8x8 Inc (EGHT) 2008 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 8x8 Earnings Conference Call. My name is Latasha and I will be your coordinator for today.

(OPERATOR INSTRUCTIONS)

I would now like to turn the call over to Ms. Joan Citelli, 8x8 Director of Corporate Communications. Please proceed.

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 first quarter of fiscal year 2008.

If you have not yet seen this morning's financial results, the press release is available on 8x8's corporate 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 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, and with that, I'll turn the call over to Bryan Martin, Chairman and Chief Executive Officer of 8x8.

All right, thanks, Joan, and I would also like to welcome everyone to 8x8's conference call for the first fiscal quarter ended June 30th, 2007.

I am pleased to announce that for the first time in the nearly five-year history of the Company's Packet8 services, we reported positive GAAP net income of approximately $508,000 for the June quarter. In fact, the last quarter 8x8 reported net income was the quarter ended December 31st, 2001.

Now, we did enjoy a number of one-time accounting benefits this quarter, which Dan will describe and quantify in more detail in a minute, but we also achieved a milestone for the June quarter, when we ended the quarter with a $284,000 increase in cash and investments on hand due to the operating results of our business.

We ended the June quarter with $12.2 million in cash and investments and no debt on our balance sheet. Our goal of building a profitable, positive GAAP net income Internet phone company with no debt is at hand, as our services continue to mature and reach critical scale.

Now, I've read many analysts' and journalists' reports over the past month, stating that the pure-play VoIP market is impossible, because SunRocket is now out of business and Vonage is having tremendous financial problems.

But I am here to tell you that 8x8, a company that has been in business more than 20 years, is building and evolving a sustainable business model that just generated quarterly free cash flow and GAAP net income as a stand-alone pure-play Voice over IP provider.

Our Packet8 Virtual Office services continued to grow during the quarter, with 8,077 businesses subscribed to our services as of June 30th, 2007. Packet8 Virtual Office revenues grew sequentially by 23% versus the March quarter and represented 44% of our total revenues in the June quarter.

Unfortunately, we saw a decline of 5% in residential revenues to $7.6 million versus $7.9 million in the March quarter, as we saw the cancellation of approximately 17,300 residential services, compared to 8,300 gross new residential services added during the quarter.

There is a silver lining, however, going into this quarter. Since July 16th, 2007, when SunRocket, one of our residential Voice over IP competitors shut its doors, we have seen more than 19,000 former SunRocket customers sign up for Packet8 residential services, along with fewer existing Packet8 residential cancellations.

Now, we've received many questions from our investors about this recent activity in the residential space and whether our strategy of focusing on differentiated business services has changed. I've even received questions wondering if signing up former SunRocket customers to our standard one-year Packet8 plan for $199, which approximately 61% of our former SunRocket customers are doing, will cause 8x8 to start performing like a SunRocket, which in hindsight was a very appropriate name for that company.

Given the opportunity to pick up SunRocket subscribers with minimal marketing costs and offering a limited time special offer to their former subscribers and a modest one-time bounty to their creditors for customers that transition to Packet8, we see the additional residential business generated by these SunRocket customers as an upside to our business.

We are making use of inventory on hand and signing up customers who are locked in with us now for at least the next year. Also, I want you to note that 8x8's unlimited $199 per year plan for residential subscribers has always been different from SunRocket's yearly plans in three important ways.

Number one, we do charge our normal monthly fees and taxes, such as E911, Universal Service, regulatory recovery and state and local taxes where applicable, on top of the $199 per-year fee, and over the course of the year, these fees add up to a substantial amount of money. SunRocket did not do this.

Second, with the long-term relationships and volume of traffic we send to our carriers, our network costs, as well as the operating efficiencies of our business, as evidenced in our margin growth the past year, are much lower than SunRocket's were, and we've seen their numbers to validate this statement.

