Crexendo Inc (CXDO) 2012 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the Crexendo, Incorporated 2012 first quarter earnings conference call. Just a reminder today's program is being recorded. At this time I would like to hand things over to Mr. Steve Mihaylo, Chief Executive Officer. Please go ahead sir.

Good afternoon everyone. I'm pleased to be here today and to go over our first quarter results with you. I have with me on this call in our conference room Doug Gaylor, our Vice President of Sales; John Erickson, our Chief Financial Officer; David Krietzberg,our Chief Administrative Officer; and Jeff Korn our Legal Officer.

I'm also pleased to introduce you to Ron Vincent, our new VP of Finance; Satish Bhagavatula, our lead engineer in Phoenix and Dave Hodgson, our Controller. I'm going to ask Jeff to read our safe harbor information and after that I will give a brief overview of the quarter. John will provide some additional granularity to the numbers. If you have any questions we'll open it up for calls afterwards -- or questions afterwards. Jeff, would you please provide the safe harbor statement?

Yes, sir. Thank you, Steve. I want to take this opportunity to remind listeners that this call with 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 risk 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 & Exchange Commission including the Form 10-K for the fiscal year ended December 31, 2011 and the Form 10-Q for the period ending March 30, 2012. 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 would now like to turn the call back to Steve. Steve?

Thank you Jeff. I'm going to go over the numbers at a very high level and then we'll turn it over to John for some more granularity.

Net income for the first quarter of 2012 was $199,000 or $0.02 per diluted common share, compared to a net loss of $1,851,000 or $0.17 per diluted common share in the prior year quarter. Income, before income tax provisions, for the first quarter of 2012 was $45,000 compared to a loss of $2,973,000 in the prior year quarter.

Cash from operations from the first quarter of 2012 was $652,000 compared to cash used in the first quarter of last year of $3,307,000.

As of March 31, 2012 cash and cash equivalents and restricted cash were $10,688,000 and working capital was $899,000 and working capital excluding deferred revenue was $17 million -- I'm sorry I misstated the number above. It was $8,999,000 working capital and working capital excluding deferred revenue was $17,882,000. Current and long-term receivables were $12,351,000 as of March 31, 2012.

I'm very pleased with our progress, particularly on the sales side. We have dramatically improved our hiring process and we are now getting the caliber of sales people that we need. I believe this will continue to improve as our productivity and results continue here.

We also continue to improve our offerings and our services and we are beginning to offer a full range of cloud services including telecom, web design and services, and broadband. I'm very impressed with our quality and commitment to our customers. I believe we are well on the way of creating a world-class business and a significant recurring revenue stream. I believe in this company and will continue to put my money where my mouth is.

I will now turn the call back over for review to John Erickson. John, are you there?

Okay, thank you Steve.

Okay, thank you.

We had a good quarter from a cash flow perspective, as well as a bookings perspective, especially on the telecom side. From a revenue perspective we had approximately $5.3 million in revenue for Q1, which is broken down as follows. Crexendo web services revenue was $770,000, a 21% increase quarter over quarter to $638,000 in Q4, and 61% increase year over year from $479,000.

The increase in revenue on a quarter-over-quarter basis is primarily due to improvements in our fulfillment process, allowing for additional one-time revenue, as well as improvements over the last quarter in our customer churn on our recurring products.

I mentioned last quarter the majority of our revenue in the web services division is recurring in nature, such as link building. As such, our future rate of growth in this segment, on both a year-over-year and quarter-over-quarter basis, is largely dependent on our ability to hire a sufficient number of qualified sales reps and increase the productivity of our current sales reps. As of today, we have 24 direct sales reps, which is flat from the prior quarter, but we do have several more sales reps in the pipeline.

Crexendo network services revenue was $75,000, an 88% increase quarter over quarter from $40,000. We had no revenue from Crexendo network services in the prior year. As we discussed in the last earnings call our telecom approval in February of this year in the State of Arizona had a positive impact on our telecom sales pipeline and was a key driver in our telecom bookings, which came in over $800,000 this quarter, taking our telecom backlog from $155,000 in December 31, 2011 to $965,000 at March 31, 2012. A majority of our network service contracts are 36-month contracts. As such, the revenue associated with the bookings this quarter expect to be recognized over the next 36 months.

StoresOnline revenue was $4,410,000 which, as expected, decreased at a quarter-over-quarter rate of 13% from $5,040,000 and a year-over-year rate, 69%, from $14,089,000 in the prior year. StoresOnline revenue is broken down as follows. Cash collected on our accounts receivable balance was $3,120,000, a 9% decrease over Q4 which was $3,412,000 and a 19% decrease over Q1 last year which was $4,204,000. This revenue stream will continue at a descending pace over the next 18 months to two years. Based upon our current collection rates we expect to collect approximately $12 million in revenue from our receivables over the next 18 to 24 months with approximately $9 million coming over the next 12 months, with the remaining $3 million coming the following year.

Hosting revenue was $860,000, a 10% decrease from the fourth quarter, which was $960,000.

