8x8 Inc (EGHT) 2008 Q3 法說會逐字稿

Good day ladies and gentlemen and welcome to the 8x8 Incorporated Third Quarter 2008 fiscal year earnings conference call. My name is [Jajida] and I will be your coordinator for today.

At this time all participants in listen-only mode. We will be facilitating a question and answer session towards the end of this conference. (OPERATOR INSTRUCTIONS.)

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

Thank you and welcome everyone to our call. This afternoon 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 third 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 limitations 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, except as required by law.

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 to discuss financial results from our third fiscal quarter ended December 31, 2007.

I'm going to make some opening remarks and then I'll pass the call over to our CFO, Dan Weirich, who will walk you through our detailed operating results and some other additional metrics.

This was a great quarter for 8x8 and our Packet8 communication services as we surpassed a significant milestone and extended our leadership in the hosted business voice over IP market, with more than 10,000 companies subscribed to the Packet8 Virtual Office services suite as of December 31, 2007.

As of that date, 10,092 companies subscribed to our virtual office services; an increase of 1,018 net new companies over our Company subscriptions at September 30, 2007.

8x8 also posted an all-time record with quarterly revenues of $15.8 million, the highest quarterly revenue in the 21-year history of the Company. These revenues represent a sequential increase of 7% over the September quarter and year over year growth of 19%.

Revenues from our Packet8 Virtual Office Business services contributed to 48% of our total revenues, versus 47% of total revenues for the September quarter, as we saw sequential growth in our Packet8 residential consumer video and mobile services of 5% alongside the 8% sequential growth in the Packet8 Virtual Office revenues.

On a year over year basis we were pleased to see the stabilization of our residential voice services, which were flat with the revenue levels in the year ago quarter. Residential and video services combined declined by only 3% versus the year ago period, as compared with a year-over-year decline of 19% during the September quarter.

These consumer segments have stabilized following the successful transition of the former SunRocket and Netzero subscribers to Packet8.

We continue to pursue new opportunities with several additional service providers who are looking to outsource their voice over IP services or exit the space all together in the near future concurrent with our marketing and sales focus on the small business space.

During the December quarter we expanded our gross margins further to 65% as our business continued to scale.

Overall, our service margins rose to 70% across all service offerings, product margins increased to 15%, and our Packet8 Virtual Office service margins increased to an all-time high of 83%.

For the second time this fiscal quarter, we reported a profitable quarter with GAAP -- I'm sorry, for the second time this fiscal year, we reported a profitable quarter with GAAP net income of $1.4 million or $0.02 per share, a trend that we are focused on continuing.

As we've said in the past, and are now demonstrating, we have a business model that is scaling and continuing to improve.

Our balance sheet showed the benefits of our business model with cash and investments increasing by $1.43 million, versus September 30, the third quarter in a row that we have recorded an increase in these assets.

Over the last nine months we have added $2.4 million to the balance sheet, and we ended the December quarter with $14.3 million in cash and investments and no debt.

The December quarter also saw some innovative new service announcements. At the end of November we announced our first service offering for mobile phones called Packet8 MobileTalk. Packet8 MobileTalk enables more than 450 models of mobile phones to connect seamlessly to the Packet8 digital network when dialing international calls, literally saving any mobile user dollars per minute versus the international rates typically charged by the incumbent cellular carriers.

Packet8 MobileTalk is unique over other industry offerings today because it can be used on any supported phone, from any location in the United States, and it does not require that the user's behavior change when dialing international calls. You continue to dial and use your mobile phone as you always have, only your calls are routed over our network instead of theirs.

At the Consumer Electronic Show earlier this month we introduced a free trial offer of this service so that anyone can see how easy our service is to use, and experience first hand the quality and clarity of our digital phone network. The free trial offer is available at our mobile website, mobiletalk.packet8.net.

Also at CES we announced the integration and availability of our Packet8 Tango Video Terminal adapter with any Packet8 Virtual Office extension plan. For as low as $100, our Packet8 Virtual Office customers can now add video conferencing as well as the other applications supported by the Tango Video Phone, including our digital photo frame application, outlook integration, and native three-way video calls with continuous presence to any Virtual Office telephone extension anywhere in their business.

