Crexendo Inc (CXDO) 2011 Q1 法說會逐字稿

Good day everyone and welcome to the iMergent, Incorporated first quarter 2011 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, Chief Executive Officer.

Please go ahead, sir.

Thank you, Lisa.

Good afternoon, and welcome to the iMergent, Inc., Q1 2011 results conference call.

I have Clint Sanderson, our Chief Operating Officer, John Erickson, our Chief Financial Officer, David Krietzberg, our Chief Administrative Officer, and Jeff Korn, our Chief Legal Officer on the call with me today.

I will first ask Jeff Korn to read our Safe Harbor statement.

After that, John Erickson will provide information on our financial results.

I will then have comments on our quarter and our business, after which we will open up the call to questions.

Jeff, could you go ahead with the Safe Harbor statement?

Thank you.

Thank you.

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 likes believe, expect, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements.

Investors and listeners 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.

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 30, 2010, and the forms 10-Q for the periods ended March 31, 2011.

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

I'd now like to turn the call back to Steve.

Thank you, Jeff.

At this time, John Erickson, will you provide information on our financial results for Q1 2011?

I will.

Thank you, Steve.

This was a challenging and disappointing quarter.

On a consolidated basis, we had revenue of $14,568,000 compared to $17,094,000 in the prior year quarter.

In the prior year, we had a one time benefit of $1 million related to a change in our Avail 24/7 compared with a decrease in revenue in the current quarter of $572,000 as a result of new accounting guidance.

When adjusting for these two occurrences, we had comparable revenue of $15,140,000 in the current quarter compared to $16,094,000 in the prior year quarter, a decrease of approximately 6%.

The demand for the StoresOnline product offering has not been the cause for the decrease in our revenue, as we generated 316 more buyers this quarter compared to the prior year quarter, even though we held ten less workshops.

We had a 29% sales rate at our workshops this quarter compared to 27% in the prior year quarter.

We believe the unemployment rate and poor economic conditions have increased the demand in our StoresOnline product offering as we have seen an increase in our direct mail response rates, show rates to our workshops, and close rates at our workshops.

The problem we are facing is that with this increase in demand comes an increase in customer acquisition costs, which are incurred regardless of whether or not they pay cash for their purchase or they finance their purchase.

The acquisition cost per buyer is high in the StoresOnline channel and is driven by number of customers acquired, which as mentioned earlier increased over the prior quarter by 10%, not necessarily by revenue.

As a result, what you see in the financials is the cost associated with the increase in gross sales as compared to the prior year, which due to the fact we recognize revenue on a cash basis does not flow through to revenue.

So while we believe the unemployment rate and poor economic conditions has increased the demand for the StoresOnline product, the customer's ability to afford and pay for the product offering has continued to deteriorate.

We have seen our percentage of customers able to pay cash steadily decrease since 2008.

We experienced a significant decrease this past fourth quarter to 33%, but given the increase in our response rate holding stead in our sales rate, we're able to deal with this decrease and generate positive cash from operations for the quarter.

The first quarter of this year saw another significant decrease, down to 29% compared to 39% in the prior year quarter.

The customers that we are currently attracting, which produce a 29% cash rate, have ramifications down the stream has well.

Similar to what we are seeing at our events with the low cash rate, our third-party partners have seen similar circumstances, and as a result, our commission from these third-party partners decreased $673,000 when compared to the prior year quarter despite an increase in leads sent to these partners.

Our receivables portfolio saw slight improvement in our collection rates during the quarter, but our default rate remains high.

Additionally, the success rate of during a high percentage of these customers into monthly recurring customers has not been high.

This trend cannot continue if we expect to become and remain profitable in the future.

We need to be able to attract a customer with more financial strength and business strength to be successful, which Steve will address later in his comments.

As a result, during the first quarter of this year we had a net loss of $1,851,000 or $0.71 per share compared to income of $123,000 or $0.01 per share in the prior year quarter.

In regards to Crexendo Web Service, we were able to generate Crexendo revenue of $479,000 compared to $242,000 in the prior year quarter and $400,000 in the prior quarter, being the fourth quarter.

Total operating expenses increased to $1,149,000 compared to $626,000 in the prior year quarter and $969,000 in the fourth quarter of last year, as we increased our marketing expenses in an attempt to generate more leads.

Our bookings have been increasing each month along with our backlog, which now fits at $972,000.

One of the positive trends in our Crexendo Web Services division is the percentage of bookings that are recurring in nature, which currently compromises about 50% of our booking.

The majority of these bookings are for monthly link building products, which have recurring amounts of $1,000 plus per month.

Our Crexendo Telecom division was able to complete the development of Phase I or our telecom offering, which we rolled out through StoresOnline preview events starting in February 2011.

We have a good initial sales response to this rollout.

We're working diligently to improve our activation rates.

As part of this offer, we offer two free months of service and a trial period to these customers.

During the first quarter of this year, that trial period had not been finished.

