8x8 Inc (EGHT) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the 8x8 Incorporated fourth-quarter 2006 earnings conference call. My name is Carlo and I will be your coordinator for today's presentation. At this time, all of our participants are in listen-only mode and we will be facilitating a question-and-answer session towards the end of today's prepared remarks, at which time (operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Joan Citelli, 8x8's Director of Corporate Communications. Please proceed.

Thank you, and welcome, everyone, to our call. This morning, I am joined by 8x8's Chairman and CEO, Brian Martin and CFO, Jim Sullivan to discuss our fiscal fourth quarter and full-year 2006 results. If you have not yet seen this morning's financial results, the press release is available on 8x8's Website at www.8x8.com.

Following our comments, there will be an opportunity for questions. Before I turn the call over to Brian, I would like to take this opportunity to remind all participants that during this conference call, any forward-looking statements are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. Expressions of future goals, including financial guidance and similar expressions, including without limitation, expressions using the terminology may, will, believe, expect, plans, anticipates, predicts, forecasts, and expressions which otherwise request something other than historical fact, are intended to identify forward-looking statements. These forward-looking statements involve a number of risks and uncertainties, including factors discussed in the risk factor sections of our annual report on Form 10-K, in our quarterly reports on Form 10-Q and in our other SEC filings and Company releases. Our actual results may differ materially from any forward-looking statements due to such risks and uncertainties. The Company undertakes no obligation to revise or update any forward-looking statements in order to reflect events or circumstances that may arise after this conference call. Please note that management will be continuing our corporate practice of not offering or providing any forward-looking guidance on the Company's financial results, forecasts or similar future expectations and your cooperation is appreciated in not asking any questions in this regard. Thank you. With that, I'll turn the call over to Brian Martin, Chairman and Chief Executive Officer of 8x8.

Thanks, Joan, and I would also like to welcome everyone to the conference call for the fourth quarter ended March 31, 2006, which concludes 8x8's 2006 fiscal year.

This is 8x8's first quarterly earnings call since September 2000 and it is great to be at the point in the development of our voice and video technologies, our sales channels and the growth of our Packet8 communication services that we have something to talk about again. We released the results for our fiscal fourth quarter and year ended March 31, 2006 earlier this morning and I would like to highlight a couple of points before I turn the call over to James Sullivan, our CFO, who will walk through our financial results.

The March quarter represents our ninth consecutive quarter of increasing top-line revenues due to the continued growth of our Packet8 voice, business and video services. We grew the business by a net 20,000 lines during the quarter from 113,000 billable lines as of 12/31/05 to 133,000 billable lines as of 3/31/06. For the fiscal year, we achieved billable line growth of 133%, more than doubling our net line count from 57,000 lines at 3/31/05 to 133,000 lines at 3/31/06.

Our quarterly revenue of $10.3 million for the quarter ended March 31, 2006 represents a significant milestone in the Company's rebirth as a telecommunication service provider. This quarter was the first time the Company's quarterly revenues exceeded $10 million since the quarter ended December 31, 1998, which not coincidentally was the quarter that we first entered the VoIP semiconductor space with technology that still forms the basis of much of our customer premise equipment in the Packet8 service today.

It has been a bumpy, difficult and thus far unprofitable world to survive the telecom bust and rebuild the Company since we launched the Packet8 service using our own technologies at the end of '02. I am therefore pleased to report that for the quarter ended March 31, 2006, our Packet8 revenues nearly exceeded the revenues that 8x8 posted for the entire year ended March 31, 2005.

We've experienced significant growth in the past fiscal year and have also accomplished a number of important milestones, including the following -- we introduced new unit and cordless telephone products ahead of our direct competitors and rolled them out in national sales channels, including The Home Depot. We continued to expand our indirect and network marketing sales channels, which now represent more than 50% of our new line sales for the first time in the history of the Packet8 service. We successfully provisioned nationwide nomadic e-911 emergency calling services to all Packet8 subscribers with a service address in the United States. We launched new private-label services with DSG International in the United Kingdom under the Free Talk brand and with BellSouth in its nine-state region bundled with their Fast Access DSL services, all of these launches using 8x8's internally developed technologies. We closed a $15 million financing in a difficult capital environment to ensure that we have sufficient capital for more than the next 12 months. And most importantly, we developed an effective sales channel for our Packet8 virtual office business services, anchored by our marketing relationship with Pitney Bowes. During the March quarter, we sold more than 8,000 new virtual office lines and also set monthly sales records for new virtual office lines.

