Crexendo Inc (CXDO) 2011 Q2 法說會逐字稿

Good day everyone. Welcome to the Crexendo second quarter 2011 earnings conference call. Today's call 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.

Good afternoon everyone. Today, I have with us Clint Sanderson, our President, John Erickson, our Chief Financial Officer, Jeff Jarvey, our Controller, Dave Krietzberg, our Chief Administrative Officer, and Jeff Korn, our Chief Legal Officer. Before we get started today, I would like to have Jeff read us the forward-looking Safe Harbor statement.

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, like, believe, expect, anticipate, estimate, will, and other similar statements of expectation, identify forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. The risk factors are explained in detail in the Company's filings with the Securities & Exchange Commission, including the Form 10-K for fiscal year ended December 31st 2010, and the forms 10-Q for the periods ending March 31st 2011 and June 30th 2011. Crexendo 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 occurrence.

Right now, I would like to turn the call back to Steve. Steve.

Thank you, Jeff. As all of you are aware, I am sure, we made a decision the first part of July to change the way we sell our StoresOnline products to our SOHO customers, our entrepreneurs, and individuals. We are aggressively pursuing sales through online marketing, inside sales, and affiliates. We have, however, discontinued seminar sales. We think this will be a better way to reach those customers, and we also think that it will reduce our expenses tremendously. In addition, we beefed up our customer service towards those customers, so that we can even help them more in the future.

Rather than going through all of the numbers at this time, I just want to state that as a result of that, the sales from the previous quarter probably aren't that meaningful. What is more meaningful is the amount of cash on our balance sheet, which is nearly $12 million, and the net Receivables, which are fully reserved in approximately $24 million or $25 million. Going forward, of course the important things are the number of salespeople that we have, the sales through our Crexendo Direct, which would be our Crexendo Business Services and web services, as well as Crexendo Telecom, and of course, a number of customers that we have in our StoresOnline division.

At this point, what I am going to do is turn the meeting over to John Erickson to go over all of the granularity and individual information.

Thank you, Steve.

You bet.

In order to provide you more clarity, on what to expect from our operations in coming quarters, as a result of our decision to suspend seminar operations, I would like to provide detail of our revenue and cost by channel, and provide guidance on what remains of the seminar channel, and what no longer exists. What you will see is that we are eliminating approximately $11.5 million in revenue based upon actual Q2 results, and approximately $15.3 million in expenses. Here are the details.

From a revenue perspective, we had approximately $17.5 million in revenue for Q2, which is broken down as follows, Crexendo web services revenue was $550,000, which grew at a quarter-over-quarter rate of 15%, from $479,000 and a year-over-year rate of 51% from $365,000. This revenue remains and is expected to grow in the future. Our rate of growth will be dependent upon our ability to hire sufficient qualified sales reps, and increase the productivity of our current sales reps. Today we have 15 sales reps, and hope to hire an additional three to four reps per month.

StoresOnline was $16,928,000, which grew at a quarter-over-quarter rate of 20% from $14,089,000 in Q1, the increase from Q1 is primarily due to the seasonal nature of the StoresOnline business, and that we don't conduct seminar events in January. We also had a slight decrease year-over-year in StoresOnline revenue of 1% from $17,083,000 last year. StoresOnline revenue is broken down as follows, Cash sales at our seminar events $9,558,000. As a result of the suspension of our seminar sales channel, this revenue will cease.

During the second quarter, we saw an improvement in our cash as a percentage of sales from the first quarter to 39% in Q2 from 29% in Q1. Historically, we have found that we really need to be at about 50% cash percentage, in order to have sustainable profitability. Though the 39% was an improvement, it was not sufficient, and it was even more problematic considering the better markets we served that quarter. We were able to hold steady in our workshop close rate, which was 30% in Q2 compared to 29% this past Q1. However we began to see significant negative trends in our marketing results as the second quarter progressed, as we found it difficult to attract a sufficient number of quality prospects at our events, as evidenced by a significant decrease in the number of attendees at our events throughout the quarter, which started out at an average of 92 in April, dropping to 82 in May, and bottoming out at 58 in June. In order to have sustainable profitability in this channel we needed to average around 90 attendees.