As such, we didn't have any meaningful billings in the first quarter, although we expect to have some meaningful billings in the second quarter of this year.

From a cash flow perspective, during the three months ended March 31, 2011, we used $3.3 million in cash for operating activities, primarily as a result of the low cash percentage at the events throughout the quarter.

With that, I will turn the time back over to Steve.

Thank you, John.

Some of my remarks today are going to be a little redundant with John's but I'm going to add some additional color here and then we'll open it up for questions.

The StoresOnline division continues to struggle.

We're very disappointed with the results.

We are facing the same problems that we have discussed in previous quarters and that we have been addressing for several quarters.

The markets served by the StoresOnline division, the B2C customer, continues to be hard hit by economic conditions.

While the general economy is improving and our gross sales have actually increased, the B2C market we have historically served is saddled with a very high unemployment rate, general difficulty in accessing credit, increasing pessimism, and increasing cost of living expenses that have negatively affected our cash flow.

We believe that this has created the low cash rates that John discussed and the continued extremely high default rates on financing.

These are trends that cannot continue.

The Company isn't profitable in the current model with these issues and we are not cash flow positive with excessive default rates.

In addition to this, we continue to have a hard time getting StoresOnline customers to host for over 12 months.

While that is not surprising considering the high default rate with startup businesses in general, it is nonetheless disappointing and is striking in comparison to our Crexendo customers, which are generally stable, existing businesses.

StoresOnline also appears to be facing increasing competition in the direct sales market.

In some of our best markets, there is direct competition to our customers, which appears to include more aggressive advertising than we feel is prudent and appropriate.

The StoresOnline model has historically faced extremely high customer acquisition costs, which is exacerbated by our high direct mail expenses.

This trend is continuing and we are working towards substantial improvement in this metric.

These results are particularly disappointing compared with our Crexendo division where our customers are paying us in full and are extremely sticky.

Our Crexendo customers are highly satisfied and are often our best referrals.

As you know, our satisfaction rate in the StoresOnline division is not nearly as high and is prone to complaints and legal problems.

As a matter of fact, as the economic conditions in the B2C market have deteriorated we have seen an increase non-specific, and we believe non-meritorious compliance.

Our StoresOnline team has been working to address these issues.

We have tested a number of concepts, including a scaled down offer that puts emphasis on training prior to building a web store.

In this higher tough sale, we continually have our customer service agents walk our customers through the process of building their stores.

We have also tested a one event to drive sales costs down, a one-event sale to drive sales costs down.

We're thoroughly reviewing the results of our basic model and the results of the tests that we have undertaken.

It has become clear that what we have been doing is not working to our satisfaction or to the benefit of our shareholders.

So I believe further changes are necessary.

We should have the results of all of these tests fully analyzed and modeled within the month so that we can make the necessary adjustments that are in the best long-term interest of our shareholders and our business.

On the Crexendo enterprise web marketing services and telecom services side of our business, we continue to be encouraged by the progress that we have made.

As I discussed, our Crexendo customers are highly satisfied and the trends with our Crexendo divisions have been positive.

In the Crexendo Web Services division, our bookings and backlog continue to increase and we are particularly encouraged by the trend of increasing revenue quarter-over-quarter as well as the high quality of customers we have been attracting.

Our Crexendo Network Services division has started selling our telecom product as discussed previously and we have started with a controlled rollout in Q1 2011 as we review our systems, staff, and capability.

The results are very promising and we are very proud of the quality of the service offered and our support.

We have customers in 15 states and we are very pleased by the reaction from our customers.

We continue the development of additional services, which we believe are necessary to make us fully competitive in the enterprise market.

I'm proud to say that the quality of our services to the point where I am confidently talking to all of you today using the Crexendo Network Services telecom service.

We are fully aware of the challenges we face.

We also are aware of where the business needs to go.

It is for that reason we have recommended to shareholders that we change the name of the Company to Crexendo, Inc., to demonstrate the breadth and quality of services we are offering.

I encourage all of you as shareholders to support us in approving the name change.

I believe our team is ready for the challenge we are facing and I'm also confident we will make the necessary changes to the StoresOnline model to make it a continued viable part of our business while continuing to drive sales, service, and support costs down in the Crexendo division.

I will now open the call to questions.

Lisa, can you open the call up to questions, please?

Yes, thank you.

(Operator Instructions) And we'll go first to a private investor, Jeff Bash.

Afternoon, Jeff.

I guess I have a couple questions.

This quarter seems to be significantly worse than the immediately preceding one.

Could you identify what are the key factors within one quarter's spell that things seems to have deteriorated as much as they did?

Well, there's several factors, but three of those factors are, number one, January we practically don't have any events at all.

So January has very little sales.

The other factors include a much lower percentage of cash buyers.

As John Erickson pointed out --

Yes, 29 versus 33.

That's correct, but it's also lower than it's been in previous quarters.

And then of course the default rate, and John, would you like to add any more color to that?

Yes, and I'll speak specifically from a cash flow perspective.

