8x8 Inc (EGHT) 2007 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the fourth-quarter 2007 8X8 earnings conference call. My name is Jeremy and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of conference. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host, Ms. Joan Citelli, Director of Corporate Communications. You may proceed, ma'am.

Thank you and welcome everyone to our call. This morning, I'm joined by 8X8's Chairman and Chief Executive Officer Bryan Martin and Chief Financial Officer Dan Weirich to discuss our results for the fourth quarter of full-year 2007. If you have not yet seen this morning's financial results, the press release is available on 8X8's corporate Web site 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, market makers and market researchers only. All others are welcome to listen into the Q&A session.

Before I turn the call over to Brian, 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 fact 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, 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 to Bryan Martin, Chairman and Chief Executive Officer of 8X8.

Thanks, Joan, and I would also like to welcome everyone to 8X8's conference call for the fourth quarter and fiscal year ended March 31, 2007. We released the results for the fourth quarter and full-year earlier this morning and I'm pleased to report that the Company's fiscal 2007 sales of $53.1 million are the highest annual sales in the 20-year history of 8X8 and they're up 67% sequentially from fiscal 2006. The fourth quarter sales totaled $14.4 million, up 9% quarter-over-quarter from December.

More significantly, the Company's cash burn for the March quarter improved to $492,000, a 76 improvement over the $2.1 million of cash used in the December quarter. We ended the March quarter and the 2007 fiscal year with $11.9 million in cash and investments versus $12.4 million at December 31, 2006. This last fiscal year, we have seen significant and steady improvement in our quarterly cash burn from a high of $5.2 million in the quarter ended June 30, 2006 to $3.3 million in September to $2.1 million in December to just $492,000 for the March quarter. The March cash burn is well within our discretionary marketing spend with $1.1 million spent on advertising during the March quarter.

While we will not be providing specific guidance on the timing of positive cash flow and profitability, let me assure you that these two milestones remain paramount atop our list of our priorities.

We're very pleased that our strategy of focusing on higher margin business service customers with our unique and patent-protected Packet8 Virtual Office technologies is yielding these improved fundamental results. We announced last month that we're now providing Packet8 Virtual Office services to more than 7000 companies who use our services as a total and complete solution to their business telecommunication needs. We have expanded our relationship with Office Depot who now features the Packet8 Virtual Office service on endcaps in 400 of their largest stores. During the last quarter, we also landed our first United States government contract for Virtual Office services at an Army facility in Yuma, Arizona.

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, or soon, our Tango Video Terminal Adapter, and individual extensions can be connected to the Internet at any location, anywhere in the world and can be relocated dynamically just by unplugging, moving the equipment and plugging it back in. Provisioning time is instantaneous and initial setup of our service takes about five minutes to complete.

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 the current residential Voice Over IP market and we do that all for one convenient flat rate price. Anyone interested in receiving a free quote and additional information about how Packet8 Virtual Office can substantially enhance your business's communications capabilities and productivity while saving lots of money should call 1-866-TRYVOIP today.

A couple of other highlights and points of interest from the quarter before I turn the call over to Dan. First, Packet8 Virtual Office represented 65% of our new order cash receipts and 37% of total revenues for the March quarter. We have seen steady and significant growth in Virtual Office penetration this year with business service revenues representing 25% of revenues for the September quarter, 33% of revenues in December and now 37% of revenues for the March quarter.

Second, during the March quarter, we agreed with BellSouth's new owners to terminate our wholesale Voice Over IP services agreement which was announced back in December 2005 and referred all remaining BellSouth digital phone service residential subscribers over to other offerings. Wholesale revenues primarily from BellSouth represented 3% of total revenues for the March quarter.

Next, we rolled out a small price increase to all existing and new Packet8 customers effective March 1, 2007. However, our services are very competitively priced and a great value for our customers. Dan will have additional detail on the net effects that the increase in price for one-third of the March quarter's billing periods had on our results and the full impact of the price increase will be included in our June quarter numbers. As part of this, I want to highlight that gross margins for the March quarter increased to an all-time high of 54% with our service margins now at 62%. Again, these margins only reflect the contribution of one month from the March 1 service price increases.

Finally, during the March quarter, the Company introduced international phone numbers in the United Kingdom, France, the Netherlands, Norway, Sweden, Finland, Italy, Ireland and Denmark that enable our business and residential customers to have a virtual local presence in any of these markets using our existing Packet8 services and equipment. We also introduced the Packet8 Tango Video Terminal Adapter device and began shipping production units on March 20.