Given the current state of the economy and the impact it has had and continues to have on the StoresOnline seminar customer base, it appeared that we would experience significant negative cash flow if we continued in this channel in the future. Cash collected on our Accounts Receivable balance was $4,383,000, a 5% increase over Q1, which was $4,204,000, and a 5% decrease over Q2 last year, which was $4,615,000. This revenue stream will continue in the future despite the suspension of the seminar model. However, the revenue we receive from our Receivables will continue to decline in the future.

Based upon our current collection rates, we expect to collect approximately $24.8 million in revenue from our Receivables over the next two to three years, with approximately $12.9 million expected to come in the next 12 months. The remaining $11.9 million is expected to be collected in the years 2 and 3 at a decreasing rate.

Hosting revenue was $1,500,000, a decrease of 10% from the prior year, which was $1,121,000. This revenue will continue in the future despite the suspension of the seminar model, and while we expect to add to our hosting revenue through other sales channels, the base of customers representing this hosting revenue number is expected to decrease in the future, as a result of high historical customer churn of our store's Online seminar base. That said, we have increased our customer service outreach programs to assist these customers, and hope to retain a high percentage of them.

Commissions from third parties was $1,978,000 in Q2, which showed a slight increase from Q1 which was $1,908.000, but more importantly, a 41% decrease from the prior year, which was $3,336,000. Commissions from third parties which has historically been one of the largest contributors to our profitability in the seminar channel has been hard hit by the poor economy, and is not expected to continue in the future, as our own internal inside sales force will be used to sell the additional products and services our customers need.

In summary, based on this quarter's revenue results, we expect to retain on a go-forward basis about $5.4 million of the $16.9 million in StoresOnline revenue or approximately 32%. In addition to the $5.4 million in revenue retained, we also retain approximately $1.3 million in interest received on our Accounts Receivable balance for the quarter, which is included in other income. I will point out however, that both the principal on our Accounts Receivable and the interest on that balance will run out over the next two to three years. In addition to these items, we will have approximately $3.2 million in operating deferred revenue, which will roll into revenue over the next six months.

From an expense perspective, we had $21,955,000 in total operating expenses, which is broken down as follows, Crexendo web services expenses totalled $1,149,000 in Q2, compared to $808,000 in the prior year quarter. These expenses remain and will increase as we add additional sales reps. Additionally, you will see expenses increase as a percentage of revenue, as it will take time to get the new sales reps to an efficient sales level. Crexendo network services expenses totaled $507,000 in Q2 compared to $339,000 in the prior year quarter. These expenses remain and are expected to increase in the future as we open different customer acquisition or sales channels.

StoresOnline expenses totaled $18,103,000 in Q2, compared to $15,270,000 in the prior year quarter. The majority but not all of these expenses related to the sale of products and services in the seminar channel will go away, as a result of this suspension of seminarswe expect approximately $15.3 million of these expenses will not be retained, while $2.8 million of these expenses will be retained primarily in the customer service and support of our customer base.

Unallocated corporate expenses related which mostly to R&D, corporate salaries, depreciation, stock option expense accounting and professional fees totalled $2,196,000 in Q2, compared to $2,073,000 in the prior year quarter. These are expected to remain at those same approximate levels for the short-term. In summary, as a result of the decision to suspend the StoresOnline seminar channel, based on Q2 actual results, we are eliminating approximately $11.5 million in revenue, and approximately $15.3 million in expenses. At the same time, we will be adding to our expenses as we increase our direct sales force, inside sales force, and online sales channel.