What you experience in the fourth quarter from a cash flow perspective is we shut down events towards the end of December and we don't start events until the end of January.

And so there's not a lot of cash flow going out the door in December related to January type of events.

What happens in Q1 is we have to make up for that.

So you have a lot of cash going out the door in January for February, March, and even April events because there's no slow down towards the end of the quarter.

And so you're accelerating a lot of expenses.

If you look on our cash flow statement, prepaid expenses went up.

Our accounts payable balance went down from a cash flow perspective.

But you don't get the luxury of slowing down towards the end of the quarter like we do at Q4 and like we do at Q2, which dramatically impacts our cash flow.

The other significant impact on cash flow was the cash percentage as well as the $673,000 decrease in revenue from our third parties, which essentially has no cost to it.

It's free cash coming without any (inaudible).

So that dramatically decreased by $673,000 due really to the same reasons that we saw.

The customers that we were selling and not able to cash from.

As we send these leads to these third party partners, the customers didn't have sufficient funds to purchase from them either.

So it really was just kind of a rolling effect of the amount of cash that our customers had that we saw in this quarter.

It was not good.

Next, is there any way to let's say prequalify the customers that you send out mailings to in some way, either working with customer databases where the customers are better healed by the nature of the database or getting some kind of simple credit check on everybody you send it out for.

I'm really not familiar with this area, but it seems to me that those are two things I would think of.

Jeff, let me answer that and then I'm going to have Clint Sanderson give you a little bit more color.

As I said in my comments, we're currently analyzing all of those metrics in our direct mail marketing endeavors here.

One of the things we're doing is we're going through the last four years zip code by zip code to see where we've had the best results across the nation.

It's a massive amount of data and we're approximately half or two-thirds of the way through analyzing that.

But it's still going to take a couple more weeks here to get the final results.

We've already made our buys on our mailers for the next five or six weeks.

So this can't even take effect until probably the middle of June or the end of June.

Once it does, we'll be mailing into locations where we know we get better results.

Where we have higher credit scores, we have higher customer potential.

Once that's done, it will not only drive our costs down because we won't be sending out as many mailers, but it will also be hopefully attracting better prospects.

I'm going to let Clint talk about that.

He's also going to talk about some of the other things we're doing, which is a one event sales event so that we drive our sales and travel costs down.

Clint, can you -- ?

Sure.

Thank you.

So on the data side, Jeff, the only thing I would add to what Steve has said is historically we've modeled our data to always do our best to identify those buyers we think would be most qualified or those prospects that would be most qualified for our products and that's probably more of an art than a science in many respects.

But what we've found and what's happened in quarter one is with the recession we've seen swings in markets as far as how people respond, but more importantly how people purchase, their ability to purchase with cash is far -- there are far greater gaps in markets now than we've ever seen in our history.

So what's Steve's talking about and what we're analyzing with our data, because of those swings in geography is we're modeling by zip code to identify those zip codes where hopefully we can find those prospects that are more qualified and are more able or capable of using cash to purchase our products and services.

So that's the data modeling side of what we're doing right now and the analysis that Steve talked about that will be done in about a month.

On the model side itself, changes we're making in the data model, we've moved to a software as a service model throughout.

We did that last year and we're continuing to change the model so that we can get our preview attendees at our events, focus more on those attendees actually using our software and services.

Again, the whole focus there is to get far more people posting on our platform and generating that recurring revenue.

Secondarily is then the up sale, making that up sale, whether it's at an event and Steve mentioned one event.

The one event would be a preview.

We're testing do we need a second live event, can we do that via webinar, are there other ways to accomplish that instead of or in place of holding a workshop.

And so those are what we're testing right now and should have results on that in the next couple of months as well.

Okay, and I have one question -- a couple questions about Crexendo.

Last quarter, the fourth quarter, sales were $400,000 and they went to $479,000 this quarter and the backlog was $964,000 and now the backlog is $972,000.

I wouldn't call this dramatic growth particularly in view of the fact that I think you said a quarter or so ago that you were hiring a bunch of new sales people.

Could you comment on that?

And then the second question related to Crexendo is, is do you think you can build a business around this telecom offering?

In other words, does this have the potential to really be a dramatic success or could you scale that some for me please?

Okay.

Well, first of all, the holidays in both quarters have a big impact on the backlog.

Also, when you hire sales people it takes them a while to get up and running and some of them don't ever make the grade at all and you have to change them out for other sales people.

This was the same thing we experienced in my former business, which we had well in excess of 200 or 300 sales people.

So what we're seeing is very similar to what we had there.

It takes a while to build a staff, but we're continuing that process and we'll be adding more sales people this quarter and following quarters.

As far as the telecom division goes, we have a very large backlog of telecom sales already in the form of individuals that we've sold at our sales events around the country.

One of the reasons for the backlog is it takes a while to get these folks activated and a lot of them prefer to wait until they've got their website up and running.

So we're working, as Clint said, more diligently to make sure that they get their website up and running because once they do that they'll also activate their telecom.