The video adapter connects right into the Virtual Office telephone handset and requires no change in how our customers use their business services.

Extension calls to other extensions with our Tango Video device automatically bring up an instant-on videoconference, as do worldwide calls to any other Packet8 videophone or Packet8 Softalk subscriber. There is no additional service charge for Packet8 video calls anywhere on the planet. Our Packet8 Virtual Office subscribers who wish to add video conferencing to any of their business phones can simply log into their account at Packet8.net and upgrade their equipment.

We are continuing to work on new robust product and service initiatives for calendar 2008, and look forward to rolling out additional innovative IP communication solutions to help our customers communicate better and open up our service offerings to new platforms and markets.

Finally, I'd like to provide an update on 8x8's portfolio of intellectual property. During the December quarter we demonstrated the monetary value of the Company's patents and intellectual property through the sale of two legacy non-core patents to a third party for $1.2 million. The transaction closed in December and we have recorded the received cash in the Other Income line of our income statement.

Now, while we've historically reported approximately $50 to $100K of royalty and licensing revenue per quarter from our intellectual property, we were pleased to report this success in our ongoing efforts to monetize the Company's portfolio of patents and other intellectual property. We believe that this initial transaction validates and establishes a baseline value of our portfolio in the marketplace and we intend to continue efforts toward monetizing our intellectual property via licensing, covenant-not-to-sue agreements, and other business arrangements and transactions in the future.

I'll now turn the call over 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. As of December 31, 2007 Packet8 Virtual Office represented 48% of revenues, Packet8 residential services represented 49% of revenues, and Packet8 videophone and mobile services represented 3% of revenue.

Average monthly churn for all services for the quarter approximated 3.8%, excluding subscribers that cancelled within the first 30 days of service. This is a reduction from the 3.9% and 4.6% churn we experienced in the September and June quarters.

In an ongoing effort to reduce churn during the first 60 days of service, we deployed a diagnostic tool in the December quarter that pre-qualified a potential customer's network prior to subscribing to the service, and simultaneously increased the number of onsite customer installations through our third-party installation partner.

The pre-qualification tool is available at voiptest.packet8.net. We are also planning to begin network-wide proactive monitoring of customer's call quality to alert us to issues that can be resolved prior to a customer experiencing poor quality for an extended period of time.

The average number of services our Packet8 Virtual Office business customers subscribe to was flat at 7.25 services versus the September quarter.

The average monthly recurring service fees billed to a Packet8 Virtual Office customer were $239 in the December quarter, compared to $223 in the same period last year and $238 in the September quarter.

The cost to acquire a new business customer increased to $1,168 from $1,031 and $1,013 in the September and June quarters. Virtual Office service margins increased to 83%, compared to 81% in the first and second quarter of fiscal 2008.

Cost of sales, which includes all network expenses, headcount to manage our network, depreciation on our networking equipment, and stock compensation for the employees who manage our network was $40 per business customer per month.

Our contribution margin per company was 64% compared to 59% and 61% in the September and June quarters.

Contribution margin is gross margin less customer support and billing expenses.

In the December quarter, customer service and billing expenses were approximately $46 per company per month, 19% of a Virtual Office company's average service revenue.

The contribution margin of a Virtual Office company increased to an all-time high of $153 per month. The gross margin and contribution margin increased due to continued reductions in our networking expenses and increased efficiencies in our customer service department and billing processes.

The payback, which is the cost of acquisition divided by the contribution margin, is 7.6 months.

Non-cash items in our financials this quarter include a $448,000 non-cash mark-to-market gain on the value of our warrant, a $324,000 stock compensation charge, and a $398,000 depreciation charge.

Gross margins were 65% overall, compared to 52% and 64% in the September and June quarters, with our recurring service margins at 70%, which is an all-time high, and product margins at 15%.

The product margins were positive due to a one-time release of a product reserve which was offset by a write-off of $90,000 in equipment delivered to but not paid for by Comp USA. Without these two adjustments, product margins would have been negative 15% due to aggressive discounting during the holiday season.

Cash outflow for inventory purchases was $688,000 during the quarter. Capital expenditures for the quarter were $215,000 or 1.4% of revenue. Year-to-date capital expenditures have been $505,000 or 1.1% of revenue.