For those of you who are unfamiliar with our services, Packet8 Virtual Office is different from any other VoIP service in the sense that it completely replaces the PBX or Centrex phone system for a business of any size. The only equipment required at the customer premise is a telephone and our adapter box and the individual extensions can be connected to the Internet at any location anywhere in the world and even change locations dynamically.

Packet8 Virtual Office gives a business access to extension dialing worldwide, a customized auto attendant, a receptionist call routing application, conferencing services, ring groups and a host of features not available in the circuit switch world and all for one convenient flat-rate price. The Company continues to maintain its focus on achieving profitability from its Packet8 services and we remain on track with our internal models towards that goal.

I will now turn the call over to James Sullivan, the Company's Chief Financial Officer, who will walk through the detailed financial results.

Thank you, Bryan. Good morning, ladies and gentlemen. I will now go over our financial results for the quarter and fiscal year ended March 31, 2006 and some related operating metrics. We ended 8x8's fiscal 2006 at March 31 with approximately 133,000 billable lines. This represented 18% of quarterly growth since December 31, 2005. As of March 31, Packet8 residential services represented 74% of our lines, Virtual Office represented 17% of our lines, video represented 7%, and wholesale and private-label services represented 2%. Average monthly churn for the fourth quarter approximated 3% for subscriber cancellations, excluding subscribers that canceled within the first 30 days of service. Our average revenue per line, or ARPU, for the quarter averaged 28.02. Revenues for the fourth quarter of fiscal 2006 were 10.3 million, which represented 21% growth sequentially over the third quarter of fiscal 2006.

For the full year of fiscal 2006, revenues totaled 31.9 million, which represented 178% growth over the 11.5 million in revenues posted for fiscal 2005.

Service margins approximated 52% for the quarter while product margins were a negative 60%. As most of you are aware, the Company's business model is similar to the cellular phone industry in that we subsidize the onetime costs of the hardware in order to acquire a customer and gain recurring revenues for the monthly services provided to that customer.

During the March quarter, the Company suspended purchases of DV326 videophones, which were a major contributor to our negative product margin. We are evaluating alternatives as we continue to work with our OEM partner on a new, lower-cost videophone. We also shifted all of our adaptive purchases for the residential market to the new BPG or broadband phone gateway 510 model. This represents a significant cost reduction over the previous models 410 and 310 adapters. Whereas our old adapters cost about $45, the new 510 adapter costs $30, a savings of 33%. The new adapter began shipping in the fourth quarter and because we delay the recognition of our revenues and cost of revenues until the thirty-day trial period has expired, we did not receive a full quarter of benefit to product cost of goods sold. The June quarter will see the full impact of the 510 adapter on our product margins.

Also in May, we began terminating a substantial portion of our phone traffic with a new carrier. While we have always used Level 3 Communications for a significant portion of our inbound and outbound PSTN traffic, we have now reached sufficient scale to be able to bring on a second carrier. We expect to immediately save more than $100,000 per month by lease cost routing our traffic between multiple carriers. For the month of March, the Packet8 network carried more than 115 million minutes of voice and video traffic.

Our subscriber acquisition costs, or SAC, for the quarter averaged $130 across all channels. SAC includes costs for advertising, marketing, promotions, commissions and equipment subsidies. Advertising and expense totaled 1.7 million and 5.3 million for the fourth quarter and fiscal year ended 2006, respectively.

Net loss for the fourth quarter of 2006 was 6.6 million or $0.11 per share and the net loss for the entire year of 2006 was 24.1 million or $0.43 per share. The net loss in the fourth quarter was impacted by approximately $450,000 of onetime severance and stock compensation charges related to the departure of our former Vice Chairman.