And, finally, number three, we've never refunded the unused or prorated portion of $199 per year customer other than our standard 30-day money back guarantee during the first 30 days if the customer cancels during the 12 months covered by the yearly fee, and SunRocket did refund the unused portion of the yearly fee. We do not do that.

In addition to being a leader in the small business space, I believe that Packet8 may be one of the last stand-alone players standing in the residential space, as well, as additional players exit the market or go out of business with unsustainable business models and limited funding options.

A couple of other highlights and points of interest from the June quarter, before I turn the call over to Dan. First, our service margins again increased sequentially, to 70%, versus 62% in the March quarter, and gross margin also increased to 64%, versus 54% in the March quarter.

Second, during the June quarter, we launched additional services to our business customers, including Outlook integration, which enables a customer to handle all of his or her Packet8 Virtual Office calls from within Microsoft Outlook. We also launched new services for overhead paging, toll-free fax, a digital courier service in partnership with YouSendIt, and professional voice recording services in partnership with HOLDCOM.

Most recently, we launched our new Packet8 Virtual Office Call Center solution for small businesses, creating the first fully integrated hosted service with both iPBX dial tone and multimedia contact center functionality. Marketed under the name Packet8 Complete Contact Center, the new suite of business services will enable companies to quickly deploy and operate multi-channel contact centers within Packet8's hosted iPBX infrastructure, without the time and expense of purchasing, installing and maintaining costly specialized call center equipment and software.

We've been using the service in our own call centers for several months, and our agents are enamored with the service's features. The services include skill-based routing of calls, e-mails, Web chats and voicemail messages, real-time monitoring and reporting, voice recording and logging, historical reporting, multi-tier menus with customer-entered digits and queue look-ahead logic for the reporting of number of calls in queue and expected wait times to your callers, and CRM integration with leading software packages, including salesforce.com and NetSuite.

Finally, I want to mention that 8x8 was issued two new patents during the June quarter, one protecting virtual telephone extensions and the other protecting our inventions in the image communication systems.

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

I'm now going to 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 first fiscal quarter of 2008 were $14.7 million, which represented 20% growth over the same period last year.

As of June 30th, 2007, Packet8 Virtual Office represented 44% of revenues, videophone services represented 4% of revenues, residential services represented 51% of revenues, and royalty and licensing revenue represented 1% of revenues.

Average monthly churn for all services during the quarter approximated 4.6%, excluding subscribers that canceled within the first 30 days of service.

Our average residential customer subscribes to the service for approximately 20 months, and the average Virtual Office customer subscribes to the service for approximately 30 months.

We ended the June quarter with 8,077 companies who use Packet8 Virtual Office services as their only source of IP communication, an increase of 1,074 companies from the 7,003 companies we had subscribing to our service on March 31, 2007.

The average number of services our Packet8 Virtual Office business customers subscribed to increased from 7.1 for the March quarter to 7.2 for the June quarter. The average monthly recurring service fees billed to a Packet8 Virtual Office company were $242 in the June quarter, compared to $229 in the March quarter.

On the marketing front, our subscriber acquisition cost for the quarter was $138 per service across all channels, versus $128 in the fourth fiscal quarter. Virtual Office cost of acquisition in the quarter was $141 per service. Approximately 69% of our new sales were sold through our direct sales channels.

Now, let me provide you some additional metrics on the average Virtual Office company.

As I just mentioned, the average revenue per company was $242 in the June quarter. The cost to acquire a new company in the period was $1,013. This is the cost of acquisition per service of $141, times 7.2 services per company. The gross margin of a Virtual Office company is 81%.

The cost of sales for a Virtual Office company service component includes all network expenses, headcount to manage our network, depreciation on our networking equipment, stock compensation for the employees who manage our network. In total, this is $45 per company per month in the quarter ended June.

Our contribution margin per company is 61%. Contribution margin is gross margin less customer support and billing expenses.

In the June quarter, customer service and billing expenses were approximately $49 per company per month, or 20% of a Virtual Office company's average service revenue.