Now for a discussion on the cash flow and the balance sheet. During the second quarter, we generated positive cash from operations of $538,000, compared to use of cash of $3.3 million in the first quarter of this year. As of June 30 2011, we have cash, cash equivalents, and restricted cash of $11,666,000. Our Accounts Receivable balance is $24,787,000 which as we discussed earlier is expected to result in future revenue over the next two to three years.

From an income tax perspective, given consecutive quarters of loss, we have experienced, and the uncertainty surrounding our operations in the future, we determined it was necessary to place a full valuation allowance on our deferred income tax assets. As a result of this valuation allowance, our income tax expense in the second quarter was $6,162,000.

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

Thank you, John. At this time, what I would like to do is open this up to questions from the folks that are on the line with us.

Thank you very much. (Operator Instructions). We will take our first question from Neal Goldman with Goldman Capital Management.

Good afternoon, Neal. How are you?

Good. The numbers you ran through were very fast. Could you just give us an estimation of what is going to be continuing revenues on, I know it is going to change over time, and continuing expenses as a net number?

Yes. So justbefore John gets into that, Neal, be aware of the fact that we are going to be diligently working on expenses to bring whatever number John mentions down, as we go forward. Now we will have some costs that will increase, like the cost of ramping our sales force.

I understand.

Go ahead, John.

Yes, Neal from a StoresOnline perspective, we had $16.9 million revenue in Q2.

Right.

Given the suspension of the model, we would have had $5.4 million in revenue in Q2.

Okay.

From an expense perspective, we had $18.1 million.

Right.

We would have reduced $15.3 million. So we would have been left with $2.8 million.

Okay.

In expenses.

For the StoresOnline. And then we have--

Crexendo, we had $550,000, which we expect to increase in the future.

Right.

And from the Crexendo network services side, it was really just starting. It was nominal in revenue but we expect that to increase in the future as well.

The expenses associated with those two segments?

The expenses associated with those two segment, from a web services side you will see increases in sales expenses as we ramp this sales force--

I am talking about the last quarter basis, where you did 560-some-odd thousand. Right?

The expenses in the telecom?

Yes.

Correct.

You lost some money in that business, right?

The expenses in telecom in this past quarter were mainly R&D related, as well as acquisition related is the network services division paid for acquisition of customers, that were in a free trial period. That free trial period has started to expire, it has started to generate revenue in network services, it will continue to generate revenue as we add telecom-specific sales reps, and open up telecom for sale through our direct sales force on the Crexendo web services side.

In the last quarter, you lost like 600,000? Right, from that?

$600,000 from Web services and $489,000 from Telecom.

Call it 1-1? Right. Then corporate overhead, you said was 2.2 million?

2.2 million, which will remain at that for the short-term and then--

So overall, 5-4, call it $6 million between the remainder of the stores and the Crexendo and the telecom, and on a current level, 2.8 went 3.3, 5, 3, so you are slightly cash-flow positive or profitable at this point?

Add an interest income of about $1 million as well.

Right. So you are making $1.5 million, round numbers, as you collect the Receivables assuming that you are accurate in that assessment. Is that correct?

Correct. You will see in the Receivables collections, you will see they will remain somewhat consistent with this last quarter, trending down slightly for the next three to six months, and then you will start to see it trend down even more after six months.

As you announced the termination of the StoresOnline model, did you see any further diminution in the Receivable collection?

We have not seen any evidence in our Accounts Receivable as of yet.

Okay.

We are taking steps from a customer service side and from the collections side to take care of that.

Okay.

So that it doesn't happen.

We have actually increased our customer service and our outboard sales in that area Neal. Frankly, I think that the $24 million or $25 million in net Receivables are probably very, very solid.

Okay. The real key then is how rapidly we can grow the telecom and the Crexendo services. I know you are adding a lot of sales people. What is your vision out there, Steve? And then talk about --

We would like to have 30 producing salesmen by the end of this year, and probably another 50 to 60 by the end of 2012. Right now, they have a quota of around $500,000, but just based on experience, and when we add the telecom products, we think that it will be closer to $1 million each. But obviously, it takes time for that to ramp.