Moving on to our balance sheet, as of March 31, 2006, cash and investments totaled 23 million. The Company burned approximately 4.7 million of cash in the fourth quarter of fiscal 2006. The cash burn improved by 1.3 million as compared to the $6 million burn during the quarter ended December 31, 2005, which I might add excludes the effects of 14 million of net proceeds received in the December 2005 common stock offering. The improvements in the cash burn was primarily due to reduced inventory expenditures and the elimination of onetime charges incurred with the establishment of our nomadic e-911 emergency calling.

As of March 31, 2006, total shares outstanding were 61 million and on a fully diluted basis 78 million. As of March 31, 2006, the Company's headcount was 175 people, excluding personnel at our outsourced call centers.

Finally, I want to remind everyone that we will be adopting Statement of Financial Accounting Standard No. 123(R) in the first quarter of fiscal 2007, which ends June 30, 2006. FAS 123(R) requires companies to reflect and expense on their income statement relating to the value of equity compensation grants, which for 8x8 consist primarily of stock option grants made to employees. 8x8 has previously reflected this information only in the footnotes of the financial statements, not within its income statement results. This concludes my prepared remarks and then we'll now turn the call back over to Bryan.

Thank you, Jim. And I also want to mention that 8x8 operates a Packet8 community website accessible at the Web addresses, community.Packet8.net. While this site is primarily for the benefit of our Packet8 subscribers and is a great tool by which our management team can communicate and stay in touch with our customers, we've also found the site to be an effective tool for sharing information and answering questions from our shareholders. Registration to the site is free and we would encourage our shareholders and the financial community to use the site as another resource for information regarding 8x8 and its Packet8 services.

That concludes the Company's prepared remarks and now, Carlo, we will open the phones for any questions

(Operator Instructions). For Colby Synesael, Merriman Capital.

I have a few questions. The first question is if I look at your net adds for the past three quarters, it looks like it has been about 20,000 each quarter. What do you guys need to do to have that start ramping up? I know you mentioned that you have a greater than 50% of new lines coming from partners so I guess that would imply that you're direct business is actually weakening. So if you could talk a little bit about that and then I'll ask my other question.

I think we are continuing to add a lot of new channels. We were very excited to get our first nontraditional, nontraditional meaning non-electronics channel, with The Home Depot, carrying a Uniden product. The channels are coming online but historically what we have found is that these new channels take a long time to ramping. It takes training in the channel. We have to get the channel armed and able to sell the product. And I think it's too early to say whether or not these new channels -- what they're going to do, how successful they're going to be. But understand that the net adds have been flat. Certainly churn is contributing to that as well and we are focused on reducing that churn to the best of our ability in the coming quarters as well.

Actually that just brings up another question. For churn, did you change your definition of what churn is this quarter?

Yes, we believe that our distinguished competitor on the East Coast, Newly Public, has done a great job of educating the street about this notion of excluding thirty-day customers who are in our free trial period. We look at it and view that those customers -- they're not really customers yet, we're not booking their revenue yet, so we've decided to continue the same practice as opposed to having to call it out and distinguish so that our numbers are not compared apples to oranges with that competitor. So Jim had reported that our churn is right around 3% excluding thirty-day cancellations.

And then my other question, I just saw Verizon lowered its pricing for its VoIP service to $25 recently. You have Sun Rocket I think that's offering it for $10. What gives you guys confidence that your $20 core product is sustainable?

We have had the $20 price since -- I'm trying to think --

June 2003.

June of '03. And in addition to that, we have certainly added a bunch of other services -- things like virtual numbers and so forth -- that actually drive our average revenues up. And so Jim had reported our ARPU's are right around $28 per line. I think the market, we're no longer the lowest cost player in the residential space, which is 3/4 of our lines. There are players that are coming in below us. Certainly, Skype, with their offer has come in below everyone.

