8x8 Inc (EGHT) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the quarter three 2007 8x8, Inc. earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. If at any time during your call you require assistance, (OPERATOR INSTRUCTIONS). As a reminder, this conference is been recorded for replay purposes.

I would now like to turn the presentation over to your host for today, Ms. Joan Citelli, 8x8 Director of Corporate Communications. Please proceed, ma'am.

Thank you, and welcome, everyone, to our call. This morning, I am joined by 8x8 Chairman and Chief Executive Officer, Bryan Martin, and Chief Financial Officer, Dan Weirich to discuss our results for the third 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. Please note that participation in the Q&A portion of this call is limited to financial analysts, institutional investors, marketmakers, and market researchers only. All others are welcome to listen into the Q&A session.

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, forecast, 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 section of our annual report on Form 10-K and our quarterly reports on Form 10-Q and in our other SEC filings & 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, forecast or similar future expectations, and your cooperation is appreciated in not asking any questions in this regard.

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

Thanks, Joan. I would also like to welcome everyone to 8x8's conference call for the third quarter ended December 31, 2006. We released the results for the third quarter earlier this morning, and I am pleased to report that in addition to the progress we are making across our services business, we achieved our goal of generating positive monthly cash flow from our Packet8 voice and video VoIP communications business during the month of December, three months ahead of our previously stated goals.

8x8 entered the last month of 2006 with $12.05 million in cash and investments and ended the calendar year with $12.42 million in cash and investments, generating approximately $373,000 in cash during the month of December. The month of December's business cycle in regards to customer billings and supplier payments was normal, except for the fact that we purchased very little inventory during the month, only approximately $100,000 worth of IP phone equipment compared with the total inventory purchase of approximately $1.8 million for the entire quarter.

While our cash growth during the month of December was largely the result of limited inventory purchases, our cash flow on a steady-state basis is now very close to breakeven and well within the range of our monthly discretionary spending on advertising and other marketing related functions. The cash generation in December is a first and a huge milestone for 8x8 as a service provider. We believe we are the first publicly traded, pure play voice-over IP service provider to achieve this accomplishment. I credit our employees, our partners, and our industry-leading technologies for achieving this milestone.

We are very pleased that our diversified strategy of focusing on higher margin business service customers with our unique and patent-protected Packet8 Virtual Office technologies and our video communication technologies are yielding these fundamental results. I would like to highlight a couple of additional points before I turn the call over to Dan, who will be walking you through the underlying details of our financial report.

In terms of topline revenues, the December quarter was flat sequentially with $13.2 million in revenues for the quarter. These flat revenues were the result of the transition of our sales and marketing resources from residential voice services to our higher margin Packet8 Virtual Office services, as we saw residential voice revenues decline at the same rate as the uptake in new sales of our Packet8 Virtual Office services.

As we announced last month, the Company surpassed a new milestone with more than 6,000 U.S. companies now using the Packet8 Virtual Office service as a total and complete solution to their business telecommunication service needs. This milestone reflects sequential quarterly growth of our business customer base of more than 20%. In response to the increased interest in our business services, we more than doubled our direct sales force focused on these channels during the month of December. These sales agents work with small business owners and IT departments to sell Packet8 Virtual Office business services.

We also, during the quarter, launched our business services in all 1,121 Office Depot stores in the United States. We plan to continue to grow our sales force and expand our business distribution channels, and expect that future quarters will once again show continued topline growth as our business services begin to comprise a larger percentage of our total sales.

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 adapter box, and individual extensions can be connected to the Internet at any location anywhere in the world, and can be relocated dynamically just by unplugging it, moving the equipment, and plugging it back in.

This service is so simple that anyone can provision and install it, and because these services are not tied to any special fixed dataline service, you never need to worry about reprovisioning the service at a different geographical location. You just pick up the equipment and go. There's no need to do anything more than that.

Businesses with multiple locations or employees who work from home immediately benefit from the ability to access Virtual Office services from wherever there's a high-speed Internet connection. 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, nor in the current residential voice-over IP market. We do that for all-in-one convenient flat rate price.

Anyone interested in receiving a free quote and additional information about how Packet8 Virtual Office can substantially enhance a business's communications capabilities and increase productivity while saving lots of money on monthly phone bill should call 1-866-TRY-VOIP today.