But we're doing several things, we're testing several things to make sure that we do everything possible to get their telecom activated even if their website isn't activated.

We're also doing some engineering things to integrate the web platform with the telecom platform.

We just started selling in a very limited beta test to enterprise customers.

We still need a few more whistles and bells, excuse me, but we closed our first sale and it's already up and running, and the customer is very happy with it.

I'm actually talking to you over our telecom service.

It's basically a digital telephone service and you can see that it's a very clear and good service.

There's no interruption, or lost packets, or any of that stuff.

We've taken quite a bit of design, hard design decisions here to make sure that the network is very, very reliable.

We'll also start selling network services in the form of bandwidth to our enterprise customers.

This was about an $80 million or $90 million business in my former company.

So a lot of the same people that are running our telecom division will be running our network services division.

And I'm really quite encouraged, Jeff.

It's just that making the transition into B2B when we were solely B2C is not an easy thing.

Plus, we've had over a two-year design cycle on our network services, our digital telephone services.

So it takes a while.

We've had to design billing software, order software, fulfillment software, and we're doing the same thing on our network services broadband side.

But these things are starting to come together.

It's a little bit slower than I would have liked but I'm encouraged by it.

John, do you want to add anything about the backlog?

On the network services side?

Yes, so what we rolled out in the first quarter is it's basically a bundled offering, a preview.

So when they purchase from us in a preview, they not only get two months of hosting of our software platform, attendance at a workshop, but they also get a telephone adapter as well as two free months of service.

And we've sold several thousand of them this month.

The challenge hasn't been in selling them, as Steve mentioned, it's been in actually getting them to activate.

So we've been working diligently to get them activated.

We've activated a little bit over 600 so far in the first quarter.

We have several thousand more in the pipeline that we are trying to get to activate.

But it's coming along and we continue to grow that pipeline, and we continue to do activations every day of the week.

It's just a matter of dialing in what works to get them to activate and that's what we're trying to figure out.

The other thing, Jeff had actually asked about the web services backlog.

From the web services backlog, our bookings have been growing every month.

We had out top booking month in April of this year, which actually came close to doubling any month we've had previously.

Marketing investment we've made has started to pay off and the sales people are starting to get better at it.

So we're actually really encouraged with the bookings and the trajectory of the bookings we're having, and you'll see it start to flow through the backlog probably even more so in Q2 of this year.

The most encouraging part about the bookings that we're having in Crexendo is the nature of the bookings and that they're recurring, and they're creating a significant recurring base for us, which allows us to be profitable on a go forward basis when we get the bookings up high enough.

Would you think that the 12-month hosting issue you have would also afflict the teleconference systems as well?

You mean the activation, Jeff?

No, how long it persists because you said earlier that you're having trouble getting people to host for more than 12 months.

That's not true of businesses.

As I pointed out in my comments, our businesses have been very, very sticky.

Oh, no.

I understand that.

But it was said before that you seem to be selling this at workshops too.

Oh, I see what you're saying.

On the B2C side for telecom, that will by its nature will be stickier than the host websites and I'll tell you why.

If you have a telephone in your house, you're currently paying X for it, let's say $40, $50 a month.

We can provide you with telephone service for a substantial savings.

So that's one reason why it's a stickier product.

We're also giving you the ability to have access to your telephone number at home on a mobile device.

That app will be available probably in the next six or seven weeks.

We're actually alpha testing it now.

So on your cell phone, you can have an app that works over the 3G or the 4G network that allows you to get all your calls from your home phone when you're out and about.

It also allows you the ability, for instance the phone I'm sitting at right now has three different area codes and three different numbers on it.

I have my office number on it, which is an 801 area code.

I have my office in Reno, Nevada, which is a 775 area code, and I have my office in Phoenix, which is a 602 area code, all appearing on the same phone.

It appears that way in my Orem, in my office Reno, in my office in Phoenix.

So I never ever miss call.

I will also have the ability to have those phone numbers appear on my mobile device, my iPhone, my touch BlackBerry, or my Droid, my Google Droid device.

So it gives you much greater flexibility, especially with small B2C customers that have a small web store and they need to be doing all sorts of different things and they can't be glued to their phone.

However, if they have a mobile device when that application is available, it will give them even greater functionality and flexibility.

So I expect the telecom services especially to be extremely sticky in both of our divisions, in our consumer division, the B2C, and also the enterprise division.

And it will also, I'm hopeful, once we have the ability to merge these two technologies, to help on the hosting side for our hosted web services as well.

So it's a little early in the process but the initial results are encouraging.

Okay, thanks.

Can I just add one more comment to that, Steve?

Yes, of course.

Just, Jeff, one of the reasons we believe in the StoresOnline channel, the hosted telecom product will be more sticky is because it's actually being presented as a replacement for the residential phone.

In other words, we're going to port their existing home phone number.

And that's being presented as a significant cost savings.

I personally installed it in my house.