But you know, when I look at the market dynamics, I think the thing that is holding these prices where they are is that the cable companies, which have a huge chunk of this market, are staying up in the 40 to $50 range with their offerings. And I think until one of those players were to come down into the '20s or sub 20, there is not going to be any pressure on us to lower our price anymore. I think if anything, you'll see us continuing to try to drive that ARPU number up and if anything in the market right now, where the major players, the cable guys have this $40 kind of price range, I think there's arguments that we should be charging more, and certainly we do with services like our virtual office service.

Michael Cody, B. Riley

You mentioned 8,000 new virtual office lines in the quarter and you mentioned also the total, 78%. How has the trend been in virtual office line adds over the last few quarters?

Virtual office lines continue to grow. I think on a percentage basis right now, it's probably our fastest-growing segment. You know, we're basically -- it's a difficult sales channel to build because unlike the residential marketing, where we can just throw money at Internet advertising and other marketing activities and generate subscribers from that, the virtual office channel is a much more difficult channel and it's a much more elusive customer. So I think we've made a lot of progress over the last 12 months of putting the sales channel together, which has proven to be very effective. It is starting to kick in and add some more subs. We have got 17% of our lines now on that service and we are going to do everything we can to keep that number -- the penetration rate going up.

But the channels we have developed, the thing that is really exciting about them is they're very cost-effective as well. And so I think we're hoping that over time, the street will actually attribute more value to these virtual office lines as they understand how we add them and what that actually means to the Company on a financial basis. I think right now, everyone -- the reports that I see just talk about lines and don't really call out that 17% of 8x8's lines are actually these higher-value virtual office lines.

Okay. And is it fair to say then that you think these sales channels are gaining some more traction?

Yes.

Okay. And do you attribute the increase in virtual office lines to the site uptick and the gross margin sequentially in terms of services margin?

Yes, it's definitely a contributor. Our virtual office subscribers are obviously paying twice what a residential subscriber is paying and in many cases actually use less minutes. We find in businesses that we will have a couple of higher users and a couple of low users. I think on average, our virtual office companies have anywhere -- I'll call it between five to six lines. And they often also take one of our additional services, such as a virtual number, the virtual attendant feature. We have toll-free numbers, etc., that are generally higher-margin products for us.

Okay. And the conference calling is a pretty [abundant] service, right?

That's correct.

Okay. And with the steps you are taking to lower the hardware costs in terms of the adapters and videophone, at what point do you think you can get to roughly a breakeven product or hardware gross margin?

I mean certainly that's a goal to get to within the next year. It's really subject to the equipment market, subject to availability of a couple of the semiconductors used in the devices. Some of the manufacturers are still using technology -- our old semiconductor -- and there is some long lead times on it. It's really hard to say. It's certainly the goal of where we would love to get it to.

As I mentioned during the call, the videophone was definitely a very big contributor to the negative margins. That's where we're really taking a closer look at that and ceased ordering the existing product, pending our evaluation of a new product and pending availability of lower cost.

Yes, and Michael, I think Jim had called it out but we went from about negative 90, negative 100% margins a quarter ago to in the March quarter negative 60. So we made a big jump there. We're going to continue to focus on that. In the perfect world, we get that to breakeven. But it's a huge driver and a huge advantage for us to have those technologies under our control so that we can influence some of those costs of the ODM's that put those products out.

Could you talk a little bit about the BellSouth arrangement, how that is working specifically and if there are any other comarketing opportunities that you might have to leverage somebody else's marketing budget to get some advertising for yourself?

Yes, so on BellSouth, our work there is continuing. As you know, they launched their residential service in December and they are now in a controlled, external customer trial with their small-business service, which is also based on Packet8 Virtual Office services. Basically the work goes on. They are very conservative in terms of launching products into the market with the BellSouth brand, which we certainly understand but we haven't had any change in our relationship and we expect their small-business service to launch shortly. We are not aware of anything with the merger but I think it's still early days with that merger and I don't think the BellSouth side is aware of what's going to happen with that yet either.

Okay, thanks. And just the last question on OpEx. R&D looks like down a little bit, obviously, SG&A up a little bit. Total costs, not a large increase. I know you don't like to provide guidance on the call, but where do you see the costs going? Are you at a spot where you're at kind of a run rate basis and start to leverage your structure or are there more adds still need to the infrastructure?