Our strategy remains to develop new, innovative and differentiated IP services that build upon the IP communication technologies we've invented and offer all of our customers the best possible products and services at the lowest possible prices.

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 fourth fiscal quarter of 2007 were $14.4 million which represented 9% sequential growth and 39% growth over the same period last year. As of March 31, 2007, Packet8 Virtual Office represented 37% of revenues, Packet8 videophone services represented 5% of revenues, wholesale private-label services represented approximately 3% of revenue and Packet8 residential services represented 55% of revenues. Quarter over quarter, Packet8 Virtual Office revenues grew by 24% and our residential voice revenues grew by 3%. The monthly service price increase we instituted on March 1 generated approximately $300,000 additional revenues during the month of March and we will see this full quarter's effect of this new pricing in our June results.

Average monthly churn for all services for the quarter approximated 4.6% excluding subscribers that canceled within the first 30 days of service, up from our overall churn of 4.2% for the full 2007 fiscal year. We're currently researching whether this increased churn in the fourth quarter resulted from our March price increase or general Voice Over IP market concern resulting from the recent industry events.

Our customers continued to report to us that our quality [and] reliability are among the best in the Voice Over IP industry. Packet8 Virtual Office churn remained our lowest churning service over the last fiscal year. On April 3, we announced that as of the end of the March quarter, we have more than 7000 companies who use our Packet8 Virtual Office services as their only source of IP business communication.

These company additions during the quarter represented an 18% increase in the number of companies [versus] our company customer count at December 31, 2006. The average number of services our Packet8 Virtual Office customers subscribed to increased from seven in the December quarter to 7.1 for the March quarter. The average monthly recurring service fees billed to a Packet8 virtual office company were $229 in the March quarter.

On the marketing front, our subscriber acquisition cost for the quarter was $128 per service across all channels versus $139 in the third fiscal quarter. Our reported subscriber acquisition cost is a fully loaded number and includes all costs for advertising, marketing, promotion, commission, equipment subsidies and rebate programs. The Company's advertising expenses totaled $1.1 million for the fourth quarter versus $1.3 million in the previous period and approximately 67% of all new sales were sold through our direct sales channels. The net loss for the fourth fiscal quarter of 2007 was $2.3 million, or $0.04 per share versus $3.1 million or $0.05 per share in the third fiscal quarter.

The fourth quarter's net loss improved 66% over the $6.6 million loss in the same period last year. The net loss in the fourth fiscal quarter was impacted by stock option expenses of $284,000. Additional differences between our cash flow and net loss numbers were a $402,000 depreciation charge, $290,000 in sales and use tax accruals and 401(k) matching, $150,000 in future technology licensing payments, $103,000 in employee severance charges, $270,000 in stock option exercises and the additional changes in working capital make up the difference. Gross margins improved to 54% overall versus 52% in the prior quarter with a recurring service margin at 62% and our product margin at 0%.

Moving onto our balance sheet, as of March 31, 2007, cash and investments totaled $11.9 million. The Company burned approximately $492,000 of cash in the fourth quarter compared to $2.1 million in the prior quarter and $3.3 million in the September quarter. Cash outflow for inventory purchases was $1 million during the fourth quarter. CapEx for the quarter was $268,000, or 1.9% of revenue, almost unheard of in the traditional telecom world for a growing telecommunications company that is expanding its networking customer base. As of March 31, 2007, total shares outstanding were 62 million and total shares fully diluted were 79 million. At the end of the quarter, the Company's headcount was 195 people, excluding personnel at our outsourced call centers.

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

Thank you, Dan. We're very proud of the tremendous growth in sales and improvements in cash flow that were achieved in fiscal '07 and we look forward to a very prosperous 2008 fiscal year. We will be presenting these results later this morning at the AEA Micro Cap Financial Conference in Monterey, California (technical difficulty) presenting at the Piper Jaffray Telecom Conference in New York on Wednesday and at the CIBC Telecom Conference in New York on Thursday. We look forward to seeing you at one of these events.

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

(OPERATOR INSTRUCTIONS). Colby Synesael, Merriman.

Hi, guys, congratulations. Obviously very impressive improvement in gross margin for the past few quarters. Curious if you could give us a little color in terms of where you expected that finally go long-term. And then, two, in terms of SG&A, that was a little bit higher then what we were expecting. (technical difficulty) anything onetime in nature there? And then on the BellSouth contract that you guys talked about, can you talk about the timing of that and when we finally expect that to go away?

I will have Dan answer the first two and then I will answer BellSouth for you, Colby.

