct sales force in Crexendo.

And what was the second half of your question?

Oh, income from operations.

Let me let John Erickson handle that.

Robin, from income from operations perspective, as you know, we have significant interest income, which is in the other income category.

That interest income primarily comes from interest received on our receivables balance, which kind of flows into StoresOnline revenue.

So when we look at it internally, we consider interest received on a receivables balance up in operations, which would indicate income from operations in this quarter.

From a specific perspective, in order to gain income from operations, simply increasing the sales rates that we have at the workshops, increasing the number of attendees at StoresOnline and increasing our Crexendo revenue.

From a costing perspective, we've reduced our cost.

We're quite efficient in the way we're costing right now.

It's strictly a function of revenue.

Okay.

And then the Company repurchased about 10,000 shares.

Is it fair to assume that there will be additional purchases by the Company in the current quarter and that the target threshold is still the $7.25 area?

Well, first of all it was a little more than 10,000 shares.

I think it was about 13,000 or 13,500 shares.

Subsequent to the quarter end, we purchased an additional 13,000 shares in this quarter already.

So a total of 23,000 have been repurchased.

Yes.

As far as the price, the target price is dependent on market, of course.

We felt the stock was underpriced or undervalued at $7.25 and we, with today's close, I don't know exactly where it closed, but I think it was somewhere around $6.10.

We feel it's still undervalued.

So there will be continued repurchasing of the stock.

Okay, and final question, sorry to take up so much time, on the last conference call you had talked about a transaction involving India.

Is there any update on that?

I'm going to -- yes, there is an update on that.

I'm going to turn that over to Clint Sanderson who is managing that relationship.

Clint, would you like to address that?

Yes.

Thanks, Steve.

The relationship in India, the two main benefits of that are, number one, the ability to have a lot of our fulfillment processes that we're currently doing for our StoresOnline customers being fulfilled with that group in India at a lower cost.

And that is underway, and we have a lot of those tasks right now being done in India.

That's the first benefit of that relationship.

The second benefit of that relationship is we have an opportunity to go to that business's customer base.

They have a base of small businesses in India who need our services, need our platform.

So we're white labeling or branding our platform and we're going to be able to offer our platform through them in India.

And that process is underway and expect to start seeing results from that here in the coming quarter.

Okay.

Thank you for helping me out with these questions.

You bet.

(Operator Instructions) And we'll take our next question from Jeff Bash.

Good afternoon, Jeff.

Hi, Steve.

Two questions.

On the Avail 24/7 change, am I correct that that was in effect a deferred income item previously because you had the liability of providing a $35 value service at any point in the future, and since you changed that to something which terminated I think 3/31 or whatever --

That's correct, Jeff.

What we had before in the contract was that they could set up the Avail service at any point in the future.

We had several customers who had not set it up at that point in time.

We sent out letters.

We switched it to you have to set it up by March 31.

If you don't set it up by March 31, you'll be subject to a $34.95 activation fee.

For all those customers who had not set it up by March 31, we got to recognize that $34.95 activation fee and that's where the $1 million comes from.

So in fact, it was a revenue recognition item previously, which has since been eliminated.

That's correct.

I mean we still deferred the $34.95 activation fee today.

It's done over a 60-day period, though, instead of until they activate.

Yes.

Yes, I understand.

But before it was forever --

That's correct.

Now, I noticed that the buy rate in the first quarter of 2010 is 26%.

You said compared to 28% in the comparable quarter of 2009, but if my memory serves me right, it's a considerable improvement over the buy rate in the immediately preceding quarter.

Is that right?

That's correct.

It's better -- it's quarter-over-quarter, it's an improvement.

A nice improvement.

Do you see that trend continuing or are you stable at the current point, you think/

So far in April, we would expect it to continue.

We're one month into the quarter.

Because if my memory serves me right, your bottom line is heavily leveraged to that buy rate and --

Absolutely.

-- and the fact that it has improved as nicely as it has from the preceding quarter is very helpful.

Yes.

