8x8 Inc (EGHT) 2008 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 8x8 Second Quarter Earnings Conference Call. My name is Amanda and I will be your coordinator for today. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to your host for today, Ms. Joan Citelli, Director of Corporate Communications. Please proceed.

Thank you, and welcome, everyone, to our call. This afternoon, I'm joined by 8x8's Chairman and CEO Bryan Martin and CFO Dan Weirich to discuss our results for the second quarter of fiscal year 2008. If you have not yet seen this afternoon'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 CEO of 8x8.

Thanks, Joan, and I would also like to welcome everyone to 8x8's call for the second fiscal quarter ended September 30, 2007. We had a busy quarter here even with the normal seasonal slowdown that we have historically seen in business sales during the summer months of July and August. We increased our Packet8 Virtual Office subscriber base by 997 net new companies for a total base of 9,074 companies subscribed to our business services as of September 30. And this is an 80% increase from September 30, 2006. This is down from the 1,074 net new companies we added in the first fiscal quarter, but it's up 13% from the 881 net new companies we added in the year ago September quarter which also had the seasonal slowdown. And Virtual Office revenues for the quarter were up 101% year over year.

Our Packet8 Virtual Office services accounted for 47% of total revenues for the September quarter, up from 44% of revenues in the June quarter and our per-service subscriber acquisition cost for Virtual Office service for the quarter remained flat at $142 per service.

The Company's total revenues increased slightly to $14.8 million in the September quarter as the growth in our Virtual Office services was offset by a 5% sequential decrease in our residential and video revenue base. But we also saw the addition of approximately 25,000 former SunRocket customers during the September quarter to our residential services, most of whom subscribed to our service during late July and during the month of August. So we really only benefited from a little more than one month of recognizable service revenue from these new customers during the quarter, and in some instances even less than that, as some of these customers joined with one month of free service as part of their migration special offer.

Dan is going to provide you in a minute with some metrics from the billings for the month of September so you can see where we stood as we headed into the first month of the December quarter from an increased revenue perspective. These former SunRocket customers also had a positive impact on operating cash flow and they had a one time negative impact on net income and gross margins as our product margins were hit with a noncash charge to account for the free equipment, and we did not charge activation or shipping fees to these customers.

Product margins declined to negative 77% due to these charges versus negative 4% in the first quarter. However, per-line subscriber acquisition costs for a residential line declined to $80 per line for the quarter, an all-time low for us compared with $134 per residential line in the first quarter.

So, we continue to view our SunRocket customer acquisition strategy very favorably as we signed up residential subscribers who we expect to add greatly to our revenues and net income in future quarters at bargain-basement acquisition costs with just a one time hit to our product margins and net income. As you may have seen in the press recently, we are repeating this residential acquisition model with the soon to be former subscribers of the NetZero Voice services owned by United Online. And will endeavor to continue these consolidation activities with the customer bases of other Voice Over IP service providers who are exiting the market, or are looking to outsource their Voice Over IP operations on a wholesale basis.

We are pleased to again report an improvement to our balance sheet with the addition of $691,000 in cash and investments compared with the $284,000 increase during the June quarter. We ended the September quarter with $12.9 million in cash and investments, up approximately $1 million, or 8.2% since the beginning of our fiscal year on April 1st. Accounts payable also decreased by approximately $870,000 during the quarter to $4.3 million at September 30, and we were also able to invest additional cash flow into our advertising and marketing programs for new business customers.

Our strategy remains to develop new, innovative, and differentiated IP services that build upon the IP communication technologies we have invented, and offer all of our customers the best possible products and services at the lowest possible prices. 8x8 was issued a new patent during the September quarter on its inventions in speech processing technologies and we received a new internet telephony patent this past Tuesday as well. We now hold 70 issued United States patents in the field of communications technologies. We are also very excited about a new mobile service that we plan to introduce during the December quarter, and we will announce details of that new service offering shortly.