For the December quarter, Packet8 Virtual Office and our business services increased to 33% of our total revenues versus 25% in the prior quarter. Our video services accounted for 5% of revenues. Wholesale and private label services accounted for 4% of revenues, and residential services accounted for 58% of revenues. Sequentially, Packet8 Virtual Office revenues increased by 30%, and video services increased by 22%, while residential and wholesale declined by 11% and 1%, respectively.

Packet8 Virtual Office new customer sales were 51% of all new order receipts for the quarter ended December 31, and our blended customer acquisition cost remained at very reasonable levels at $139. While 8x8's cash burn continues to improve sequentially, we are looking to accelerate the Company's timeline to achieve profitability on the bottom line. As a result, we have announced to our customers that effective March 1, we will be implementing a price increase to our Packet8 Virtual Office customers to $49.99 per extension per month for new customers, and $44.99 per extension per month for existing customers as of March 1. Our residential customers will also see a price increase to $24.99 per month for new customers, and $21.99 per month for existing customers as of March 1. We believe that these price increases will bring our services more in line with mass-market pricing in the industry and enable us to reinvest more money into our R&D efforts for new business, video, and other IP communication offerings.

Our gross margin for the December quarter was 52% compared to 52% in the September quarter and 37% in the June quarter. Service gross margins for the December quarter increased to 60%, up from 56% in the September quarter and 52% in the June quarter. Product gross margins for the December quarter declined to negative 1% down from positive 29% in the September quarter due to aggressive Thanksgiving and Christmas promotions and increased hardware subsidies.

We reported a net loss of $3.1 million, an increase from the $2.7 million loss posted for the September quarter. Excluding the December quarter's stock option expense charge of $428,000, our operating net loss for the quarter was $2.6 million with a net cash burn for the quarter of $2.1 million versus a $3.3 million cash burn in the prior quarter, a sequential improvement of 36%.

With more than $12.4 million in cash and equivalents at the end of the December quarter, our balance sheet is strong, and enables substantial flexibility to continue to expand our services offerings. We are also one of the only phone companies on the planet who have built our network and service offerings with no debt on the balance sheet.

At the Consumer Electronics Show in early January, 8x8 again led the IP communications industry by introducing the world's first video terminal adapter named the Packet8 Tango model VTA 464. This innovative device instantly turns any standard analogue phone into a state-of-the-art videophone while still powering whole house replacement telephone voice service via Packet8's residential voice-over IP service plans. These service plans include calling features such as unlimited video calls worldwide, unlimited long distance calls to any phone number in the U.S. and Canada, voicemail, caller ID with name, call waiting, call forwarding, three-way calling, and many more. The Packet8 Tango communications appliance uses any high-speed Internet connection to also deliver advanced full motion video with delay-free audio, adding video and other applications to any conversation. Tango's sleek, light, portable design fits perfectly into small spaces and on-the-go lifestyles, so our customers will be able to tango at home, tango at work, and tango while they travel.

The device includes a one port router, an interchangeable faceplate for other skins, and a USB port to power optional external peripherals that we're working on. Compatible with older Packet8 videophones and with Packet8 Softalk, the Packet8 Tango boasts twice the video quality of our older phones for smooth, lifelike images over any high-speed Internet connection. We announced an MSRP of $249 for the Packet8 Tango when we begin shipments later this quarter.

Unlike previous videophone offerings, the Packet8 Tango adapter will be a part of every call, whether voice or video, and will enable new IP applications that will enhance the functionality of every call, even your voice calls. These new applications will increase the functionality and stickiness of both our consumer and our business service offerings, and open up new revenue opportunities for all of our services.

I have never been more optimistic about the Company's competitive position and growth and profitability prospects than I am today.

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 and some related operating metrics of the business. Dan?

Thank you, Bryan, and good morning to everyone on the call. As Bryan mentioned, revenues for the third fiscal quarter of 2007 were $13.2 million, which is flat sequentially, represented a 56% growth of the same period last year. The 30% and 22% growth rate in our Packet8 Virtual Office and video services during the quarter was impacted by a decline in our residential customer base and our aggressive discounting and promotion in the December quarter.