Alright.

So I would think that we will be very fortunate if we are at 30 to 35 salespeople by the first part of 2012, that are producing at least $500,000 in sales annually.

That is basically a SaaS model? A monthly charge.

Yes. It is all monthly revenue. The bulk of it is. I would say 90% to 95%, some of it will be for being for building websites, but most of it is search engine optimization, link building, conversion rate optimization, telecom, that sort of thing, and that is all monthly recurring, plus of course, anyone that we build a site for is going to need hosting. In addition to that, we are diligently working towards reselling network services in the form of broadband. I will let Dave Krietzberg address that in just a minute, since that is part of the area that he is responsible for. So we are pretty optimistic about what we can do here. We are going to be opening up Utah to telecom here, as we speak practically, and we are going to be increasing our efforts in Salt Lake City, which will give us a much bigger footprint. In addition to that, we are hopeful that we will receive telecom approval in Arizona at the end of this month, and there is just a handful of states that we are state waiting for approval in. So we are pretty optimistic about the sales.

What kind of capital expenditures are you going to need?

Well, we are probably going to need $3 million to $5 million in capital expenditures as we build out data centers and switching centers. But it is going to be over the course of the next 14 to 16 months so it is not going to be all at once. Actually what I am going to do is I am going to have Clint Sanderson comment on the sales effort, before I have Dave Krietzberg talk about the broadband services.

Okay. So the sales effort is obviously a focused recruiting effort on recruiting sales, competent sales talents all over the country. And we will have sales teams both in Phoenix and in Orem, and then we will also have sales representation all over the country, so we have reps here and then we also have reps in the location.

We are confident those reps will be able to offer both our web services and our network services to the businesses that they approach. That is priority Number one right now is recruiting, training, and getting those sales teams productive.

Where are you finding these sales persons from?

We have all of the traditional sources, Neal, everything from referrals from our current successful sales people.

That is probably the best. Yes.

To all of the recruiting services, the popular recruiting services out there, we are utilizing all of those right now.

And we are also getting some high-interest from our former sales folks at Inter-Tel.

When you look, Steve, I mean, since you started at Inter-Tel, when you look at the offering you have today, both from a telecom and a web servicing versus what you offered in the beginning at Inter-Tel, how would you compare in terms of opportunity?

I think the opportunity is much greater. We have a broader product line. We are going to be adding broadband services some time next year. I am not exactly sure when, because we have to build out these data centers. We will be offering data storage and retrieval for our customers. That will give us a very robust small to mid-size business offering, which is probably just infinitely broader than what we had at Inter-Tel when we first started.

At Inter-Tel when we first started, we sold nothing but telephone systems that were customer premise equipment, and there were a lot of issues with financing those products, and a lot of issues with getting them installed, serviced and so on. We had at the end when the business was sold, we had over 700 trucks on the road. Most of what we are doing today can be done from the data center. It is all recurring revenue. At Inter-Tel, we had no recurring revenue in the beginning. By the time the company was sold, we had about 50% of our revenue was recurring.

This model is a much, much broader product offering. It is mostly recurring revenue. At least 90% to 95%, and in most cases on the telecom side, we are able to save the customers a considerable amount of money. So there is a lot of advantages to what we are doing today versus what we did at Inter-Tel when we first started.

On the public companies out there, who would be similar offerings to what you are offering?

Well, there is nobody that offers everything that we are offering right now. There are similar companies, 8x8 is similar on the telecom side. What Web.com

Web.com is similar.

Probably similar. Web.com is probably similar on the other side but they handle much smaller customers than we will be handling.

Okay. Okay. Very good. Thanks.

You bet.

We will take our next question from Jeff Basch, a private investor.

Good afternoon, Jeff.

