Crexendo Inc (CXDO) 2011 Q3 法說會逐字稿

Good day everyone. Welcome to the Crexendo, Incorporatedthird quarter 2011 earnings call. Today's call is being recorded. At this time I would like to turn things over to Mr. Steve Mihaylo, Chief Executive Officer, please go ahead sir.

Thank you. Good afternoon everyone, this is the Crexendo third quarter 2011 conference call and earnings report. With me today I have got Clint Sanderson, our Chief Operating Officer, Dave Krietzberg, our Chief Administrative Officer, John Erickson, our Chief Financial Officer, and Jeff Korn, Senior Vice President of Legal and General Counsel.

Before I get started with a few remarks, I would like Jeff to go ahead and read our Safe Harbor statement. After he reads that I am going to have a few remarks, and then I will turn it over to John Erickson for more granularity, can you go ahead Jeff.

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 on assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today. The risk factors are explained in detail in the Company's filings with the Securities and Exchange Commission including the Form 10-K for the fiscal year ended December 31, 2010, and the Form 10-Qs for the periods ending March 31, 2011, June 30, 2011 and September 30, 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 otherwise.

I will now like to turn the call back to Steve. Steve.

Thank you Jeff. I am just going to have a few remarks here, and then I will turn this over to John Erickson. Net income for the third quarter of 2011 was $4,507,000, or $0.42 per diluted common share, compared to a net loss of $79,000, or $0.01 per diluted common share in the prior year quarter.

Income before income tax provisions for the third quarter of 2011 was $4,546,000, which included $209,000 in restructuring related charges, charges related to office space impairments, and other one-time charges associated with the announced restructuring of our StoresOnline division, compared to a loss of $455,000 in the prior year quarter. Cash used in operating activities for the third quarter of 2011 was $320,000 compared to $601,000 for the prior year quarter. As of September 30th, 2011 cash and cash equivalents was $10,096,000, which included $1,088,000 of restricted cash. Working capital was $8,376,000 , working capital excluding deferred revenue was $19,809,000. Total current and long term receivables were $19,348,000 as of September 30th, 2011, and this is net of reserves.

At this time I am going to turn this over to John Erickson to give you the granularity, and then we will open it up for questions. John.

Thank you Steve. So I wanted to keep with the theme of last earnings call, and provide clarity on what you can expect from our revenue and operations in future quarters, based upon this quarter. This quarter was the first transition quarter without seminar sales, with the exception of 2 days of sales in July. The quarter for the most part went as we expected. From a revenue perspective we had approximately$10.25 million in revenue for Q3, which is broken down as follows, Crexendo web services revenue was $648,000, which grew at a quarter-over-quarter rate of 18%, from $550,000. and a year-over-year rate of 105% from $315,000 last year. Our future rate of growth in this segment will be dependant on our ability to hire sufficient qualified sales reps, and increase the productivity of our current sales reps. Today we have 28 sales reps, and we will continue to hire an additional three to four reps per month. Crexendo Network services revenue was $52,000, which grew at quarter-over-quarter rate of 188% from $18,000 in the second quarter of this year. We had no revenue from Crexendo network services in the prior year.

As with Crexendo's web services this segment is primarily a direct sales segment, and our future growth will be dependent upon our ability to hire a sufficient number of qualified sales reps, and get them up to quota as quickly as possible. We anticipate that while our direct reps will have the ability to sell both web services and network services, the sales reps will have a focus on either network services or web services. We started hiring our first telecom-specific reps in October, and expect to grow from there.

StoresOnline revenue was $9,542,000, which as expected decreased at a quarter-over-quarter rate of 44%, from $16,928,000 in the second quarter of this year. And a year-over-year rate of 32% from $13,969,000 in the prior year quarter. The StoresOnline revenue is broken down as follows, Seminar event-related revenue was $3,626,000. The majority of this revenue related to the roll-off of deferred revenue with the remainder related to the few events we had in July. This revenue will not continue in the future, however we still have approximately $530,000 in deferred revenue, which we recognized over the next 12 months, a majority of which will be recognized next quarter and the fourth quarter of this year.