I will now turn the call over to Dan Weirich, the Company's CFO, who will walk you through the detailed financial results and operating metrics of the business. Dan?

Thank you, Bryan, and good afternoon to everyone on the call. First, I am going to break down details about our revenue, then discuss items that contributed to the net loss, and conclude with some specific financial metrics we track to manage our business. Virtual Office revenue increased by 8% compared to the first quarter. In the first quarter we recognized $573,000 in non-recurring revenue due to a court ruling related to the Universal Service contributions for internet -- for interconnected VoIP providers. Approximately $250,000 of the Universal Service revenue was Virtual Office revenue and the balance was residential and video. When the $250,000 is removed from our Virtual Office revenue in the first quarter, Virtual Office revenue grew by $756,000 or 12% between the first quarter and the second quarter.

Residential and video combined revenue declined by 5% during the quarter, but removing the effects of the one time Universal Service benefit last quarter, our residential revenues declined by only 1% sequentially. As our residential subscriber base increased during the quarter, residential revenues grew by 15% between July and September. In summary, revenues for the month of July were $4.6 million, but grew consistently through the quarter to $5.2 million for the month of September.

Now moving onto our net loss. Our net loss during the quarter was $2.6 million that stemmed from expenses on the income statement relating to the SunRocket customers which totaled approximately $2.2 million, including $1.4 million in cash expenditures. The following expenses related to the acquisition of SunRocket customers were incurred during the quarter. Approximately $50,000 in one time cost of service expenses related to porting customers' phone numbers and E911 provisioning, approximately $750,000 in hardware and $350,000 in freight, packaging supplies, and labor expenses recognized as cost of product sales. If this $1.1 million expense with no corresponding revenue was removed from the cost of product sales in the second quarter, the negative 77% product margins would have been negative 4%. Our product margins in the first quarter of fiscal 2008 were negative 4%. The $750,000 of hardware was already in inventory and was paid for in a prior quarter. The $350,000 in freight, packaging and labor expense was paid for in the September quarter.

And finally, selling, general, and administrative expenses of approximately $1.0 million were incurred for our sales and customer service call centers to handle the high call volume from new customers ordering service and customer service related inquiries, expenses for credit card processing, and bounties paid to the SunRocket liquidator. All of these SG&A expenses were expensed and paid for in the September quarter.

Now moving on to financial metrics, as of September 30, 2007 Packet8 Virtual Office represented 47% of revenues, Packet8 videophone services represented 4% of revenues, and Packet8 residential services represented 49% of revenues. Average monthly churn for all services for the quarter approximated 3.9%, excluding subscribers that cancelled within the first 30 days of service. This is a reduction from the 4.6% churn we experienced in the March and June quarters. Churn trended downward throughout the quarter, but we feel it is too early to tell if this will continue. The average number of services our Packet8 Virtual Office business customers subscribed to increased from 7.18 for the June quarter to 7.25 for the September quarter.

The average monthly recurring service fees billed to a Packet8 Virtual Office company were $238 in the September quarter compared to $209 in the same period last year and $242 in the June quarter. The cost to acquire a new company slightly increased to $1,031 from $1,013 in the June quarter. Service margins remained the same as the first quarter at 81%. Cost of sales includes all network expenses, headcount to manage our network, depreciation on our networking equipment and stock compensation for the employees who manage our network. Costs of sales were $45 per company per month.

Our contribution margin per company was 59%, down from 61% in the first quarter. Contribution margin is gross margin less customer support and billing expenses. In the September quarter, customer service and billing expenses were approximately $52 per company per month, 22% of a Virtual Office company's average service revenue, which is an increase of $3 per company compared to the June quarter. A Virtual Office company generated $141 in contribution margin per month. The payback, which is the cost of acquisition divided by the contribution margin, is 7.3 months.