We're not going to give any guidance on it. Certainly, our goal is to do everything we can to cap our expenses where they are and we're going to try to do that. But it's a very dynamic environment, both from a competitive perspective as well as a regulatory perspective. We had a lot of expenses added with about 120 days notice from the SEC last year with the 911 initiative. So no guarantees there and that's why we're not giving guidance on it.

I will also add that R&D expense in the fourth quarter did include the charges, the severance and stock comp charges related to our former Vice Chairman so that did inflate the R&D line in the fourth quarter.

I think the other thing that will affect things going forward is as we continue our focus on Virtual Office and how we spend the advertising and marketing dollars, obviously advertising is not the same for a business customer versus attracting residential subscribers. So that can affect things going forward.

Oh, got you, I see. I was looking at the wrong number; your R&D is up a little bit. Thanks a lot for your time.

Eric Buck, Brean Murray.

A couple of questions. First since you haven't given percentage breakouts before on businesses for compo purposes, can you give us what those numbers were in the third quarter?

I want to say that Virtual Office probably was in the -- about the 14% range, so we had probably at least a 3% growth there.

Videophone was a bit higher.

And I would say private label and wholesale probably went from zero to 2%.

Videophone was higher but again, I think the decrease in the March quarter was more due to us adding additional virtual office subscribers, not due to necessarily selling less videophones. But we did go on backorder there at the end of the quarter.

Although since your net adds were the same as last quarter, if one grew, the other had to have declined, I assume.

Sure.

And then similarly, the churn numbers, have they changed -- the 3% churn, is that significantly different than the prior quarter?

Candidly, it's not. It's consistent with the prior quarter. I think as Colby mentioned in his question, we had previously looked at it including the thirty-day cancellation customers. Generally the cancellation rate on the thirty-day trial period customers approximates 10 to 12%. Folks who get it, try it out, decide it's not for them, that type of thing. And as Bryan mentioned, in light of the other statistics being put out by the competitors, we decided it was best to be on an apples to apples basis and keep it consistent.

One of our -- a huge internal focus here is on reducing the churn rate because, obviously, that has a huge impact on our model and it's a key indicator of how the Street is judging our success. So we have an internal swat team focused on it and we have a number of initiatives in place to improve the customer service experience, including we're expecting to go live here at the end of the quarter with a new CRM system, which will improve the customer's experience on our website, allow more self-service by the customer, that type of thing.

Okay. And that SAC cost, you said $130; that's about 2.6 million. It looks like if I just take the loss on the product, that's a million of the 2.6. That's 1.6 million of SAC out of 8.7 million sales and marketing. So I'm kind of curious to what the other 7 million of spending is in sales and marketing if not advertising, marketing, promotions?

Sure. The other components in there -- a smaller component is obviously our G&A expense. Secondly, all of our customer service costs are included in SG&A. Our outsourced call center costs, our costs of our internal call center downstairs, which is mostly Tier 1, Tier 2 and pretty much all of our virtual office operations, and then as well as some marketing and sales, internal marketing and sales personnel, which we don't include in subscriber acquisition costs. The costs of any outbound call center calls, obviously, getting subscribers, etc., is included in SAC.

And then you mentioned the 911 costs. Can you identify how much they were in '06 and where they show up in the income statement?

We have not disclosed those costs and prefer not to do so. I would say the majority of them are in the research and development line because they related to development of our technology.

Okay. And in the Virtual Office, is the churn rate there meaningfully different than the overall churn rate?

Yes, it is, it's much lower. Again, there is the financial benefits that I think Jim described and then there's the intangibles of those customers in the sense that they churn less, they tend to pay their bills more promptly and overall are a better customer for us.

Okay. And hopefully not putting you in the realm of future guidance, but can you kind of strategically talk about the plan on how you get to a breakeven level or even profitable level? I mean we have seen kind of a flat number in the sub add tier, the losses are relatively flat even with the growth we have seen in the revenues and subscribers. So what is the plan to get you to profitability?

