8x8 Inc (EGHT) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to the Q1 fiscal 2007 8x8 earnings conference call. My name is Tony and I will be your coordinator for today. At this time all participants are in a listen-only mode and we will be conducting a question-and-answer session towards the end of this conference. (OPERATOR INSTRUCTIONS) I'd now like to turn the call over to Miss Joan Citelli, 8x8's Director of Corporate Communications. Please proceed, ma'am.

Thank you. And welcome everyone to our call. This morning I'm joined by 8x8's Chairman and CEO, Bryan Martin and CFO Dan Weirich to discuss our results for the first quarter of fiscal year 2007. 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 Bryan I would like 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 factors sections of our annual report on Form 10-K and 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 co-operation is appreciated in not asking any questions in this regard.

Thank you. And with that I will turn the call over to Bryan Martin, Chairman and Chief Executive Officer of 8x8.

Thanks, Joan, and I would also like to welcome everyone to the conference call for the first quarter ended June 30, 2006. We released the results for the first quarter earlier this morning and I would like to highlight a couple of points before I turn the call over to Dan Weirich, who as we announced this morning has just been permanently appointed to the post of Chief Financial Officer, Vice President of Finance and Secretary of the Corporation, and congratulations, Dan. Dan will be walking you through the underlying details of our financial report.

The June quarter represented our 10th consecutive quarter of increasing topline revenues due to the continued growth of our Packet8 voice, business and video services. June quarter revenues were $12.3 million and grew 19% versus the quarter ended March 31, 2006. And more importantly we improved the bottom-line and trimmed our net losses by 14% as well. The efforts we talked about in last quarter's call have improved our overall gross margins to 37% and as the Packet8 business continued to grow this quarter we saw our operating expenses as a percentage of revenues continue to decline.

The net loss improvement versus March is also significant given that we began expensing employee stock options as required under FAS 123(R) in the June quarter resulting in a $663,000 charge for the bottom-line that was not a component of our March quarter loss. 8x8 continues to improve its fundamentals and remains focused on achieving profitability, increasing revenues and expanding Packet8 service offerings to both residential and small-business customers. The Company has continued to focus on controlling operating expenditures and managing customer acquisition costs.

The increased marketing focus on the Packet8 Virtual Office small-business voice over IP phone service which now represents 19% of total subscriber lines, and 23% of quarterly new line sales has been instrumental in overall gross margin and bottom-line improvements. Unlike other voice over IP single line services which are residential in nature but are nonetheless being promoted in the market as business class solutions, Packet8 Virtual Office delivers hosted PBX features and functions over the Internet to businesses of any size, thereby replacing the need for a premise based PBX or Centrex phone system. The only equipment required at the customer location is a telephone and our adaptor box, individual extensions can be connected to the Internet at any location, anywhere in the world and can even be relocated dynamically.

Businesses with multiple locations or employees who work from home immediately benefit from the ability to access the Virtual Office services from wherever there is a high-speed Internet connection. Packet8 Virtual Office gives the 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 on the circuit switch world nor the current residential voice over IP market. And all for one convenient flat rate price. Virtual Office is as easy to set up, install and use as our Packet8 residential services so anyone that can plug in a phone jack can sign up for our service on the Web or over the phone and be up and running with their business in a couple of minutes.

In the June quarter we sold approximately 8,900 new Virtual Office lines more than 8% above what we sold in the March quarter and we set both quarterly and monthly all-time sales records for new Packet8 Virtual Office services in the month of June. There are several other highlights for the quarter that I want to cover. First, we completed the development and testing of our new soft phone services which because they leverage the Company's Packet8 technologies and network, now offer the industry's highest quality and most reliable soft phone telephone services available. We have married these new soft phone technologies to our business class Packet8 network. Now personal computer users and business travelers no longer need to rely on their expensive cellphones while traveling. Packet8 SoftTalk works seamlessly over wireless, hotel and other crowded networks with business class voice connections to the PSTN unlike competitive platforms currently on the market that focus on peer-to-peer connections.

We have also included some brand-new NAT traversal technologies and standards including a new combination of Stun, Turn and Ice and we believe 8x8 leads the industry in the deployment of these plug and play technologies. Packet8 SoftTalk is the only industry soft phone that also supports FCC mandated nomadic E-911 calling and Packet8 SoftTalk can be downloaded today from www.Packet8.net.

The second highlight I want to cover is that at the end of June we again began accepting orders for our Packet8 DV 326 video phone which works seamlessly with worldwide Packet8 SoftTalk video phone. We have secured new pricing from our overseas suppliers that will significantly improve the product margins of these DV 326 video phone sales, consistent with our goals of achieving positive cash flow as soon as possible. We expect to begin fulfilling these DV 326 orders in the September quarter.

Third, 8x8 announced this quarter that it was awarded a patent for technology related to the routing of telephony data within hosted voice over IP business services such as Packet8 Virtual Office and similar IP PBX services. 8x8's technological achievement such as those in this invention, that provide scalable, cost effective, user-friendly control over communications networks are vital successful deployment of voice over IP business phone services.