Cash collection on our Accounts Receivable balance was $4,190,000. A 4% decrease over Q2 which was $4,383,000. IT was also a 4% decrease from last year which was $4,346,000. This revenue stream will continue, and at a defending pace over the next two to three years. Based upon our current collection rates we expect to collect approximately $19.3 million in revenue from our Receivables over the next two to three years. With approximately $11.5 million expected to come in the next 12 months, the remaining $7.8 million is expected to be collected in years two and three at a decreasing rate.

Hosting revenue was $940,000, a decrease of 6% from the second quarter which was $1,005,000. As we mentioned the last earnings call, we increased our customer service outreach programs , which we believe has been of beneficial as we saw a reduce in our churn rates during this quarter, and a reduction from what we expected as well. Commissions from third parties was $786,000 in Q3, a 60% from Q2, which was $1,978,000 and a decrease of 65% from the prior year, which was $2,228,000. Commissions from third parties which has historically been one of the largest contributors to our profitability in the seminar channel will not be significant in the future. We expect that we will receive a little bit of money in Q2 and Q1 of next year, but not a significant amount. Interest on Receivables was $1,241,000 in Q3 compared to $1,452,000 in the prior year. We will continue to collect interest on receivables at a decreasing rate as our Accounts Receivable portfolio from StoresOnline winds down.

Expenses, from an expense perspective with we had $6,946,000 in total operating experiences, a quarter-over-quarter decrease of 68% from $21,955,000 in Q2 of this year. And a 57% decrease from the prior year at $16,191,000. Our expenses are broken down as follows,Crexendo web services expenses totaled $1,185,000 in Q3, compared to $1,145,000 in Q2 of this year, and $750,000 in the prior year quarter. Crexendo network services expenses totaled $573,000 in Q3, compared to $507,000 in Q2, and $435,000 in the prior year quarter. These expenses for both Crexendo web services and Crexendo network services are expected to increase in the future, as we add sales reps and increase our fulfillment efforts with increased sales.

StoresOnline expenses totaled $2,850,000 in Q3, compared to $18,103,000 in Q2, and $12,764,000 in prior year quarter. We expect this expense level to decrease over the next several quarters, but it will remain in the $2 million to $2.5 million range as we continue to support our customer base in StoresOnline, and explore additional sales channels for StoresOnline. Unallocated corporate expenses which related mostly to R&D, corporate salaries, depreciations, stock option expense, accounting and professional fees, totaled $2,338,000 in Q3, compared to $2,196,000 in Q2, and $2,242,000 in the prior year quarter. The increase from the previous quarter is primarily to a rent impairment in our Utah office.

In summary, on a consolidated basis we income before income tax provision of $4,546,000, of up $10,242,000 in revenue, Now for a discussion on our cash flow and balance sheet. Steve mentioned during the third quarter we used $320,000 in cash from operations,compared to a use of cash of $600,000 in the prior year quarter. The use of cash of $320,000 in the current year is primarily due to the pay down of our Accounts Payable balance and accrued liabilities balance during the quarter, which decreased by $2,571,000. We believe that our Accounts Payable balance will remain in its current level for the coming quarters.

As of September 30, 2011 we have cash, cash equivalents and restricted cash of $10,096,000, our Accounts Receivable balance is $19,348,000, which as discussed earlier is expected to result in future revenue over the next two to three years. During the quarter we also repurchased 143,000 shares of common stock for $593,000. With that I will turn the time back over to Steve.

Alright. Thank you John. At this time we will open it up to general questions. Kelly, do you have any folks that are waiting to ask questions?

Thank you sir. (Operator Instructions). We will go first to Robin Lochner.

Good afternoon Robin.

Robin your line is open, if you still have a question. Or you may have us on mute. Hearing no response we will move next to [Jeff Bash].

Good afternoon Jeff.