A summary of recurring and non cash items in our financials this quarter include a $671,000 non cash mark to market gain on the value of our warrants, $430,000 stock compensation charge, $398,000 depreciation charge, and $273,000 in sales and use tax accruals. Gross margins were 52% overall compared to 64% in the prior quarter, with our recurring service margins at 67% and product margins at negative 77%. The service margins declined by 3% from the June quarter due to the prior quarter's recognition of $573,000 of Universal Service revenue with no corresponding expense, and an increased number of new residential subscribers on our network making calls while their first month was free.

Cash outflow for inventory purchases was $966,000 during the second quarter. Capital expenditures for the quarter was $200,000, or 1.4% of revenues. Advertising expenses were $1.7 million for the quarter compared to $1.4 million in the June quarter. As of September 30, 2007, total shares outstanding were 62 million shares, and total shares fully diluted were 81 million.

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

Thanks, Dan. We know we've just thrown a lot of numbers at you, and to help you out, we've posted a transcript of our prepared remarks on the 8x8's website, 8x8.com, in the investor relations section. We will be presenting these financial results over two days at the AeA Classic Financial Conference in Monterey, California next week on November 6 and November 7, and we look forward to seeing you in person at that event. We are pleased with the growth in our Virtual Office subscriber base, the cash and investments on our balance sheet, and our new residential subscribers from former service providers. We are focused on growing the operating cash flow and net income from these subscribers and the services we provide to them, both current and future. That concludes our prepared remarks, and I'll turn the call back over to Amanda for any questions you may have.

(OPERATOR INSTRUCTIONS). Your first question comes from the line of Colby Synesael of Merriman. Please proceed, Sir.

Great, thank you. Obviously the margins on the business were different this quarter with SunRocket compared to last quarter. Do you guys expect, moving into the fiscal third quarter, for the numbers to look much more similar to what we saw in the fiscal first quarter? Also, a little bit of color on that mobile service that you referred to. I know you said we'd see a different process for that, but is that an MBNO? Is that something completely different? Just a little bit of an idea so we can gauge what the service is actually going to look like?

Okay, so I'll take the margin question. Yes, we expect margins to return to close to what they were in the first quarter. On the product margin side as I noted, if you remove the one time hit for the acquisition of the SunRocket customers, product margins would have been the same at negative 4% and we don't expect that to change. On the service margin, the Universal Service windfall last quarter represented about a 1.5% service margin, so if you remove that, you're comparing 68.5% to 67% and our cost structure is still pretty good and we expect it to continue in that range.

Colby, good afternoon, this is Bryan. I'm sworn to secrecy from our engineers. They told me I could mention it but I can't give any other details on the mobile offering. We're in the final kind of testing phases with some beta customers on the service and trust me, as soon as it's ready to ship, and you'll be one of our first customers I'm sure for it, we'll get it into your hands and answer questions about it then, but today we're not ready to give any other details.

Maybe I could ask it this way then. One, is this going to be a completely different revenue segment? In other words, is this going to be a value added service to current Virtual Office customers or is this going to be a different customer segment? And then the other question would be, is there going to be a significant cost for 8x8 associated with bringing this product to market?

So first of all, it's a different segment, so I think we'll be looking at it as residential, business, and mobile. So it's not going to require that you be an existing Packet8 broadband Voice Over IP customer in order to get the service. And we're looking forward to getting that out in all those hands.

And is there going to be a big cost associated with doing that?

No, you know, we've been looking at mobile and kind of these mixed mode handset technologies for many years and it's something that I think we get asked quite often is, what do we think about that. So we've had ongoing R&D in this area for some time. We've rejected a lot of approaches to the market. We've found an approach that we think has some very good merit. But you're not going to see our R&D expenses increase as a result of this.

Okay. Thank you.

You're welcome. Amanda, any other questions?

There are no other questions at this time.

Okay. Well thanks, everyone for tuning in this afternoon. If you're not already a customer, of Packet8, I encourage you to sign-up today for our services for both your home and your business at www.packet8.net. Go ahead, Amanda.

Thank you, Sir. This concludes today's presentation. You may now disconnect.