Hi, Colby. So on the first question on the service margins, we increased the price in March, and in March we actually -- on the service side, we actually had 69% margins. So that's the $300,000 in increased revenue and there's no corresponding increase in price.

SG&A was his other.

And SG&A, it's a little bit higher than your number. It's pretty much unchanged from last quarter, but there's just a handful of onetime items that you could look at, and I will repeat those again. One was depreciation charges, $402,000. There was $290,000 in sales and used tax accruals and 401(k) matching. We just started doing 401(k) matching again effective January 1, and so that represented about $100,000 of that, so that would have been an increase. And there's $103,000 relating to employee severance charges and $150,000 relating to future technology licensing payments. And those are primarily the onetime items. Depreciation charge obviously is recurring.

So Colby, on BellSouth, we've been having discussions with these guys for a long time since the merger. It became clear that AT&T was going to consolidate at least their residential services back into their existing platform and we worked with them on a very productive basis to make that move happen. It happened seamlessly, we've been paid for all the services rendered and I think we have a very good customer reference going forward because I know the BellSouth team enjoyed working with us and offered to provide references if we ever needed that. So that's kind of where that has gone. I think most of the revenue, Dan, came in for the March quarter so you should see the wholesale revenues drop off in June if we don't have something to replace those with.

Thank you very much. Can I just confirm, you said that gross margins for the month of March were 69%?

The service margins for the month of March.

Which is roughly 85% of revenue.

Thanks.

Eric Buck, Brean Murray.

Good morning guys. I was wondering if you could talk a little bit about the churn numbers. As you indicated, it was up fairly significant. Was it both the residential and VO side, or was it primarily residential? And I guess I was a little surprised that residential revenues were up, particularly looking at that churn number, so maybe if you could talk a little bit more.

Yes, so as we indicated in the script, we're still trying to figure out where (technical difficulty) churn is coming from and whether this is a onetime event or if it's going to sustain itself through the quarter. I would say both residential and business churn was up, but as Dan mentioned, our residential churn is much higher than our business churn. And we know that from in the past when we marketed one of the lowest-cost residential services out there that we had a lot of customers that were extremely price-sensitive. So it's possible that the $2.00 increase to existing customers had an impact there. I think the positive thing is we're trying to understand where that churn number is coming from and is one of our biggest focuses operationally right now inside the Company is to really get that churn down because it really leverages these numbers. But what we're positive about is that we did see the 3% sequential growth in residential voice and that was with substantially no advertising targeted at that sector. So we continue to sign up residential customers and we will continue to try to sign up video customers now that Tango is in production and try to offset the losses until we can figure out where these customers are going and why they're turning off.

Would residential have been up without the price increases?

Residential increased by 3%, and if you remove the price increase, residential would have grown by 1%. So it declined 11% between the second and third quarters and we're very happy that it had stabilized.

Okay. And when you look at the VO in the March month, what percentage of the VO lines were subject to -- or were actually paying the price increase?

We didn't increase it on every one. There were just kind of selected planned; some of it depended on which the sales channel -- it was sold through. So for example, Office Depot right now is selling at $39.99, and so we did not change any customers that signed up through that channel. But I don't know the exact percentage, but it was approximately two-thirds of the lines across the board, including residential, were increased.

And I think last time you gave kind of the mix of lines within VO accounts in terms of fully paid and metered, fax, etc. -- do you have those stats?

Yes. So, for the -- they purchased on average (technical difficulty) 7.1 lines, 7.1 services per Company, and the breakdown is -- last quarter, it was around, for full priced extension, it was around four lines. It's right around that now, and then the discount and the metered were about 1.2, and that has actually increased to about 1.3 lines now. Features are 1.75, and then 20% of our customers subscribe to the fax service.

Okay, great. And finally, can you elaborate on the tech payments, the tech licensing payments that you talked about on the SG&A line, what those are specifically related to?

It is just some technology that we've licensed, and the structure of it is that we needed to expense it in the period that we did the arrangement. But we have to pay it in installments, and that's -- so we're going to be paying it over the next five to six quarters.

So this is a onetime licensing fee, or will it be an ongoing --?

It's a onetime licensing fee.

Thanks.

(OPERATOR INSTRUCTIONS). At this time with no further questions, I'd like to turn the call back to Mr. Bryan Martin for closing comments.

Thank you, Jeremy. Thank you everybody for listening. If you're not already a customer, I encourage you to sign up today for our Packet8 services for your home or business at www.Packet8.net. Go ahead, Jeremy.

Thank you for your participation in today's conference. Ladies and gentlemen, this does conclude the presentation and you may now disconnect. Have a wonderful day.