Commissions from third parties and other revenues was $322,000 in Q1, a 15% decrease from Q4 which was $379,000, and an 83% decrease from the prior year of $1,908,000. 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. The remaining other revenue was primarily derived from inside sales selling to our current customer base.

Interest on receivables was $764,000 in Q1 compared to $1,014,000 in Q4 and $1,158,000 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.

From an expense perspective, we had $5,981,000 in total operating expenses, a quarter-over-quarter decrease of 5% from $6,315,000 in Q4 and a 68% decrease from the prior year at $18,699,000.

Our expenses are broken down as follows. Crexendo web services expenses totaled $1,333,000 in Q1 compared to $1,380,000 in Q4 and $1,149,000 in the prior year quarter. Crexendo network service expenses totaled $763,000 in Q1 compared to $1,380,000 in Q4 and $1,149,000 in the prior year quarter.

StoresOnline expenses totaled $1,224,000 in Q1, a decrease from Q4 which was $2,282,000, and a decrease from the prior year which was $14,784,000. Unallocated corporate expenses, which related mostly to R&D, corporate salaries, depreciation, stock option expense, accounting and professional fees, totaled $2,661,000 in Q1 compared to $2,044,000 in Q4 and $2,190,000 in the prior year.

In summary, on a consolidated basis we had income, before income provision, of $44,000, off of $5.3 million in revenue.

Now for a discussion on our cash flow and balance sheet. During the first quarter we generated $652,000 in cash from operations compared to use of cash of $3,307,000 in prior year. As of March 31 we have cash and cash equivalents of almost $10.7 million and receivables of $12.3 million which we expect to collect over the next 18 months.

With that, I'll turn the time over to Doug for some discussion on sales.

Thanks John. As John has mentioned the Crexendo sales team is currently at 24 reps. We have a team of new reps starting in May for our May training class. Our refined hiring process of focusing on sales representatives that have a successful track record in either web or telecom has resulted in some immediate success with initial sales from our most recent new hire class totaling over $100,000 in their first four weeks. So that was a nice change that we've had there.

Our new Director of Sales, Dale Miller, has launched our new training programs with great initial results and we're excited to have additional training classes with strong new hires scheduled for mid-May and for mid-June. Continued daily inspection of expected activity levels is helping insure that our activities levels and sales opportunities are increasing. The daily inspection of activity by the management team allows us to quickly identify any weaknesses and shortcomings and put the proper measures in place to increase our sales contributions of each rep.

Our new business development program that we started back in December, continues generating quality leads that have already resulted in numerous sales. We're increasing the size of this group and their efforts and are currently interviewing for a business development manager to help take that group to a new level of success.

In addition we had three new association partnerships that generated tremendous success in Q1 with high quality lead generation efforts as well as significant sales contributions in both telecom and web marketing sales.

With the approval of our telecom petition in Arizona, along with our initial telecom sales in many of our other markets, we were able to recognize significant sales of approximately $800,000 for the quarter including the conversion of some of our beta sites that were trialing our telecom offerings.

We also added our network services division offerings in Q1 that allows us to offer broadband services in conjunction with our cloud communications. This offering, in a relatively short period of time, has already resulted in sales and we've been able to offer these services to all of our existing clients out there and seeing a nice take rate.

I continue to be extremely optimistic on the initiatives that we've put in place and I'm extremely excited about the progress that we're making in building the sales division.

So with that, I'll turn it back over to Steve.

All right. Thank you, Doug. At this time I think we've covered everything from the standpoint of the granularity in the numbers, the progress we're making. I'd like to turn it over to the operator for any questions that may be out there.

(Operator Instructions)

Well, I have one shareholder, Operator, that emailed me with a couple of questions and maybe I'll go over that. One of the questions was -- assuming that the June quarter sales for new initiatives will look a lot better than the March quarter, can you comment on that?

Well, I think Doug has already commented on it. We have more producing sales people than we've had in the past. I would expect at least a 40% or 50% increase quarter over quarter. So that's just on the telecom sales. So we had $75,000 in recurring revenue. In the telecom sales I would expect maybe about $100,000 to $110,000, a little bit less than the 45% or 50%, about 30% to 40%. If we do better than that, that will just be frosting on the cake.

Doug has also commented on the sales process. We hired a sales manager that used to be with us at Inter-Tel, Dale Miller. We now have 24 sales reps with 4 in the pipeline that are starting any day now. They'll be in our May training class. Our goal is to have 50 by the end of the year. We're also hiring a business development person that will work on increasing the leads and that sort of thing.

Let's see what his -- he had four questions. I've answered two of them. Oh, I've answered that, too. He also wanted us to comment on large, well-known companies that we've sold. The largest is Realty Executives with currently about 400 desktops. We're working on an account which is still in the trial stages so I can't mention the name, but they have several thousand desktops and we've installed two of their outlying offices with about 5 or 10 phones each and we'll probably put in about 5 or 10 more locations before we have something that we can announce.