A Virtual Office company generates $147 in contribution margin per month. The payback, which is the cost of acquisition divided by the contribution margin is 6.88 months. Assuming that we have a Virtual Office company for 30 months, this customer will throw off approximately $3,400 in cash before they terminate.

The cash generated by this customer is 3.4 times the cost to acquire the customer. The 1,074 net new companies added to our network in the June quarter will deliver $3.7 million in contributory cash into our business over the life of those subscribers.

The net income for the first fiscal quarter was $508,000, or $0.01 per share, versus a net loss of $2.9 million, or $0.05 per share in the fourth fiscal quarter.

A summary of one-time and non-cash items in our financials for this quarter are -- I'm going to begin with the recurring item.

The recurring items are a $979,000 non-cash mark-to-market gain on the value of our warrant -- this will change each quarter, depending on the movement in our stock price -- a $391,000 depreciation charge and a $215,000 sales and use tax accrual.

One-time items in this quarter's financials were a $573,000 recognition of revenue related to a one-time change in our contribution requirements to the Universal Service Fund, a $203,000 expense related to the restatement in June, a $150,000 release of a security deposit on our corporate headquarters in Santa Clara. This cash moved from other assets to short-term investments on the balance sheet, and $19,000 in cash receipts related to employee stock option exercises.

Gross margins improved to 64% overall, versus 54% in the prior quarter, with our recurring service margins at 70% and product margins at negative 4%.

Moving on to the balance sheet, as of June 30th, 2007, cash and investments totaled $12.2 million. The Company's cash and investments balance increased by $284,000 in the first quarter, compared to a reduction of cash and investments of approximately $492,000 in the fourth quarter and compared to a reduction in cash and investments of approximately $5.2 million in the quarter ended June 30th, 2006.

Cash outflow for inventory purchases was $1.1 million during the first quarter. CapEx for the quarter was $91,000, or 0.6% of revenues. Advertising expenses were $1.4 million for the quarter, compared to $1.1 million in the March quarter.

As of June 30th, 2007, total shares outstanding were 62 million and total shares fully diluted were 79 million. That concludes my prepared remarks and I will now turn the call over to Bryan.

Thank you, Dan. We are obviously very pleased to surprise you with quarterly GAAP net income, as well as the positive cash flow, and we look forward to growing all of our services and subscriber bases in the September quarter.

On August 28th, 2007, 8x8 will hold its 2007 annual meeting of shareholders at 2 o'clock p.m. Pacific time at the Company's headquarters in Santa Clara, California, and we look forward to seeing you at that meeting.

That concludes our prepared remarks and I'll turn the call over to Latasha for any questions you might have.

(OPERATOR INSTRUCTIONS)

And your first question comes from the line of Colby Synesael with Merriman. Please proceed.

Hey, guys, congratulations on the quarter.

Thanks, Colby. Good morning.

Just a few questions. One, I'd like to talk about the sustainability of both the GAAP EPS number, as well as the cash flow. Obviously, as you pointed out, there were some financial benefits there to get you guys to GAAP EPS. Is that something you think going forward you guys will be able to sustain there? In other words, will those one-time benefits be replaced by some recurring positive trends? And then on the cash side of things, a similar question.

And my next question will have to deal more with the residential side. You guys talked about last quarter seeing your churn rates increase. But you weren't quite sure why that was taking place.

Has there been an update on that and as that relates to the SunRocket customers, do you guys expect them to churn off at a similar rate going forward?

Colby, I'm going to take the first part and Bryan's going to pick up the second part of the question.

On the EPS side, so we did have these one-time benefits. Relating to the warrant liability, it just depends on where our stock ends up on September 30th, but that one's a little difficult to forecast what's going to happen there. But we have seen a significant number of customers subscribe to our service, particularly relating to the SunRocket customers who have come over.

So in the quarter that we currently are in, we've been sending those boxes to the customers for no cost to the end user. So every time we send a box out, we incur approximately about a $30 charge for the box and about a $40 charge to Federal Express, so our product margins are going to be significantly reduced in this current quarter, and that will flow all the way down to the net income or net loss line.