Advertising expenses were $1.9 million for the quarter, compared to $1.7 and $1.4 million in the September and June quarters.

As of December 31, 2007, total shares outstanding were 62 million and total shares fully diluted were $80 million.

I would like to remind you that as we have disclosed in our annual report on Form 10-K, we have estimated net operating loss, or NOL, carryforwards for federal and state income tax purposes of approximately $148 million and $96 million respectively. As we move closer to profitability for a fiscal year we will begin to utilize these NOLs.

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

Thank you Dan. As usual, we've reported a lot of numbers today and have posted a transcript of our prepared remarks on 8x8's website at 8x8.com in the investor relations section for your reference and convenience.

We are very pleased to report these strong results and are excited about the Company's prospects through 2008 and beyond. All of these results are possible due to the hard work of our dedicated, loyal employee team and I want to thank all of them for their many contributions this quarter and past.

Sustaining profitability is our primary focus and our efforts this year will be directed towards introducing a stream of new business services, products, and technologies, while capitalizing on opportunities in the voice over IP industry for outsourcing and subscriber consolidation.

As a leader in this space with a proven profitable business model, a strong patent portfolio, and a track record of bringing innovative technologies to market we believe that we are uniquely positioned to capitalize on these industry trends.

That concludes our prepared remarks and I'll turn the call over to Jijada for any questions.

(OPERATOR INSTRUCTIONS.) Colby Synesael with Merriman.

Great. Thank you for taking my question. Your residential revenues were very impressive this quarter and you talked about stability in that segment. One, is that something that you guys believe is going to continue? And, two, if it is can you at least give us a little idea what it is that you're seeing that's really changed call it over the last three or six months that's allowed you to be so confident in that.

Also, on the profitability side, is there other ways in which you guys can continue to improve the profitability besides just scalability? Are there areas where you guys could actually continue to reduce costs so that we could continue to see the gross margins increase?

Okay, Colby, this is Bryan. So, in general I think we've seen hopefully the rate of reduction in our residential business begin to stabilize. We've seen this as a trend certainly with the exit of SunRocket, which was a major provider that was at a price point substantially below us. We began to see some strength in that business after that.

We also see very good strength in the rate of renewal of our annual plans and so we're seeing those renew at a rate of about 90%. Is that correct Dan?

Yes.

So, one of the things as we get to the summertime again, July and August timeframe, we're expecting to see those consumer subscribers that came over from SunRocket pay us for another year and provide additional cash.

We also see all of these opportunities that I hinted at during the call, of other service providers that are exiting the space or wanting to outsource their operations to us.

So, we're cautiously optimistic here that our residential business may not decline as fast as we previously thought it might just based on the rate of decline we saw, for instance, in the September quarter.

So if that answers that question I'll let Dan comment on the second half.

Yes, so on your gross margin question, yes, we are continuing to see a very good pricing environment from the network side of our business. It continues to kind of exceed our expectations on where we can go and the cost to support a customer. So things are looking very good there and we don't expect that to end any time soon.

On our cost for our product, we're not seeing the reductions that we are on the network side so I would say on the product side we're not really forecasting too much improvement. We definitely would love for it to be kind of on a regular basis closer to neutral than negative but it's still very close to that number.

So on the services side of the business you guys hit 70% gross margins this quarter and I think you did that in the fiscal first quarter as well. Should we consider that the feeling in terms of where those margins can go or is there still room to expand upon those?

Yes, I think that that is definitely not a feeling. I don't think that you're going to see the improvements that we've had. Over the last year or so we've gone from 60% to 70%. You probably won't see that over the next year but you definitely -- I think it's fairly reasonable to believe that 70% is closer to a baseline than a feeling.

Do you guys expect to continue to be EPS positive from this point going forward?

That's certainly our goal Colby.

Wow, that's very impressive. And then just lastly, I just wanted to see if you can expand upon you said a baseline valuation for monetizing patents, can you explain what that means.

Yes. Well, in general my own philosophy has always been that an issued U.S. patent in good standing is worth no less than $1 million because it takes $1 million in court to invalidate anything, at least in our experience with the matters and what we've seen other people do with them. So we have a pretty high threshold. We think the research and development that's been done over the years at this Company in the communications field has yielded a number of innovations, we think our patent portfolio is very strong, and we think that some of these patents are very valuable.