Hi, Steve. How are you? You made an excellent presentation today. And I think it was very helpful, and of course, Neal's questions were good. I have one different way of looking at the numbers that I would like to ask about. The net loss for the second quarter was $9,345,000, and if you take away the tax effect, it was $3,183,000. And the reduction in revenue versus the reduction in expenses is going to create a gain of $3.8 million. So do you think it would be fair to say that if this had been in place for the last quarter, you would have been $3.8 million better off than the $3.183 million that you actually lost on an operating basis?

I am going to trust your math, Jeff. I am going to also let John Erickson talk about the details in what you are asking.

Yes. Jeff, the numbers that I disclosed is what revenue would have been reduced and what expenses would have been reduced, is based upon the actual Q2 numbers. So had we not had seminars.

You would have been $3.8 million better off?

Correct.

Since your loss before taxes was $3.2 million, in effect you would have had an operating profit of, a net income of 600,000?

Additionally, $1,075,000 of that $3.1 million loss was related to restructuring and other one-time charges associated with it.

Okay. Pushing to $1 million in terms of where you are starting with going forward?

That is correct.

Keep in mind what I said about expenses will increase as Crexendo adds sales force and our Receivables and interest will started to trend down as time progresses.

I am aware of that, but then also, expenses in other areas might decrease.

That is correct.

Now some general questions about the new Crexendo initiative. Roughly how many business customers do you have in Crexendo today excluding StoresOnline type related customers?

We have approximately 400.

And do you have any feel as to, well let me introduce this question. I look at the numbers, and I say well Q1 was $479,000 sales in Crexendo. Q2 was $550,000 which is up 15%, your backlog went from 972 to 1196, up 23%, which are decent quarter-to-quarter gains but it is going to obviously, at that rate, take some time before you see material absolute numbers. So I am just wondering, do you have an image as to how long it is going to take before you go from, let's say from 400 customers to, let's say 4,000 customers?

That is purely a function of the number of sales people that we have in the Company. But I think it is doable by the end of next year.

Okay. Good.

And that would just be the Crexendo customers. Telecom, I think we can do a little bit better because you are actually looking at savings for each of these customers so it is almost a no-brainer.

Would it be fair to say since your answer to Steve's question about the market opportunity that you saw as being very sizeable, that you see destiny was within your own control, and execution expertise, as opposed to a situation where maybe you are going after a limited market where it might be tough to make a sale? If you execute well, we are going to see success here, and it is less dependent upon the environment, per se?

I would agree with that statement, Jeff. Every potential business out there needs our services. Regardless of their size. Now obviously, we are not in a position to handle large, large accounts yet. But at some point in time, just like at Inter-Tel where we could handle customers with thousands of employees. We will be there. I am not going to predict when that will be. But it will certainly be within the next four or five years.

You could achieve reasonably good margins in this business, despite the fact that some of the products are considered sort of commodity-type products?

Yes, because we are also going to have a lot of services over and above premium services, like a call center sweep applications, which is a very sophisticated software sale, and we sell it on a SaaS model. Also operator services where we will have live operators, and these people will not be in India or China. They will be in the United States speaking with a nice, Midwestern accent. You won't be talking to Rajiv, or anybody like that. So I think people will be very happy with the fact that we are going to be employing Americans. And obviously that is not to disparage Indian people, but we want to keep the sales here in the United States, and the jobs in the United States.

Okay. Now does the challenge small business face, still face, which has been given lots of coverage from time to time in the press, do you think make it easier or harder to achieve success with your offerings, or does it vary some where the web services may be a little more reluctant to spend the money, and on the telecom you can offer real savings, so there is less reluctance. Is that a fair assessment?

Not really. I think you are forgetting the fact that the money we save them on telecom can be used for web services to help them increase their sales. And we are finding that as time goes on, most of our customers wind up eliminating the Yellow Pages, that is becoming very passe.

They can have both services and eventually network services and also, data storage and retrieval for probably less than what they are spending now for everything. All of their sales and marketing, Yellow Pages, people that do these things in their company, as opposed to outsourcing it to us. Another thing that I think would be important is to have Dave Krietzberg talk about network services, and when we expect to launch that. Dave, do you want to?