I was paying Qwest between $110 and $120 a month and for $25 a month plus my bill for high-speed, which is $60, I'm saving $40 to $50 a month now and I have the phone.

So when we're replacing their residential phone as it is and keeping their residential number, we feel that will make them a more sticky customer.

I see.

All right.

Thanks a lot, guys.

(Operator Instructions) We'll now go to Austin Hopper with AWH Capital.

Good afternoon, guys.

Thanks for taking my questions.

I was hoping you could elaborate or provide some additional color on the competitor pressures you're seeing on StoresOnline.

Is it literally other players in the same kind of seminar type space or how would you describe it?

What we've seen is we've seen competitors and we're not aware of the names of these competitors because they don't put their names on their mailer the way we do.

But we've seen competitors using the same method of sending out mailers and inviting people to seminars in certain markets.

And the way we became aware of it is customers of ours and some of the regulatory bodies thought it was our mailer, and that's how we became aware of it but it is occurring.

Perhaps you'd like to add some more background information to that, Jeff Korn?

Yes, when I became aware of it was I was contacted by at least representatives from two offices of Attorney's General who thought we were reneging on obligations we had and the manner in which we conduct business by placing our name clearly on the mailers and by making certain disclosures, which were not in there.

And I assured both of the attorney's generals who called my office that those were not our mailers and I don't know what they've done since then.

They did not provide us a copy and we have not received a copy from any of our customers, but we know of at least in two states that happening and we've heard of it, as Steve mentioned, from customers in other states.

One of the things that we're doing, Austin, that's going to improve that, if we go to a single event where we sell them training and we either have a training event after that within a few days or a training webinar that will be live and allow them to go step by step.

We're also working on the interface, the user interface for our web services.

This is software release 7 and it should be available by the middle or end of June.

So all of these things are improving the stickiness of our customers and it should drive down the complaint rate to near zero over time, which will also improve the viability of that channel.

I guess more generally, I'm just trying to understand the difficulty that you're having in your StoresOnline business.

Repeatedly you've mentioned difficulties in the economy and that impacting the business, maybe I guess resulting in lower cash rates.

I guess my question, we talk to a lot of companies across our spectrum and within the economy, and a lot of areas.

Things are kind of, have leveled off or improved somewhat.

And so I guess my question is, how do you know it's the economy?

Couldn't it just as easily be that your business and your product offering has lost relevance kind of in the face of the hundreds and hundreds of services online where you can avoid a seminar setting and set up a website, and have a web business?

How do you know it's the economy and not just that your product or your services is just kind of losing relevance?

Well, I don't think it's losing relevance and I'll tell you why.

There's probably somewhere in the neighborhood of 600 or 700 million websites out there and of those 600 or 700 million website, only about 4% or 5% are getting the lion's share of all of the ecommerce worldwide.

So that in itself is a reason why the relevancy of what we're doing is very, very germane in this day and age.

We're especially ---

Steve, I'm sorry to interrupt you, but I'm not saying that the web is irrelevant or people don't want to go on the internet anymore.

But if I go to one of your sessions and learn what it's going to cost me to get a site online versus going to any numbers of hundreds and hundreds of sites on the internet that offer, in my estimation, a very similar service for a price point that looks to be substantially below that, I guess that's more of a pricing relevance as opposed to the relevance of the internet.

Well, yes, Austin, just let me continue if you will please.

We've got two different kinds of customers here.

We've got established enterprises, which are Crexendo Enterprise web marketing services division handles.

Than we have small and home offices.

These are folks that may not have a website, but they have -- they're spending money currently for some sort of advertising and they could use a website.

We're starting to identify them.

We're doing co-branded events with one bank and we're working with another one.

We're also attending trade shows where we go into certain verticals, like florists, and plumbers, and things like that.

We're having very good success there.

The only area that we're struggling in is the pure consumer that may want to have a website and may want to start a small business.

Now, the obvious market for that is people that are unemployed but the issue with the unemployed, and as you know, unemployment actually spiked up this last month from 8.8% to 9% and it's been stubbornly high by historical guidelines here or historical reference.

That's the area where we're struggling, and as Clint pointed out and I pointed out, we're making some serious adjustments.

We're analyzing all of our data for the last couple of years.

We're looking for better credits and better neighborhoods, which will drive our marketing costs down and should attract better customers or better prospects.

But I sincerely believe that the relevancy of what we're doing is not the issue here.

It is exactly what we think it is and that's the unemployment rate.

There's still a lot of pessimism out there.

There's still a big problem accessing credit and the fact that people will eat and put shoes on their kid's feet before they're going to pay for something like a website is probably part of the reason.

So what we're doing is, is we're driving our costs down but we're also driving the sales price of what we have down and we're training, and we will get these people hosted through a more intense training program.

And we can do it relatively inexpensive by doing it in webinars and that sort of thing, and by charging them on a monthly basis instead of trying to sell them a $3,000 or a $6,000 package.