Alright, can you hear me?

Yes, I can hear you fine.

Okay. How would you characterize the realization of your discounted receivables versus your expectations, are you doing better about the same or what?

We are slightly ahead of where, the number we have got there. Not so much that we are we are going to revise the reserve, or anything like that, but we feel we will collect everything that we have got on the books and probably just a little bit more.

Good. I was rather pleased with going from I think it was 15 sales reps last quarter to 28 now. Do you still feel comfortable with what I recall you previously said as being about $400,000 revenue per year generated by let's say a mature sales person after they have had their training, and so forth?

Yes, but it takes anywhere from 60 to 120 days to get them there.

Okay. I understand.

Most of the reps that we have on board right now are not producing. They have all been hired in the last three or four weeks.

I follow. How far would you say you are from having a product offering in the telecom space that meets the needs of most potential customers?

We have a telecom offering right now that meets the needs of most small businesses. That would be a 100 desktops or less. So we are actually starting to ramp the sales in that area.

Okay. Good. Where do you stand on any regulatory approvals that you might need?

I believe we are, and Jeff Korn you can correct me if I'm wrong, I believe we are approved in 46 jurisdictions, that is 45 states and the District of Columbia.

That is correct.

We have one state that we chose not to put an application in yet. We had another state where there were a couple of issues that needed to be corrected on the application, so we pulled it back which leaves three states. One is Arizona. And the other two, Jeff Korn, are--?

I don't have that in front of me. No, I don't recall.

Well it is not important.

Arizona is the only big state that we are waiting on.

Right.

We don't have applications pending in South Carolina or Maine, and there are two other states that we are waiting on.

Yes, but the bottom line is we have got enough of a footprint, that we are going to start going national with the program now.

Excellent. John had said something about the reason that you showed $320,000 cash used was basically a significant paydown of Accounts Payable and similar during the quarter. John would there be a fair presumption that in future quarters then we might have actually have considerable cash generated while we still have the Receivables coming in?

I don't know if I want to define considerable at this point in time Jeff but we expect to have cash from operations in Q4.

Okay. That is fine. Steve I have just one general question. Many of us had thought that given your success with Inter-Tel, success here in sort of a related telecom business at least with respect to that initiative, would largely just be a matter of time, since it is just sort of like repeating something you have more or less done before?Is there anything you see generally wrong or incomplete with that thinking?

Well the entire telecom industry is in transition. For the next year or two I think we have got a huge advantage in that by offering telecom services on the cloud we can offer a much larger savings for the customers, but as time goes on, the savings will be by improving the productivity of companies, which I think will give us an even better opportunity for operator services, secretarial services, and other things that we can do for the customer. That is the good news.

The bad news is, it is not really bad news, but it takes probably six months before you are paying for a sales person, because we are looking at a SaaS model here, which is monthly recurring revenue, so if someone sells $1000 in services in their first month, it will take them 5 or 6 months to get to the point where they are covering the cost of their salary. Beyond that it becomes extremely profitable. But in answer to your basic question, Jeff, I don't see anything that is going to prevent us from being successful. We still have got a few more states that we have to be approved in. And we are going to have to build out data centers and that sort of thing. But most of it is mechanical, and I am pretty optimistic about the direction we are going in.

Excellent. I noticed that you said you purchased $593,000, 143,000 shares for $593,000, which is like $4.15 per share. So I presume then that you didn't have a 10B51 plan going for the quiet period. I think that is factually correct. Can you indicate anything as to what the Company's interest in stock at these price levels going forward or yours personally?

Yes, going forward the Company probably will not be buying stock. We want to make sure that our cash is conserved, and make sure that we don't get below a certain threshold on the cash. We will even be looking at the dividend next quarter, with the idea of possibly reducing it or eliminating it completely. We are also looking at additional savings in the way of expenses. I would like to be in a position where cash does not get below $4 million or $5 million. And in order to do that, we certainly have to look at everything, and especially repurchases of stock. Personally, I will still be looking for opportunities to acquire stock, if and when large blocks are presented to me.