You know, there's two components to it -- one -- and a number of folks have commented on the flat adds. The Company is turning away opportunities to get new subscribers that don't fit our subscriber acquisition cost models. We obviously have a hard cap on what we are willing to spend to get a new sub. I've seen all sorts of reports in the last few days of these subs are worth anywhere from 750 to $2000 per head. And frankly at the end of the day, a residential line for me is worth exactly $19.99 a month and we're very cognizant of that in our approach to how we acquire these customers. And so we're not willing to spend unlimited amounts to get a new customer and we think that will -- that approach is certainly radically different than some of the other approaches in the market right now and we think that will benefit the bottom line in the long term.

The second component is really focusing more of the Company on our Packet8 Virtual Office and our video services, where there is much more of the blue ocean out there. We're not fighting head-to-head every day with the latest and greatest promotion. We are really a unique product in the virtual office segment. We've got capabilities in that product that just cannot be competed with with traditional solutions. We recently won a head-to-head review that network computing did a couple of months ago against [CoVab], which is the first time anyone has even compared us with that solution, which we were very even surprised to see that because CoVab traditionally sells to a much larger enterprise market. And I think we are focused on that and we are going to move more and more of our efforts onto getting those subscribers.

And one of reasons we don't give forward-looking guidance is we can't forecast what that breakdown, what that mix of customers is going to be going out 12 months. So the goal is to get Virtual Office to be as large a percentage of our subscriber base as possible.

(Operator Instructions). Mike Beardsley, Internet Securities.

Thank you and hi, Bryan and Jim. It looks like you had some very strong sales growth. Congratulations on that. Question about the Virtual Office products, 8,000 new lines shipped during the quarter. Can you comment on the seasonality of those shipments or sales for Virtual Office? For example, [but] that's all the typical seasonality for your quarterly shipments for the Virtual Office?

No, it really doesn't. I mean businesses are in the mood to save money just about any time of the year. I don't know any business owners that when we approach them are trying to time that. Certainly, some of our marketing activities are directed at greenfield installations, you know businesses that might be moving locations or opening regional offices away from the home office. Those are kind of low-hanging fruit customers for us. But other than that, there's really not any seasonality associated with it.

So roughly a third of the sales for Virtual Office fell within each of the three quarters or was there any like hockey stick?

I think it's definitely been increasing quarter over quarter. Particularly as Bryan mentioned, we're putting more of our marketing and sales efforts on that product, given that it's candidly a more profitable subscriber. And to add, one company on average is equivalent to five residential subscribers, just on a subscriber basis and on a revenue basis, it's double the revenue, as I mentioned often with less usage and more up-sells, add-on, higher-margin features. But I think you are definitely over the past, certainly in the fourth quarter and continuing now into this first quarter of fiscal 2007, are putting much more effort on that. It's definitely a different sales and distribution approach and we are even moving to lead generation programs, etc. and closing the sales in-house. We have an internal team here in the building, a full set up of guys who are the phone all day, gentlemen and ladies on the phone all day, making the sales, closing the deals.

In terms of the number of extensions or phones that are shipped out with Virtual Office system, has that changed? Typically I think in the past, you've shipped about five -- somewhere, five to eight phones with an initial system. Has that mix changed? Are you seeing that more and more phones are being shipped with the Virtual Office?

Yes. I would say in recent months, that has actually been trending up. And a typical order for us this past quarter was more like ten extensions being shipped with the initial order.

Oh, okay.

I think the other thing is businesses might start off small and then as they gain their comfort level, just keep adding. We see a lot of repeat orders.

That's great. Another question, I mean people are commenting on the cable companies becoming a pretty formidable competitor on the residential side and are you starting to see product offerings from the cable companies on your Virtual Office side? Are they starting to implement solutions -- is the competition increasing?

No, I wouldn't say it is. I would say we are selling to larger businesses now. You can go to our website and actually see a testimonial from Unisys, which is obviously a very large company, who is using our solution in some of their regional offices. So I think as we are selling to larger companies, we're certainly creeping into the small end of the enterprise space and certainly there's more competition there.