The monthly spend can be as little as $75 to $100 a month, which includes the web hosting, the training, and a telephone service.

So it's not much of a stretch for them to do that and it allows us anywhere from $600 to $1,000 a year in recurring revenue as opposed to one time sales revenue.

Okay, and last question.

You conducted a share tender at some point last year and both a lot of stock back.

You had some very, very difficult results especially in this quarter and I'm just wondering sort of from an ongoing perspective the viewpoint of the buy back.

I mean is it cash is becoming increasingly precious so it's just not something that we can do because our results have been so bad, and presumably even worse than you expected.

I can't imagine you would have spent so much money on your own stock if you knew your business was going to look like this.

Is the buy back kind of dead for a while or just curious?

Well, we still have a buy back in place and we do it based on the circumstances at the time.

If we were to do another tender that would take Board approval and we haven't discussed that with my -- with our Board.

So it's probably not a good idea to speculate where the Board is.

But I can tell you this, I have been a buyer of this stock ever since I came into the Company.

I now own about 3.7 million shares of the stock and depending on where the stock is, and the liquidity in the stock I personally will probably continue to buy shares of this Company because I believe in what we're doing.

And I know we had some of the same issues in my previous business and these things take a little bit of time.

But I am just as optimistic, probably more so now because I see the potential of what we can do with our telecom services.

We still have a lot of work to do and making the transition from a purely B2C Company to a B2B Company is not an easy thing.

It's sort of like threading a needle in a hurricane.

So you can appreciate how hard it is but we are getting traction.

We're seeing good positive results from the customers that have these new services.

We're getting bigger customers.

We've closed some very large companies on our Crexendo Enterprise Web Services side of the business.

We're starting to get some good co-branding opportunities with other businesses that deal with B2B customers that they want to offer additional services to their customers.

And I know it's not a question of if, it's a question of when.

I'm encouraged, excuse me, I'm encouraged by the fact that this quarter our cash flow should be probably neutral, either slightly positive or slightly negative but nothing like you saw in the first quarter.

Maybe you could comment a little bit about cash flow, John, if you would?

Sure.

From a cash flow perspective from this quarter, again, it's a month end.

But what we're seeing specifically from the StoresOnline perspective, our cash percent at the event has gone up in April and if we continue on the trend, we've been at in April and the first week of May, I would expect that you would see a decrease in cash for the quarter.

But there's still two months left in the quarter, but right now the trending in April and the first week of May has been much better than it was in the first quarter of this year.

Yes, and the other thing is we'll continue to drive down our marketing expense and other related expenses.

For seeing if we're putting mailers out at a lower rate because we're only going into zip codes where we know we've had success over the last four years.

That automatically drives the cost of marketing down.

We don't know exactly by how much yet but I think it will be substantial.

We're also going to get better utilization out of our sales teams.

We're going to transition some of our sales people into the Crexendo division.

So there's a lot of positive things going on here but it's not something that's easy or will be easy and I pointed this out on previous quarterly conference calls.

(Operator Instructions) We'll now take our next question with Mr.

Jim Dowling with Jeffries Capital.

Good afternoon, Jim.

Hey, Steve.

How are you?

I'm doing well, thanks.

How are you?

Good.

What I'd like you to do to the degree you feel comfortable is to try to translate your enthusiasm on the ultimate B2B business model as the company goes from one to the other.

Is this a $25 million business?

Is it $50 million?

Is it $250 million?

What is it and what kind of financial metrics are we talking about?

Well, I can tell you this.

First of all, we have the potential for mostly a recurring revenue model here, quite a bit north of 50%.

As John pointed out, our recurring revenue in the Crexendo division was over 50%, a little bit over 50%.

As we get more hosting revenue in there, more network services and more telephone, digital telephone services in the mix, this will become even greater than 50%.

The thing I like about, excuse me, the thing I like about this business over my previous business, and we were doing over $450 million a year in revenue in the previous business, but we were selling telephone systems to businesses.

In this business, it's services that we're selling.

We can sell the trunk lines, the internet service, and the web services to business and we get paid on a monthly basis.

So you're not selling a big chunk of hardware that has to be financed or something like that.

The revenue is sticky and it's recurring.

Now, we can also sell the phones but the switching gear is shared in a data center.

So that automatically drives cost down.

Every single business out there could use our digital trunk services and our internet services, and our web services.

On the consumer side, it's more of a training proposition and we teach people how to use the tools properly and how to get a little supplemental income, or in some cases actually wind up with a small business.

I think this Company can be bigger than the previous company.

I'm not in a position right now to tell you when I think that will occur, but I think that we have a very good opportunity here.

The way we're going about marketing our products on the enterprise side, we very seldom run into competition especially when we're co-branding in these industry vertical conferences or with partners like banks and insurance companies, and so on.

Virtually no competition and every single company out there is interested.

It's usually just a timing issue if they don't sign with us when we make our presentation.

Thanks, Steve.

You bet.

We'll now take our next question from Craig Samuels with Samuels Capital.