And certainly would look to -- I would say as we were closing this deal in December with this entity, I think I had three other separate entities approach us about intellectual property we have and their interest in it. And I'm not a big believer in coincidences so I would have to think that people in that space have been whispering to each other that 8x8's willing to sell some of their patents in order to monetize them.

And we continue to look on the enforcement side towards our competitors in the space who are slowing down our sales increasing and we won't hesitate as our balance sheet improves to go that direction as well.

Okay. Well, great, thank you. Congratulations.

Thanks Colby.

Joel Achramowicz with MDB Capital Group.

Thank you very much. Good afternoon Bryan and Dan and Joan. Actually, Bryan I like the numbers so don't -- oftentimes we don't get enough. And in fact I've got a couple of issues with regard to the -- that regard the operating business but prior to that I was just interested in a couple more metrics Dan if you might be able to be so kind to provide them. One, being headcount.

So as of the end of December we had roughly about 210 employees.

And that's up from what sequentially?

That is up from--

I hope you don't mind.

No, no problem. We had 207 at the end of September so it's up three people.

How many total residential subscribers did you have in the end of December?

We're not disclosing that number.

Okay. Did you mention the percentage of sales that through your direct channel?

No, we did not. But on our Virtual Office product we see about 70% of our sales come from our inside sales force.

Great. And then one final. Did you mention the cost of acquisition per service for the quarter?

I don't think we mentioned that. It was $129.

Well, that's great.

That's over all services.

Yes, all services yes.

But certainly down from the second quarter?

Well, it's actually up from the second quarter. In the second quarter it was $99 because we added all of those SunRocket customers at a very, very low cost of acquisition. So but compared to the first quarter it was $139. So, yes, it's down from kind of a more normalized quarter.

Okay, great. Now, I had a question Bryan on the business in particular. Any new -- and can you qualify in any regard any progress you've made with the SYNNEX arrangement and give us some color on any of the programs that are moving forward there and how they're impacting the Company's model.

Sure. I can't quantify anything for you yet, Joel, but I would say that we have invested a lot of time during the quarter, certainly since we announced the deal, just in training that channel. We continue to train that channel. We've had people on site at SYNNEX on the east coast doing a lot of training. And it always takes a quarter or even two quarters sometimes with these larger partners to really ramp them up and make them effective sales people for us.

And so hopefully by the time we have this call at our fiscal year end we can quantify what percentage of sales might be coming from that channel. But right now it's really still too early.

Another partner that I just visited in Delray Beach, Florida, last week is Office Depot and we've gotten back into their end cap cycle. So at approximately half of their stores right now, I was in the store in Delray Beach, you'll find a very colorful red end cap that's up displaying all of our wares again. And we've already seen their sales in January pick up with that.

They go into a mode in the summertime where they start pushing back to school items and unfortunately we haven't convinced them yet that all back to school students need something from Packet8. And so our Office Depot sales the second half of the year, certainly in the December quarter, were down from what we saw earlier in the year but we're seeing that pick up again as well.

Very good. But, of course, you're working on that trying to convince them.

Yes, yes. Well, I think with something like MobileTalk it's a great service that every student should have on their cell phone.

Indeed. What are your thoughts on the industry in particular? This is a good juncture, the end of the calendar year and getting into the first year, what are your thoughts on the voice industry in particular? I mean Comcast has been hurting and it would seem to me that generally overall the movement towards voice seems to be inescapable and yet it seems to have occurred in fits and starts. Do you see that maybe 2008 being finally a significant transition year in terms of really establishing prospective and visibility for voice across a broad number of communications channels?

Yes, I think that's a great question. So a couple of perspectives we have. At the Consumer Electronics Show a year ago there were no fewer than probably 20 voice over IP companies in various forms on the show floor. This year, earlier this month, there were three. So we've certainly seen the effects of the kind of mass exodus of the small players. And certainly I think that's a trend you'll continue to see this year just because we know of players we're talking with that are certainly interested in handing their subscribers over to us because they haven't figured out how to make money off of them.