So just a $10 charge to FedEx, so $40 total.

Yes, $40 total out the door expense and it's only a $10 cash expense to us that's relating to the payment that we would make to Federal Express.

The fortunate thing that happened is we had all of this inventory sitting here for quite some time. We've paid for it a long time ago, so this is not a cash expense to us.

And on the cash flow side, since we have 61% of the SunRocket customers subscribing to the annual plan, all of these customers are cash flow positive immediately and there's no payback period. So we're seeing significant influx of cash at the moment.

So, you do obviously, so right now, when a customer takes that one-year service, you're billing their credit card for that $200 payment right now. So based on, I think, the $19,000 number that you had referred to in your comments, you guys should actually see your cash go up quite meaningfully in this current quarter. Is that correct?

That's correct. It was 61% of those new subscribers are signing up for the one-year plan, which frankly surprised us, but, hey, we'll take them.

So on the revenue side of that, if someone's paying us $199, we take the $199 in cash upfront, but we recognize the revenue over 12 months, so we just divide $199 divided by 12.

And then going forward, after the one-time SunRocket situation that we're seeing in this current quarter, do you guys now think that you will be sustaining your cash flow positive, at least from an operations standpoint?

We don't provide forward-looking guidance, but I think you can just tell from the last five quarters we've just showed consistent improvement.

Okay. And on the churn question?

So I think, Colby, you're referencing in our last call we had just raised our prices across the board, effective March 1st, and I think we reported we were seeing higher-than-normal churn that also continued into the next month or two after that. And we weren't certain where churn was going to end up.

So I would say we were disappointed to see the residential churn during the quarter. It's one of the reasons our revenue growth slowed a bit, and that's why we gave you the numbers, so you can kind of see where that went.

The Virtual Office revenue growth, of course, was very much in line and somewhat improving and accelerating versus our historical trends there.

I think a couple of interesting things are happening here in the residential space. SunRocket being one of the major providers, meaning one of the larger independent providers that was out there that was well below us in price, I think taking them off the table is going to limit the number of opportunities our residential subscribers might have to go to a big carrier and be able to save a bunch of money over the prices that we're at right now.

So we have seen a slowdown, as I mentioned in the script, in terms of the number of residential cancellations since that event a couple of weeks ago.

I would caution that I think it's too little data yet to kind of declare victory and say that the residential churns are going to decline. But I think in another month or two of data, we'll probably be in a position to comment on what that looks like.

So, basically, if you want to save money over what Packet8's offering on a residential plan, you have to go with a very small and possibly unknown and possibly risky provider today.

Also, I think we'll see a stabilizing influence from these new SunRocket subscribers in the sense that once they're beyond their 30-day trial they are locked in for a year, regardless of whether they pay for the year upfront or they're month-to-month with us, because there's a disconnection fee on the monthly plans.

I think that will serve -- in the numbers of subscribers we're getting, it should serve as a stabilizing influence. I have seen the business churn come back in line with our historical metrics, so I think we've gotten through the little bump there on churn related to the price increase on the business side.

And the disconnection charge that you're referring to for SunRocket customers that are coming over, do current 8x8 customers have to pay that disconnection charge, as well?

Yes, they do. So all of our plans have, excuse me, a $60 disconnect fee if you cancel between day 31 with the service, all the way out to one year out from when you subscribed to the service.

Okay, well, thank you very much, and I really appreciated the additional metrics you guys provided this quarter. Very helpful.

Okay, great. Glad to hear it, Colby.

(OPERATOR INSTRUCTIONS)

I show no further questions in the queue. I'd like to turn the call over to Bryan Martin for closing remarks.

All right, thank you, Latasha. Thank you, everybody for listening. If you're not already a customer, I encourage you to sign up today for Packet8 service for your home and business at www.packet8.net.

Go ahead, Latasha.

This concludes the presentation. You may all now disconnect. Good day.