Good afternoon, Craig.

How many sales guys do you presently have for Crexendo?

In Crexendo, I think we've got 12 or 14.

Are you tracking a plan there or ahead or behind?

We're about where we expected to be.

Unfortunately, we've got a couple that are on the bubble.

So we're going to have to replace them.

I'd like to be able to add at least five or ten per quarter so that by the end of the year I'd like to have at least 30 or 35 producing sales people.

What's been the average revenue for these guys?

It's growing.

It's currently at about $40,000 per month but it's tracking upward from that.

Our best sales guy is doing right around $90,000 or $100,000 per month.

In bookings, not in revenue.

Yes, in bookings.

I was going to say, then the others must be doing zero or negative.

No, there's a lag.

If you sell $90,000 worth it's usually over a six or a 12-month period that the revenue is collected.

Right.

What's been the largest sale to date?

I think the largest single sale, and it was just web services, did not include telecom or internet, was about $80,000 or $90,000.

Is that right, Clint?

Yes, $90,000 in April and it was actually an 18-month contract for link building services.

And that's to a company that's about how large?

I believe the company's revenue is probably in the $30 million range.

When do you guys go up the food chain and attack revenue, corporations with revenue north of $100,000 or -- ?

We're already doing that.

One of our salespeople who came out of my former business just started with the Company two weeks ago and he's already contacting much larger customers, prospects.

Inter-Tel had how many customers?

We had about 100,000 active customers.

And is anybody currently pursuing that list?

We will be.

It's -- we're --

What are you waiting for?

We're not waiting for anything, but I wanted to have a full product offering before I went out there.

We won't have our network services up and running for at least another couple of months.

But as soon as we've got all of our telecom products, our networks services and the web services, we're going to attack that customer base with a vengeance.

What about -- are there any opportunities for you guys to partner with, this may be extreme examples, but the likes of Googles, Amazons, eBays, Facebooks?

I don't think they're the natural partner for us.

I think a natural partner would be someone like a bank that has business customers and they want to offer their customers more services.

I'm talking about on the B2C side.

I mean I attended here locally one of your seminars --

Even on the B2C side, banks are a much better natural, insurance companies, brokerage companies because they handle both businesses and consumers.

And we can stratify the -- their customer base, offer them services that we share.

We pay them a commission.

Plus it drives services to them in the form of merchant services, credit card services, and so on.

So if that's a logical partner, are you in discussions with anyone now?

Yes, we're in discussion with actually four banks currently.

When you're talking about banks, are you talking about the large national money centers or small local within states?

Small to large?

As far as cash break even, where are you now on a quarterly basis?

For the current quarter?

Just --

Are you talking about from a Crexendo perspective?

No, no, no, just overall Company-wide.

Well, as I said, I expect this quarter to be up a little or down a little.

It's going to be much improved over the last quarter.

Because we're driving marketing expenses down.

We're driving headcount expenses down and productivity up.

But some of these changes won't occur until the third quarter.

But we'll make the bulk of the changes this quarter.

So basically, you're kind of stuck in the $10 million to $11 million revenue area?

I don't know.

I think it's premature to speculate.

What other offerings will you be introducing in Q2, Q3 can further drive revenue and/or make the bundled offering more attractive to a prospective customer?

Well, we'll have broadband services by Q3 and the average business is spending anywhere from $1,000 to $10,000 a month for broadband services.

We'll have our telecom offering available at the enterprise level, but a lot of this is driven by the feet on the street on the B2B side.

On the consumer side, the StoresOnline side, it's driven by marketing.

Is there any competitive edge to your offering or is it basically you're just selling commoditized products?

Well, we're the only ones that you can get it from a single source and that makes it a lot more convenient to the customer.

Instead of having to deal with three or four different vendors, they deal with one vendor and a single bill, a single customer service representative.

Steve, I would also add on that, what makes us unique on the web services side is we're not only providing commoditized SEO services or a website, we're also offering, one of our differential advantages is the training suite that we have.

And so it's not just, and this is our message to our potential customers, is it doesn't matter if you have a website, you have to market it.

So you can either, A, you can market it using our services, we'll do it for you, or B, which is the option that consumer customers take is that starting our training programs to learn how to do it.

So once you've built the site, you only build the site but you also have the knowledge and the capability to promote the site.

Right.

So I think overall you guys were expecting your business to be significantly stronger yet it continues to stall, right?

I mean that's a fair statement?

I wouldn't call it stall.

It's in transition.

We have had some difficulties in the StoresOnline division, but this is nothing new.

We've talked about that for the last couple of quarters.

All right, but ultimately if you're trying to go from a B2C to B2B you've got to replace $40 million worth of StoresOnline revenue ultimately?

We'll still have a StoresOnline division.

It's going to be a lower sale, but it's going to have a lower cost structure also, and we believe it will be sticker.

When you were modeling Crexendo six, nine, 12 months ago, would you have expected it to be overall corporate revenue higher than today?

Or is that tracking at or below -- ?