In terms of India, I think you may have said before the number of small businesses that this relationship has available to it with your new initiative.

Could you quote that or perhaps my memory is wrong?

I don't believe we did, but it's a significant amount.

It's in the thousands.

So it's significant relative to the current size of iMergent?

For one thing, the market there is very price sensitive because of the size of these businesses are very small.

Pricing and competition doesn't allow us to get the same kind of sales amount that we would from a comparable customer here.

And finally, and most importantly, we're too early in the process to really be able to gauge exactly how much that is going to relate to.

But there's other opportunities down the road that might be available to us as a result of this relationship.

Now, with respect to telecom, I think you indicated that you will be starting limited distribution in this quarter with a full rollout the beginning of next year.

Could you tell me a little bit more detail about that or add a little color?

I'm going to turn this over to David Krietzberg.

He's been the person responsible for managing that process.

Hello, Jeff.

Yes, we are announcing on a limited basis our product in the second half of this year.

And then based on regulatory approvals, we expect to have more of a national launch towards the beginning of next year.

Now, in terms of distribution, Steve has discussed having some challenges with VARs with respect to, I presume, the StoresOnline product.

Do you think there will be the same challenges with this or it's a product that the VARs are more familiar with and they'll be less challenges?

I mean, how would you characterize the difference between the reception by VARs to these two different product lines?

I'm going to give you my thoughts on that, Jeff, and then Dave will give you additional comments.

First of all, we've got a lot of moving parts to the telecom hosting business.

The primary market as we get full functionality of the product will be small -- everything from a SOHO, to small, to medium-sized businesses.

Probably no more than 50 or 60 telephone instruments in a business.

So that's still a fairly small business.

But we have to get more business functionality to the product before it will be good for larger businesses that are brick and mortar businesses.

The current StoresOnline customers are ideal for the product as it sits today.

In January or the first quarter of next year when we roll it out, we'll have more functionality that's geared more towards the small business, the 10, 20, 30, 40 instrument business.

There will be multiple channels that we'll be selling this through.

We'll sell it through our Crexendo Division.

We'll sell it through our StoresOnline division and we'll also have a website where people can go onto the website and order various configurations of the product without having anybody involved in the sales process, much the same way you would go in and order cell phone service and all the different features and functions you can get on your cell phone.

With that, I'm going to turn it over to David, if he wants to add anything to it.

No, Steve, you did a good job at describing.

Okay.

But the main thing is, is we've got multiple channels here to sell it.

We would hope at some point in time that it's more of an automated service that we drive customers or potential customers to our website through various methods, including some form of advertising.

Okay.

And one last question, I wouldn't call the buyback in the last quarter or to date as being especially aggressive.

I would think that if you thought that this -- the Company had the potential to be let's say a double-digit stock in a year or two, you would be buying more along the lines of what the SEC limitation is than you are.

Is there any comment you can add to that?

Well, the main comment and then John Erickson is going to add little bit to it, since he's been managing that process.

The main thing is the low volume in our stock really is a gauge.

It's a throttle, if you will, or a governor as to how much we can buy.

John, why don't you add your thoughts?

We have a 10(d)51 plan in place right now.

We're not going to give you the level of which we're repurchasing, but it's in place right now and what we repurchased is based upon the SEC rules and what we are allowed to repurchase.

Okay.

Not to be argumentative, but I'm quite familiar with the SEC rules and I see that the average trailing three month volume is [17,781] off my screen right now, which with a 25% limit would indicate you could buy a little less than 4,500 shares a day.

So I guess my only observation is that you certainly could be buying 50,000 shares a month under the SEC rules and I'm sort of surprised you didn't buy a little more than you did.

Well, we could if we want to keep hitting the ask price, but we're usually at the bid price.

And we have a 10(d)51 in place that's active.

All right.

Thank you very much.

Thank you, Jeff.

(Operator Instructions) And it appears we have no further questions a this time.

All right, thank you, Nancy, and thank you for all of you that joined our conference today.

We look forward to speaking with you after our second quarter results.

This concludes today's presentation.

Thank you for your participation.