And finally, we completed the development and installation of a new back office customer relationship management system which has significantly improved the capabilities of our customer Web portals and the efficiencies of our onshore service operations. The new back office platform went live on July 5th and it allows us to significantly scale our subscriber support operations to accommodate the continued growth of Packet8 services. Three weeks ago I issued an open letter to 8x8 shareholders out of concern that some recent events in the voice over IP industry and at 8x8 may have unjustifiably affected 8x8's stock price and valuation. In this letter I pointed out that some of the decrease in our stock price may be attributable to the current overall market declines, as well as the results of the recent IPO of one of our direct competitors. I also explained some of the key differences between 8x8's Packet8 services and other voice over IP services and why we believe that our approach to this business will result in potentially better overall financial results for the Company. The letter, if you did not see it, is available on the media relations page of 8x8's Website at 8x8.com.

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

Thank you, Bryan. Good morning to everyone on the call. I will review our financial results for the quarter ended June 30, 2006 and some related operating metrics of the business. Revenues for the first fiscal quarter of 2007 were $12.3 million which represented 19% growth sequentially over the fourth quarter fiscal 2006. Our average revenue per line or ARPU, as calculated from our income statement for the quarter was $28.76. As Bryan mentioned, we ended the quarter with 151,000 billable line servers, a 14% growth in line, of the line count at March 31, 2006. As of June 30th Packet8 residential services represented approximately 74% of our line, Packet8 Virtual Office represented 19% of our line, Packet8 video phones represented 6% of our line and wholesale and private-label services represented approximately 2% of our line.

Average monthly churn for all services for the quarter approximated 4.1% excluding subscribers canceled within the first 30 days of service. Our monthly churn was higher with the March quarter due to the onetime effect of new and stricter operating procedures and in our billing and collections group pertaining to overdue customers. Excluding cancellation, the result of these new procedures our customer churn due to normal customer attrition increased slightly 3.4% per month.

8x8 offers a thirty-day unconditional money back guarantee on all services and we have historically deferred the recognition of new service revenues for 30 days until we deem that a customer has accepted the service. Beginning in the first fiscal quarter of 2007 the Company has determined that it has sufficient operating history to apply a returns reserve to new service revenues and therefore began recognizing all new service revenues for the last month of the quarter in that quarter. The returns reserve gave us a onetime revenue benefit in the June quarter of $440,000 and accelerated $466,000 of corresponding cost of sales.

Gross margins were 37% for the quarter. During the June quarter we saw the full impact of our new, low-cost BPG 510 adapter on our product market. The wholesale PSTN marketplace and our traffic volumes continued to offer the Company opportunities to lower its telecommunication termination expenses and we continue to leverage these opportunities with the goal of growing our service margins.

During the June quarter our service margins were essentially flat as we continued to see improvement in our product margins. Our subscriber acquisition cost or SAC for the quarter averaged $135 across all channels. SAC includes costs for advertising, marketing, promotion, commission and equipment subsidies. Advertising expense totaled $1.8 million for the quarter. The net loss for the fourth quarter of fiscal 2006 was 5.7 or $0.09 per share.

As Brian mentioned the net loss in the fourth quarter was impacted by a required adoption of the statement of financial accounting standards number 123(R). FAS 123(R) requires companies to reflect expense on their income statement relating to the value of equity compensation grant which thereby consists primarily of stock option grants made to employees. 8x8 previously reflected this information as a footnote in the financial statements, not within its income statement results. The FAS 123(R) charge for the first quarter was $663,000.

Moving on to our balance sheet at June 30, 2006 cash and investments totaled $17.8 million. The Company burned approximately $5.2 million of cash in the first quarter of fiscal 2007; the cash burn increased by $500,000 as compared to $4.7 million burned during the quarter ended March 31, 2000. The increase was due to the $946,000 increase in revenue as reflected on the balance sheet. As of June 30, 2006 total shares outstanding were 61 million and total shares fully diluted were 80 million. As of the June 30, 2006 the Company's headcount was 178 people, excluding personnel at our outsource call centers.

That concludes my prepared remarks. I will now turn the call back over to Bryan.

Thank you, Dan. We are very pleased with our improving financial results and fundamentals and are eager to communicate our differentiated voice over IP story to the investment community. This summer we have been invited to present at the Merriman, Curhan and Ford Investment Conference in San Francisco as well as the AG Edwards Technology Conference in New York, and we hope to see some of you at these events this summer. That concludes our prepared remarks and I will turn the call back over to Tony for any questions.

(OPERATOR INSTRUCTIONS) Colby Synesael with Merriman.

My first question has to do with the channel partner's solution, (indiscernible) using channel partners for your Virtual Office product. How are you guys going about trying to sell that product and how reliant are you guys on using partners to get to your end-users?