Sure. Thank you, Steve. As you said earlier, the gist of it is really a cost-savings initiative as we bundle our telephony features and product offerings along with the bundled broadband services and web services, we think we will have a unique offering to offer cost savings to the customers, for what they are currently paying, plus a very flexible payment plan because it is on a monthly basis, and they are using the services that they need on a monthly basis. So as their business grows, they will be able to easily add on to their services as needed.

As far as the actual broadband telephony services, we are finalizing the implementation with Level 3 backbone, so we will be able to offer high quality broadband services, to a majority of the markets we will be in, we should have, starting to see some of that growth next quarter.

When are you coming to New Jersey?

We can convert your phones right now in New Jersey.

With Verizon?

No. With Crexendo.

No. No. No. No. If you have a Verizon backbone?

Yes, it would be Verizon for now. If you wait probably about two months, we will be able to give you backbone from Crexendo. We have to finalize our billing software, and some other things, but like we found out at Inter-Tel, the more products and services that you offer, the stickier the customer is, and sticky is really important. We have less than a 1% attrition rate at Inter-Tel. I think we can get to that with our Crexendo customers probably by the middle of next year.

Okay. Terrific. Thanks for your guidance and help.

You bet Jeff.

We will take our next question from Walter Disney, a private investor.

Good afternoon, Walter.

A couple of questions that I had. One of them was on your $24.7 million Receivables, is that the total amount of receivables at this point? Or is that the total amount you think that you are going to be able to collect?

Based on our historical collections rate, that is the amount that we expect to collect. However, our gross Receivables are considerably more than that.

That is the net Receivables balance.

Okay.

We feel confident that will be collected.

Okay. Great. Another question that I had was, on the hiring of your new salespeople, what is the period from hire to when they are actually able to get through training, and do some selling?

It depends on their experience level. Some of them hit the ground running. Others take anywhere from 60 to 120 days. Do you want to expound on that, Clint?

Yes. Based on what we have done to this point in Crexendo, we are planning on 90 days as a ramp-up period. That is what we have built in to our model, moving forward, and that is what our training programs are built on as well is a 90-day ramp to full productivity.

Okay. And one last on the sales, you had indicated that you were doing promotional free period sales. Are you expecting to be doing that as a standard as you are getting more of the in-house salespeople?

That was only done through the seminars when we were initially testing the telecom products. And it was only--

That is not continuing then?

No. Not at all.

Okay.

On the website for the online offerings, you will however see some 30-day free trial periods, and things like that, for the online Website offering.

But that is basically for individuals, consumers?

The StoresOnline type customers.

Okay. And one other question is, do you have any --

By the way I invite all of you to go up on our website, and convert away from that expensive offering that you have from your local telephone company.

Sounds good to me. Do you have any web based sales initiatives going?

Yes. As I said earlier, we are looking at affiliate programs. We are looking at web sales, and we are looking at inside sales to reach out to the potential customers.

Okay. And then last question, which may be just clarifying that, are you establishing sales partners through banks or professional companies that can partner with you to offer services?

Yes. We are looking --

Is that part of it.

Yes. We are looking at banks. We are looking at insurance companies. We are looking at anybody that has a customer base that fits into our profile.

Great. And have any signed up so far?

We have had a trickle from Bank of the West, but we are aggressively working with several banks, and these things take a long time, because there is such an approvals process but eventually we think it is going to pan out for us.

Great. Thanks then.

You bet.

And with no further questions in the queue, I would like to turn the call back to Steve Mihaylo for any additional or closing remarks.

Thank you, Ann. I would like to thank all of you for being with us today. We will be releasing our third quarter results probably in early October. Say again? I am sorry. Early November. Yes. The quarter ends September 30th, which is essentially early October. So it will be early November. We look forward to being with all of you at that time, and wish you a good day and a good evening.

This does conclude today's conference. We thank you for your participation.