As of December 31, 2006, Packet8 Virtual Office represented 33% of revenues. Packet8 videophone services represented 5% of revenue; wholesale and private label services represented 4% of revenue; and Packet8 residential services represented 58% of revenue. Average monthly churn for all services for the quarter approximated 3.7% excluding subscribers that canceled within the first 30 days of service, unchanged from 3.7% in the prior quarter.

Since we have stopped reporting the reporting of generic lines as a useful metric to model our differentiated IP communications services business model, I want to provide some metrics which describe how the average Company utilizes our services. As Bryan stated, we now have more than 6,000 companies who use our Packet8 Virtual Office services as their only source of IP business communications.

Over our entire customer base, the average Packet8 Virtual Office business subscribes to four full price extensions, 1.2 discounted or metered extension services, 1.7 feature services, and .15 fax-line services. Assuming each employee has a physical extension, our average virtual office customer employs between five and six people.

We continue to see a trend with new sales of our Packet8 Virtual Office service going to larger and more distributed business customers. The average monthly recurring service fees billed to Packet8 Virtual Office Company were $223 in the December quarter.

On the marketing front, our subscriber acquisition cost for the quarter was $139 across all channels versus $99 in the second fiscal quarter, mainly impacted by our aggressive discounting and promotions during the quarter. Our reported subscriber acquisition cost is a fully loaded number and includes all costs for advertising, marketing, promotions, commission, equipment subsidies, and rebate programs.

The Company's advertising expenses totaled $1.3 million for the third quarter versus $1.1 million in the previous period. More than 75% of this marketing was focused on growing the Company's Packet8 Virtual Office subscriber base.

The net loss for the third fiscal quarter was $3.1 million or $0.05 per share versus $2.7 million or $0.04 per share in the second fiscal quarter. The third quarter's net loss improved by 55% over the $6.8 million loss for the same period last year. The net loss in the third fiscal quarter was impacted by stock option expenses of $428,000, which were not present in the year-ago period, and a sequential increase of $335,000 in SG&A.

Gross margins were flat at 52% for the quarter versus 52% in the prior quarter. Service margins increased sequentially by $551,000, though the increase was offset by a reduction of $580,000 in product margins resulting from increased promotions and hardware subsidies.

Moving on to our balance sheet, as of December 31, 2006, cash and cash equivalent totaled $12.4 million. The Company burned approximately $2,065,000 in cash in the third quarter compared to $3.3 million in the prior quarter and $5.2 million in the June quarter. You will notice that while our cash burn declined by $1,253,000 sequentially, our accounts payable decreased by $1 million during the same period. The reduction in cash burn is being achieved through our improving business fundamentals.

Cash outflow for inventory purchases was $1.8 million during the third fiscal quarter. CapEx for the quarter was $292,000. Depreciation totaled $387,000 for the quarter. As of December 31, 2006, total shares outstanding were $61 million and total fully diluted share count was 80 million. At the end of the quarter, the Company's headcount was 183 people, excluding personnel at our outsourced call centers.

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

Thanks, Dan. We are very pleased with these results and given that we achieved positive cash flow on a monthly basis in December, three months ahead of our previous guidance, we reiterate that with our cash position, we have no need for additional financing at this time.

To conclude, I want to discuss again our growing IP communications patent portfolio. On January 16, 2007, we were notified by the U.S. Patent and Trademark office that the Company will be awarded a patent containing 16 claims regarding the invention of virtual extensions. Subject to the payment of issuance fees and regular USPTO policies and procedures for the issuance of an allowed patent application.

We are excited by this recent notification of our fifth U.S. patent application allowance relating to core voice-over IP technologies, and we continue to invest substantial funds into our research and development efforts in the field of IP communications technologies.

That concludes our prepared remarks, and I will turn the call back over to Michelle for any questions.

(OPERATOR INSTRUCTIONS). Colby Synesael, Merriman Curhan Ford & Co.

I first want to talk about the revenue. That was a little bit lower than what I was expecting. Was that, in terms of what you guys were expecting, was that actually by design or was that actually worse than what you guys were also expecting?

And then, going forward, you guys are now going to be raising your prices on the residential side of things. Do you anticipate that you're going to see significant churn from raising your prices? Because if you look at guys like SunRocket, for example, who are half of that price, if that, it seems like you could see quite a bit of customers actually start to leave your service much faster than what we've seen in the past.