As far as the market size -- that was the fourth question that our shareholder asked. The market size is so big for hosted telecom, web services and broadband worldwide that I'm afraid to throw a number out there. But it's at least 100 times bigger than the market that we served -- the market niche that we served at Inter-Tel. Now if there's any more questions that maybe these questions have generated, I'd be happy to answer them. Operator?

At this time there's no one in the queue. (Operator Instructions) We'll pause for just a moment. Mr. Mihaylo, there appear to be no phone questions. I apologize, we did just get a question --

No, there's no apologies necessary. We're very happy with the results that we had. We're happy with the progress that we're making, and we look forward to talking to you next quarter.

Sir, we actually do have a couple of people that have signaled now.

Okay, good.

Our first call will come from Bruce [Senor].

Bruce who?

Senor.

Good afternoon, gentlemen. I was just curious on the StoresOnline effort that is slowly diminishing, I presume to zero, is there any chance of selling that operation separately?

No, we have no plans for selling the operation and it won't reduce to zero. We have over 13,000 customers that host with us, websites, so we don't expect it to reduce to zero. This is core and it's very important to our progress. A lot of these customers are becoming affiliates of ours to sell our telecom and web services -- not directly sell them. They'll be selling whatever products and services they sell, but they'll have a link on their website that will go to a co-branded landing page which will be people that notice a chance to reduce their telephone costs and to increase their sales leads. And those will be handled through an inside sales force. But we have no plans to sell that division. We've (multiple speakers) --

That sounds excellent. That's very reassuring.

Yes, we've stepped up our customer service in that area to support these customers and we're working diligently to help them and support them.

Will the seminar sales effort continue?

No, we discontinued that almost a year ago.

Is there an active sales organization pushing the StoresOnline?

No.

No. Okay, thank you.

And we do have another question. It comes from [Jay Harris.]

Steve --

Good afternoon, Jay.

How are you?

I'm very good. I'm excellent as a matter of fact.

Good. I wondered if you could give us some insight as to what you expect from your sales organization in terms of revenues generated or a range of revenues generated per salesman, as they hit stride?

Well, Doug can probably handle that question a lot better than I can. Doug, can you go over the quotas that we're establishing. And, you know, it's all over the board right now, but I think the quotas are more important in the kind of sales activity we saw in our previous business. Doug managed our sales force at Inter-Tel and we had approximately 300 sales people.

Yes, great, so as we look at where we are today, typical quota for our average sales rep out there is $50,000 in bookings per month. And we've got, you know, as we mentioned, a lot of new hires on our sales team, so that 24 sales reps that we currently have, over half of those are fairly new, within six months of hire. And, so, obviously, the ramp on them is a little bit longer than the ramp for our experienced reps. When we look at our average productivity per rep today, for the Q1 period, it was right around $20,000 average productivity in sales per rep per month.

All right, and are they selling both telecom as well as Internet hosting?

Correct. All of our reps are what we call hybrid reps so they've been trained and are selling all of our offerings. So that includes the web and the telecom as well as the network services which we just launched in Q1. So now we've got network services to add into that equation. So obviously from a training perspective training is critical for them so that they can cross-sell and make sure they up-sell all of the opportunities to make sure that we're covering web, telecom and network with all of our potential clients out there.

Have any of your salesman hit the -- hit objective strides yet?

Sure. If you look at our core numbers out there, last year we had three representatives that qualified for our Presidents Club, which was exceeding 100% of their quota for the annual quota targets that they had. Then this year, I think we've got the same three on track and some others knocking on the door to hit Presidents Club for the year.

How will you make decisions in terms of building that sales staff?

Sure, so we're actually hiring right now in our core markets of Phoenix and in Salt Lake. We're actually hiring in the outlying areas as well, so targeting particular markets. So we just promoted one of our employees to a sales manager position and we're going to be hiring and recruiting heavily up in the Northeast corridor, so the New Jersey, New York, Boston, Washington DC marketplace.

And so as we look at where our growth is going to be, we've got nine reps now in the Phoenix marketplace and so we'll continue hiring here in Phoenix, Phoenix obviously a large market. But we realize that as we look at our growth and expansion, the Northeast corridor and the West Coast are going to be primary targets. So we've already made that first step by putting a sales manager up in the Northeast corridor and we're hiring heavily there. Then the next step will be the LA/Orange County area out in California.

So how many salesmen do you think you'll have a year from now?

Steve mentioned our target is to get to 50 by the end of this year. So I'd like to get to that target number first and then we'll continue growing from there. So obviously as we make our strides that number will continue to increase, but targeting 50 by the end of this year.

All right, thank you very much.

You're welcome, Jay.

And Mr. Mihaylo, there are no further questions.

Okay, well, I think we've covered everything. And for the gentleman that asked questions about StoresOnline, obviously you're new to our Company, but we announced everything that I had mentioned on the call here today approximately a year ago. So I'm surprised that we had questions on that.

Having said that, I'd like to thank all of you for being here today and we look forward to seeing you next quarter. Goodbye.

Ladies and gentlemen, that does conclude today's conference. We would like to thank you all for your participation.