It's below expectations but it's partly because it's taken us a little longer to get our telecom products out and up and running.

Any other, I mean I know you consider telecom could be a significantly largely opportunity.

Anything under development that could be similarly large forthcoming under development behind closed doors?

We're just now starting to sell the telecom product on the enterprise side.

So that's just coming out of development.

We're selling it in the consumer side because it's a plain Jane vanilla product but it will still have great flexibility than just about everything out there and especially greater flexibility than whatever they currently have from Verizon, AT&T, or Qwest, or one of the cable companies.

But on the enterprise side, you have to have a few more whistles and bells.

And we'll have the products and the whistles and bells necessary here in the next six to eight weeks.

I would suspect that we'll be able to start selling enterprises in a much more aggressive manner by the end of this quarter, the current quarter.

And the last question, I didn't hear anything about Asia, India in particular.

Any progress there?

Yes, we are making progress there.

Perhaps, Clint, you'd like to talk about that.

Yes, so our partner in India, we are just on the brink of launching the website and proactively going to their base with our services there.

So the website is almost complete and their sales teams are being trained right now to take this offer to their customer base.

What about in other Asian countries?

I'm not trying to -- everyone is talking about China, but possibly English translation is a challenge.

But other places like the Philippines where English is pretty prevalent.

Are you guys exploring any opportunities in any other countries where English is widely spoken?

We're not currently exploring other opportunities in other countries and the reason we're not is we don't want to dilute our efforts in the most developed market in the world, the United States.

Once we start to get proper traction and things are paying their way and making a profit then we'll look at other countries.

India, we've already got the relationship, excuse me.

We already have the relationship and we're nurturing that opportunity and it's starting to get there.

It has great potential but the prices that we're able to charge in that market are substantially less than what they are in the US.

And the last question, the tone of your release was about as dour as I've seen in multiple quarters.

What's it going to take to turn your kind of negative commentary back to more positive discussion?

I know that you're kind of an eternal optimist and I'm an optimistic pessimist by nature.

But we've had this discussion before, right?

Yes, we have.

What data points, in other words, can investors look for from you to kind of feel a little bit better?

Well, one of the things we're going to start doing, we're actually going to show you the number of posted customers we have starting with our second quarter results.

Now, you have to remember that's going to be a small number because it will be the first time we've ever done that but you'll be able to start modeling the ramp and that will give you a better visibility into what the future looks like.

But all of this, like I said, it's like threading a needle in a hurricane.

I know personally, and maybe I am a very optimistic person, but you certainly wouldn't want a pessimist running your business for you.

But I know that the potential is great.

I'm going to continue to take advantage of dips in the stock.

Obviously, I can't do anything for 48 hours because we're in a blackout period.

But I continue to put my money where my mouth is, plain and simple.

Right.

Good deal.

Thank you.

You bet, Craig.

And we'll now take a follow-up question from private investor, Jeff Bash.

I have a comment and a question, Steve.

I want to say that hearing that you're continuing to be interested in the stock and your comment about the current quarter being in the neighborhood of cash flow break even changed my attitude about what I first read at around 4:15 considerably and I really appreciate the additional color and discussions you've given in the latter part of this conference call, particularly the comment that you see the potential of this company as being as much as it was as Inter-Tel.

So it's interesting, but the question I have is when you first came on board you talked a fair amount about VARs as helping you sell the product.

And now it seems to be the focus is more on a direct sales force.

Now, the question I have is that given that the telecom (inaudible) frame by itself seems to be so compelling, wouldn't that be something that would be a natural product for the VARs that used to sell for, let's say, Inter-Tel, your products then to go into the marketplace and penetrate much more rapidly than we might get at the 15 salesperson or the 30 salesperson direct sales force could deliver, at least in the terms of short-term progress?

Well, that's certainly a good observation and we are going to be looking at what I would call a reseller program.

In fact, this afternoon I'm actually meeting with some individuals to talk about just that.

So no question about it, that's a good opportunity for us and we will be exploring that.

But we're not quite there yet as far as the robustness of the product on the enterprise side.

We can probably do it if we're just replacing a company's trunk lines.

But when we start replacing their telephones on the desktops that's going to take a little bit greater capability than what we currently have and that probably won't occur until the third quarter or maybe even the fourth quarter that we can start adding VARs.

And once we get the telecom VARs I'm confident that over time we'll get folks selling the web services or at least we'll get some Cobra-ending opportunities where we sell it and we pay them a commission.

Okay.

Thanks, Steve.

Thank you, Jeff.

It appears there are no further questions at this time.

Mr.

Mihaylo, I'd like to turn the conference back over to you for any additional or closing remarks.

Thank you, Lisa.

Well, this has been one of the longest calls we've had.

It's about an hour and 16 minutes according to my timer on my phone.

I appreciate everyone's interest in the Company.

I appreciate your support and we look forward to talking to you after the second quarter.

Thank you and good day.

This does conclude today's conference call.

Thank you for participation.