We are using kind of a two-phased approach to sell it. We use channel partners to primarily generate leads, some of these channel partners are very large in terms of the number of agents and resources that they have. And I think what we are seeing is because Virtual Office is such a new technology and a new concept to these businesses that for the first time they don't have to go by a 5 or 10 or $20,000 PBX system. They can do all of this virtually right over their Internet connection. We're finding it's a new concept to train these indirect partners on how to sell it because even to them it is a new concept.

And so what has been most successful for us, Colby, is to use our channel partners as a lead funnel into a sales group that we run here at 8x8 that actually then gets on with the customer, works to understand what application they have for their communication services, what issues they are trying to solve. And then we close that lead internally here within our sales group. And that has worked very well. We have a couple of partners that are coming online that are actually beginning to close sales themselves. But I think for the most part, probably upwards of 80, 90% of our sales follow the first function where a lead comes to us and then we close it.

And as far as how that revenue model works with the partner, is it fair to say that you receive less revenue, but you also have a lower subscriber acquisition cost and therefore the margins are pretty similar regardless if they come from a partner or if you get them directly?

Yes, I mean a Virtual Office sale is a larger upfront receipt for us. So the typical, a three-extension line will typically cost you upwards of $500 to just get started. So there is actually a lot of money available both for us on our margins as well as to pay the partners. Of course we pay less for a lead than a closed sale. So the lead generation works pretty effectively for us in the sense the cost of customer acquisition versus some of our other channels is actually much lower there. So we benefit on both sides. Bigger receipt and a lower bounty that we pay.

And another question, you know you did mention how you received a patent during the quarter. Do you think that there is other voice over IP providers in the market now that are infringing upon some of the patents you may have? Or do you think it is more important for you just to protect the technology that you are using today?

I'm not going to go on the record with a legal interpretation of the applicability of our patents. It is something we are certainly looking at. But I do believe, Colby, from what we are seeing in the space already plus what we know is in the hopper, there was kind of this first wave of voice over IP back in 1998 when we first got into it. And the patent that issued this quarter for us was a patent that came out of technology developments at that time. The cycle at the U.S. PTO has gotten so long that it takes five or six years to get a patent issued. That I know that voice over IP is going to be an extremely litigious space with a lot of licensing and a lot of intellectual property out there. So I think the companies that hold the strong patent portfolio like 8x8 does are certainly going to be in a better position to deal with the licensing threats and the parasites that come after us as the business grows.

And last question just a point of clarification. The 8900 Virtual Office lines that were sold during the quarter is that a gross number?

That is a gross number.

Thank you.

Clay Moran with Stanford Group.

Good morning; a couple of questions. What percent of your subscribers are residential and what percent are business? And then could you talk about the pricing history in those two areas? And anything you are willing to give us on the expectations for price going forward? Thanks.

On our line distribution we have a 74% on Packet8 residential product and 19% on our Packet8 Virtual Office product and the Virtual Office is the small-business product, so the number is 19%. And video as well is 6% as well as wholesale is 2%.

I think again the thing that we continue to be very on those percentages, very pleased with is we've got 19% of total subscriber lines on Virtual Office today. But as we mentioned our new line sales for the quarter were 23% of lines during the quarter actually came on as Virtual Office lines. So we continue to see the penetration rate increase which I think is good news for that channel. On pricing, on the residential side we still don't see I think any pricing pressures at the $20 level, at least with the major voice over IP competitors. There are smaller competitors out there that have these incredible deals every once in a while and certainly prices that are below where we are at. But we haven't seen pricing pressure there, in fact our ability to sign up new residential customers. On the Virtual Office side where we are watching the pricing very carefully I actually think we are one of the lower priced people in the market right now.

Certainly if anyone that is installing a physical hardware PBX on your premise you are going to be paying many thousands of dollars to get started, you are going to be paying maintenance fees and you still have to buy your long distance from someone. And even on some of the ones that work over the Internet or work over a managed broadband connection, we are typically anywhere from $5 to $15 or $20 per month per extension lower than those folks. And if you look to the big telco companies and their Centrex services we are probably about half what those folks are selling for the same sort of package, not necessarily with all the features, not necessarily with unlimited long distance. So a great bargain can be had there.

Thank you.

(OPERATOR INSTRUCTIONS) Colby Synesael of Merriman.

So when I look at the churn number, the 4.1 that you just referred to, is it fair to assume that going forward we are going to get back down to that 3% range? I know you guys mentioned new and stricter operating procedures. Was that really a onetime factor or do you think that is something that is going to increase the churn going forward as well?

No, it was just a onetime affect. We just had some policy changes to kind of reign in some customers that had been out there for some time. And it's just a onetime event. We did it kind of earlier in the quarter and latter in the quarter, the number kind of came back to where it has been historically.

Okay. Thank you, that is it.

Gentleman, there are no further questions in queue.

All right. Thank you everybody for listening. And if you are not already a customer I encourage you to sign up today for Packet8 service or our new soft phone service which you can try for free at www.Packet8.net. Go ahead, Tony.

Thank you for your attendance in today's conference, this concludes your presentation. You may now disconnect. Good day.