Yes, good morning, Colby, good to hear from you. It was really according to design in terms of the flat revenue. We knew when we shifted substantially all of our marketing resources and advertising spend over to the VO channel that our new adds of residential services were going to decline. Basically, we have such a large base there of existing residential customers that with the churn numbers you get in that channel, the churn kind of dominates and we saw that decrease in lines because of that. So it wasn't a surprise to us to see that.

We are glad to see that our VO customer base, our virtual office base, is now 33% of our total revenues and that continues to rise pretty quickly. That's why we made the statement that we're pretty comfortable that this was a one quarter thing and not something that we should expect in the future. We're forecasting that VO sales will continue to increase and began to dominate the overall issues with the residential channel.

The price increase -- this residential market in particular has been extremely price competitive for some time now. There's -- when we first launched our services at the $20 price point, I think way back in July 2003, we were well under anyone in the space including Vonage, including -- I don't even know if SunRocket was around then, and since that time, there's been a lot of people come in below our $20 price.

We've been at $20 now for that long and I think the factors we see in the market and in terms of customer retention and so forth are such that I don't think it's -- it's not like we're just suddenly going to put people underneath us. There's people that are already below our price. What we're trying to do is mark our services up to where we think the market will support it. Maybe we get a higher quality customer because of that.

We've done a couple of price increases in the last 18 months mainly related to regulatory issues and in none of those instances have we seen a spike in the churn rates, and so we are expecting with just a $2 increase to our existing customers that we won't see a spike in churn this time as well.

What's the difference between the gross margins in the residential business versus the virtual office?

So we do not break those numbers out, but it's what we said in the past is that a business user uses less minutes on average than a residential user, and so since that's a variable cost component to us, we do have lower cost per virtual office line, and they pay more money. So, you can just kind of lead into that that the margins are higher on virtual office; they're lower on the residential side. But at this point, we're not breaking those numbers out.

But essentially the cost to provision a line for a business customer versus a residential is the same for you guys?

Yes. The only difference is, is that it runs on just a little bit different network architecture and so there's maybe a slight difference in CapEx per customer, but effectively it's the same amount.

Have you guys stated -- I just wanted to make sure, are you guys planning on burning cash in the next quarter or are we actually going to see you grow cash in the next quarter?

So we're not giving any guidance on the quarter we're in right now, but certainly after we've gotten one month of cash flow, our next goal is to get a whole quarter of cash flow and the goal after that will be to get a profitable quarter in there.

Right, but you mentioned that a lot of it had to do with how you managed your inventory, so I'm not -- I didn't get from you that that was necessarily sustainable. So, in the January month for example, have you seen that you are actually able to sustain that?

With the volumes that we're shipping, we buy this equipment that we have to ship to these customer sites in very large numbers, so I think what you're going to see, Colby, is very lumpy results on the cash burn on a monthly basis because when we go out and by a bunch of gear, we buy a lot of gear and that's what happened in the December quarter. We bought a bunch of gear in the early months and we had it all stocked up for December and didn't have to buy any more.

So, it will be lumpy going forward, but I think to the extent that our margins continue to improve, and that we did a lot of discounting this quarter, so we were basically breakeven. It was negative 1% margins on the product, but we've turned on all the activation fees and shipping and so forth again beginning in January and hopefully we'll see some small positive margins from that as a result on the product side.

What I'm really excited about is the fact that we have these 60% margins on the recurring service fees and that in and of itself is a huge achievement for us. We've never had margins that high in the service side, and we think those are sustainable levels.

Michael Coady, B. Riley & Co.

Dan, you mentioned the $223 as the average for a business customer. Is that right? And then what was it in the last quarter?

Yes, so that's the average service revenue we receive on a monthly basis from a virtual office customer, and that was in the December quarter.

Have you provided that? Or do you know what that was for the September quarter?

We have not disclosed that number, but it was in -- this is the first time that we've actually told ARPU on the virtual office side, but it's been fairly consistent.

And then, could you talk about the increased promotions in hardware subsidies in the quarter? Was that a function of the holidays and will that decline?

Yes, so, what we did was for about a 10 day period around Thanksgiving, and then we turned it off around December 1, and then we turned this back on around the 12th of December through the end of the year. We were offering, on the consumer side, free activation, which is a $30 discount, and free shipping to incent people to purchase our services around those holiday periods. So that's why you see that the product margins were hit so hard. In January, as Bryan noted, we started charging for those services again; so activation and the shipping component.