Great that is it for me.

Thanks Jeff.

We will go back to Robin Lochner.

Yes, I'm sorry. I was on mute before and I didn't realize it.

Not a problem.

Okay. On the last conference call, you indicated that the Company would be fortunate if they were at 30 to 35 sales people in the first part of 2012. Is that still your goal, and if you achieve that goal, is that a place where you would level off or would the number of sales people continue to grow beyond 35?

Well we are going to keep growing the number of sales people, but you have to remember this is sort of like building a ball team, football basketball baseball, whatever. You are constantly changing players. And only about probably 25% of our new recruits are going to make it. If we are fortunate it could be 30% or 40%. So we will constantly be hiring and reshuffling the deck here, in order to get producing salespeople. I would be very pleased if we are up around 15 or 20 producing sales people by the first quarter. And that would indicate probably 35 to 40 sales people in the Company at that point in time.

Okay. And then also last quarter you indicated that you had approximately 400 business customers in Crexendo excluding the stores online related customers. What is that figure for this quarter?

I don't know. Do you have that information, John.

As far as quantity of customers?

Yes.

No.

That is not something that we necessarily want to disclose on a go for basis in the future. We did have around $830,000 in bookings for the third quarter of this year. Our average sales price is typically about $9,000.

Yes, I think it is probably easier for us to just do the segment accounting, which would disclose the sales but not the actual customers.

Okay, fair enough. And then last question, as you continue to buy stock, Steve Mihaylo, your ownership percentage gets closer to 50%. If your ownership ever exceeded is 50%, would that result in any changes in the way the Company was run, or would it have any significant implications for smaller stockholders?

No, quite frankly, Robin, if I owned 90% of the stock, we would run it just like all public companies with full disclosure, a full Board of Directors that are independent. I have always run all of our businesses, all of my businesses, as if it was 100% owned by the public.

Okay. Thank you very much.

You bet.

(Operator Instructions). We will go next to Jim Dowling with Jefferies Capital.

Good afternoon Jim.

How are you doing Steve.

Very well thank you, how are you?

Good. If we can go and say take a 20,000-foot view of all of this, if we are sitting on this call a year from now and more hirings will have occurred, some more maturity of the sales force, some actual revenues coming in, what do you think that you would be able to say to us a year from now, as to what the annualized level of business would be in the major segments?

Boy, I will tell you, that is a crystal ball sort of a question. I would be disappointed if by the end of next year we are not doing at least $2 million a month in revenue.

Any thoughts as to how that might break out?

Probably about 60% or 65% telecom, and 35% to 40% web services.

Okay. And if you are at that level annualized a year from now, what kind of a future growth rate would you think ensues?

We should able to attain for a couple of years after that a rate of at least 50% per year.

Okay. Very good. Thank you.

You bet.

We will move now to Neal Goldman with Goldman Capital Management.

Hi Steve.

Hi Neal.

First of all that segment, the telecom and the web services, what would you need on a cash flow breakeven per quarter to get the cash flow breakeven?

Well, that is going to depend on a lot of things, Neal, but it is probably somewhere in the range of, and it also depends on how good we are at getting our expenses down. And I think there is room for considerable improvement in expenses. Our current projection is sometime in 2013, but I think we can beat that by at least two or three quarters, so that would suggest maybe $7 million a quarter.

I can actually give some clarity if you like. Neal this is depending on several factors, how many sales people we hire, et cetera. But you are speaking specifically of the telecom segment correct?

Yes.

I misunderstood Neal, I thought you meant the whole Company.

No I am excluding the StoresOnline, Receivables, and the hosting on that side. I am just talking about the new offerings, the telecom and the corporate?

Right so from the telecom segment itself, given the ramp in sales people that we have forecast in, you are going to need between $2 million to $2.5 million a month from a cash flow perspective to pay for all of the revenue ramp, to pay for all of the increase in sales and cost of sales, et cetera.