But for these small businesses, the five to 20 extensions, which is really our sweet spot, we don't see any activity from the cable companies and like I said, I think it's a very differentiatable and defendable ground right now.

Okay, one other thing. What was the contribution from your international markets? Have you seen that pick up from I guess historically you guys were at about 5 to 8% sales going to international?

Candidly, it has come down. During the fourth quarter, we actually ceased shipping the residential products to international locations. We just weren't pleased with the additional costs of shipping internationally. We found the potential for fraud was too great, that type of thing. So we actually stopped the international shipping. Obviously there are certain countries, VoIP is illegal. I think Vietnam and a couple of other locations and we just found it best to focus on the United States in Canada.

We will ship the Virtual Office products internationally. I know we have customers with their "U.S. offices" sitting in foreign locations, sitting there with a Virtual Office system and U.S. phone numbers. So that product, we're fine with it, but on the residential, we stopped it. So the international has probably come down but as you mentioned, it was never really significant.

Hey, Mike, one other comment on your question about do we see business competition from the cable companies. As one example, we actually have one reseller that we work with that refers us Virtual Office customers who fall out of product selection when they go to one of these major cable companies. We haven't identified who that is but that's an example where a customer goes to a cable company, finds out that the VoIP offerings that are available are not going to suit the needs of the business and we actually get a referral from that cable company as a result.

Great thank you guys. That was a good quarter.

Eric Buck.

Just a couple of follow-ups. On your line counts, the toll-free numbers and 800 numbers, are they included as a separate line or are they not counted in the line count numbers?

They are counted in the line count numbers. Any line that is billable, we include in those line count numbers (multiple speakers) they are not significant.

Anything with a phone number. Again, it's another instance where if you're looking at some of your competitors who do not include those in their line counts, you've got to factor that into the ARPU difference that we are reporting versus what they are reporting. Our ARPU's on an apples to apples basis is actually going to be higher because of that.

Okay. And then when we look at the wholesale accounts, can we kind of run through the flow of revenues and product there? Specifically, the DTA's -- are they purchased through you or do you get any revenue for those directly or indirectly or do Dixons and BellSouth go directly to the manufacturer?

It's different with each one because the scope of our responsibilities is a little bit different between the two. You know with Dixons, they're a retailer and so essentially what they're doing is buying inventory from us and putting it in their store. In the case with BellSouth, we're actually doing everything for them, including fulfillment. So we're managing inventory on their behalf and again that's inventory that they are purchasing.

Actually, Bryan, if I -- on both Dixons and BellSouth, with purchase directly from the manufacturers, I think BellSouth did make one purchase from us just for convenience, kicking off their relationship. But Dixons' orders directly from the manufacturer. We are out of the loop there. And that's the goal. We're not looking to be in the hardware business. They should buy direct from the manufacturers.

So is there any kind of royalty fee that comes to you from the manufacturer for those?

We actually get a very small royalty from the semiconductor company related to our old VoIP technology that's pretty insignificant because they're building a chip, which the manufacturer obviously buys the components and assembles the boxes.

What was the licensing revenue in the quarter?

Licensing revenue in the fourth quarter, I want to say was about $50,000, related to the old semiconductor royalties.

And then finally it looks like you burned about 8.5 million or so of cash this quarter.

It was actually 4.7 million. We have obviously short-term investments and also in light of the yield curves, we also have some long-term -- we have about 4 million [down] in long-term investments. So if you add them up, it's about 23 million versus the 27.7 we had at December 31.

(Operator Instructions). Ladies and gentlemen, this concludes the question-and-answer portion of today's conference. I'd like to turn it back over to Bryan Martin for any further comments.

Thank you, Carlo, and thank you, everybody, for listening. I just want to conclude by saying that if you're not already a Packet8 customer or if you haven't tried VoIP yet, I would certainly encourage you to sign up today for Packet8 service at our website, www.Packet8.net. Go ahead, Carlo.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes your presentation and you may now disconnect. Good day.