Are there any fees in January that hadn't been there previously? Or are these just fees that got kicked back on again after the promotional period?

They are the same fees that were there in the month of October and in the second quarter, so we didn't add on anything additional.

Tom Watts, Cowen & Co.

Congratulations on the cash flow positive and the progress in the business sector. You had talked about the part of flat revenues was due to transition of resources from your traditional business over to the business side, and could you talk a little bit more about that? Was that just transitioning telesales people to who they're calling? You also highlighted direct sales. How much of an expansion direct sales force was that?

Yes, so basically it was both -- I think the change in our focus of our advertising and marketing. We substantially cut the amount of residential advertising or dollars that were targeted to some of our residential channels, but it was also a shift in resources inside the Company. So I mentioned that we had doubled our direct sales force, which is an in-house, kind of inside sales force that sits on the phone all day and talks to these small business owners and talks to them about what their current solution is and how much they're paying right now for phone service and what features they wish they had, and then we provide them basically with a quote of what we can do for them and the feature set.

And so, the kind of average selling cycle with these businesses is kind of in the 20 to 30 to 40 day range from when we first start talking to them to when we actually close business with them. So it's a very hands-on sale and I think it's very bullish that we're increasing that sales force so directly.

We've got a call center here in Santa Clara that does these telesales and then we've also got some outsourced partners and in both cases, we've added a lot of heads. Mainly late in the quarter, but we are continuing to add heads here in January as well.

And [do you have] a sense of like in the quarter, what the timing was of the transition? Was there something that was gradual throughout the quarter so you didn't -- it sounds like we're going to have a lot more at least phone calls being made or a lot more people on the phone during Q1.

Right. The doubling really didn't occur until the month of December, so it was very late in the quarter that we got these new heads onto the phones and I was -- you would think there's not a whole lot of business sales going on over the Christmas holiday period, but we really didn't see our business slow down that much during that time, which was very encouraging and kind of surprising to me. I thought it would slow down more than it did.

You have a couple of different channels -- your telesales, Office Depot. Is it right to think of a direct versus an indirect channel going forward and how should we think of the revenue split between those? Or how would that revenue split work out during the December quarter?

Yes, so we do have indirect and direct channels. For the December quarter, about a third of the sales came from indirect channels.

Is that something that -- are you going to have a lot more locations going forward? How is the timing of the Office Depot openings? Is the number of locations going to change that going forward, do you think? And what else are you likely to do on the indirect front?

So our understanding is Office Depot is actually going to add a lot of stores to their universe here in 2007 and certainly we'd be rolling out at those new stores. We've been very pleased with the results from the Office Depot launch. Again, it's relatively a new channel for us, but I'm very encouraged because of the percentage of units sold that actually activate on our service is actually very high. In the past we've seen, with residential equipment sold through other retail channels, that you don't get a great activation percentage. We are seeing that with Office Depot.

The other thing that I think is very encouraging for this channel is we're seeing a lot of follow-on sales subsequent to the initial purchase at the Office Depot location. So they might buy one or two phones in the store but then come back and actually order a fax-line and virtual number and different services that we sell or additional extensions that we sell. So, it's been very encouraging so far. We are looking at other channels, but we don't have anything to announce at this time.

(OPERATOR INSTRUCTIONS). Orin Hirschman, Citigroup.

Congratulations on the positive cash flow.

Thanks, Orin.

I just wanted to review some -- if you're giving any guidance overall in terms of whether we'll see revenue growth begin to reoccur this quarter, number one. And number two, can you comment a little bit on when you expect to ship Tango?

Yes, so I'm not going to give any more guidance than kind of what I've hinted at that we expect to see the increase in virtual office sales again continue to drive more of our revenue line, and so hopefully that will take care of itself. Tango, we have our first production unit in Santa Clara this week and we should be shipping those by the end of -- definitely by the end of this quarter.

Sir, at this time you have no further questions.

Thank you. Thanks, Michelle. Thank you, everybody for listening and if you're not already a customer, I encourage you to sign up today for Packet8 service and lock in those existing customer prices prior to March 1 at www.Packet8.net. Go ahead, Michelle.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.