Okay and above that what percentage flows to the bottom line Steve?

Here again, it depends on what your expense level is. We are working on about a 60% or 65% gross margin.

Okay.

As we get bigger, our cost of bandwidth and other things will decrease. So it is, hopefully we would exceed the 60% or even 65% margins.

Okay, what kind of capital spending will you need no terms of facilities, you talked about that, that is why the cash issue?

Yes, somewhere between $1 million and $2 million to get us to the point where we have got two fully redundant data centers.

And that would give you what kind of capacity?

Capacity for at least 100,000 customers.

You talked about that you needed two sales forces initially, although people ultimately could sell both. What is the rationale for two different sales forces for telecom and web hosting?

Well, the rationale is to keep your people focused. But it looks like, and I am going to let Clint Sanderson talk about this. It looks like over time, we will be able to do it with one sales force. Clint, do you want to add some color to this?

Yes. Neal what we are doing is initially because the telecom offering is relatively new, well not relatively, it is new, and we already have a sales force in place well trained to sell web services, so immediately we will have a team that is focused only on selling telecom, and a sales team focused only on web services. Now what we will be able to do is the team selling telecom only, once that customer relationship is established with the rep, that rep can go back with the web services offer, and vice versa. There is too much of a risk in diluting our sales efforts right now, by immediately having a sales force that is selling web services, getting them trained to sell telecom as well. So instead of diluting the sales force, we are going right now with independent sale forces. If the future we foresee that becoming one sales force, once we get traction in both channels.

Okay. Steve you talked initially about the benefit would be on pricing but ultimately on productivity. Why don't you go through what your offerings will include that is different than is out on the market today?

Well, there are things like call center suite, which is a very robust capability for call centers, gives you all sorts of statistics, and things like that. Ones that we will introduce first will probably be secretarial and operator services, and a lot of those services can actually run more than the monthly for the telecom itself. But imagine this, a small company with 10 or 15 desktops paying somewhere between $200 and $400 a month for secretarial services, that is still so much less money than what they would have to pay for, or I should say operator services, that is so much less money that they would have to pay for a full blown operator that requires healthcare, and all the various taxes, and so on. It is probably only 10% or 15% of what they would pay.

So just those three services, operator, secretarial, and call center services, and I aim talking about the call center software and what have you, would easily be two or three times what their monthly phone bill would be. But their savings would be tremendous. For those three services even a small company with 10 or 15 employees could save easily as much as $80,000 or $100,000 a year.

Okay. Does anyone else have those offerings?

Not that we are aware of. It is not to say that they won't it is just to say that they don't have them yet.

I mean, the ROI has got to be enormous then for any company. what would be, other than reaching that buyer, what would be the issues that would keep you from getting that customer?

I am very optimistic about this, Neal. I think that there shouldn't be a lot of issues, one of the big issues is going to be how long a period they have remaining on a contract with a current supplier.

Okay.

But we can also offer other things. As we get bigger, and we have the ability to buy better on our bandwidth we can resell bandwidth. It will also drive our costs down which will drive our margins up, and then of course, other services that we identify in the market place.

Okay thank you.

You bet.

And we appear to have no further questions at this time. Mr. Mihaylo, I will turn things back to you for closing remarks.

Thank you Kelly. As you are all aware, this has been a transition that we are we are in. We are still supporting our consumer customers. In fact we have increased our customer service to our existing customers, and that is one of the reasons why we are seeing better than anticipated Receivables collection. We are starting to see existing customers actually buying more services from us, which is encouraging. I am not going say it is a floodgate of services, but they are increasing marginally at this point in time, which is good. We are seeing the ramp in our telecom and our web services we are getting our sales force ramped up, and we are optimistic about the future.

And we look forward to having you all on a conference call at probably sometime in February or March when we announce our year end and K1 results. I wish you Happy Holidays, both the December and November holidays, and we look forward to talking with you in the New Year. Thank you everyone.

That concludes today's conference. Thank you all for joining us.