The other thing that I think we can't ignore, and I've been getting a lot of questions about lately, is how the deteriorating business market and economy in general might affect our sales here this year. And fortunately for us, because we save these customers so much money, we tend to run counter to those downward economy trends and certainly when times are good most businesses that you approach and say I'd like to save 50% to 90% on your telecommunications bill are happy to talk to you but they're even happier to talk to you when times are tough.

And so while we do see -- some of our businesses are in areas like real estate and mortgage and they may be getting hit a little more than regular businesses. I think all businesses in general are always going to be looking to services like ours that can save them a lot of money.

So, we're looking forward to the year. I think we've already seen in recent weeks a couple of PBX manufacturers disappoint because no businesses are out there buying shiny new phones and big shiny boxes that are going to go in the closet. But I think they're all looking to save on their telecommunication costs and we have the perfect suite of services to do that.

Are you still seeing a pretty good reference selling from existing base and you tracking that? I mean seem to me that word of mouth would be very, very powerful.

Yes, that's exactly what we rely upon especially for these business sales where the introduction to the business owner, the IT manager, it's a tough introduction to earn. And certainly being able to have a fellow business owner recommend us and suggest that the person give us a call is something we try to capitalize on. Yet every quarter we run a promotion whereby we offer very large referral fees for anyone that introduces us to a customer that becomes a future customer of the Packet8 Virtual Office service. And we have a promotion running right now through April 30 where you can earn up to $3500 in referral fees just by sending us names and e-mails and phone numbers.

So we certainly do push that. We've got a base of very satisfied customers and we love using them as one of our selling tools.

Very good. And one final question, any major events in the calendar that we should be aware of going forward? Any shows or seminars or events of particular note that might involve 8x8?

We're going to be at Voice Con either the week or the week after down in Orlando. That's our next major show. And then certainly we're very happy with these financial results so we're going to be hitting the road again and participating in a number of financial industry events. We'll be at the SRA Financial Analyst conference in San Francisco a week from Monday. Is that right Dan?

Yes, February 11.

Very good. Well, nice expense control and revenue growth and margins as well. And good luck going forward, we'll be watching carefully.

Thank you Joel.

Michael Coady with B. Riley.

Thank you. Good afternoon everybody.

Good afternoon Michael.

Bryan, you had talked previously about changing the contractual terms on the Virtual Office business such that once your year is up you don't go month by month you would roll over into a new year. Have you started to implement anything like that either on the Virtual Office or the residential side?

Yes we have. We're actually in the process of rolling out both two and three year contracts, where we'll have a written contract with the customer, there'll be a guaranteed commitment term and associated with that a kind of 10% to 15% discount off the monthly service fees.

And, again, I think with reference customers we have and some of the customers we've talked about this type of plan, this is something they're very interested in.

Okay. And talking about getting customers to replace their existing equipment to save them money on their telecom solution, it seems as though your primary customer would be a new startup small business as opposed to going in to an existing business unless it's time for them to upgrade or it's time for them to renew a lease or something like that. So I guess who is your typical customer? Where are they in that regard, that cycle?

Yes, I think one of the early questions we get from all our customers that have an existing phone system is certainly can I keep my existing phones or some of my equipment. And we do support regular analog phones like the Polycom speakerphone I'm talking on right here. But, in general, we recommend that the business change out their phones and use the phones that we have integrated with Virtual Office.

When we tell them that those phones are only $100 per station that usually gets us over any objection, because if you look at the cost of traditional PBX phones and even the new IP phones, even some of the low end ones, they can easily run $300, $400, $500 per phone. Some of these companies will still make you buy the power supply for an extra $75. Our friends up the street on Tasmin and Santa Clara are kind of famous for that.

So, I think these businesses have already seen those quotes, they know how much some of those IP phones are, and when they hear that our solution only requires $100 investment in the phone and, by the way, you can take the phone with you and keep using it as a regular phone if you do ever leave our service, there's really very little objection on that.

Why was the cost per acquisition or the acquisition cost per business up?

So we spent a little bit more money on advertising this quarter and a lot of that advertising was loaded in the latter part of the quarter. So, we definitely account for it in the period that is incurred but typically we see a little bit of lag before that takes into account.

And the thing that we're seeing is is that the dollar amounts that we're increasing for advertising are fairly small in the scheme of things. It was an increase of justly slightly more than $200,000 quarter-over-quarter. And so this is something that I would say that we're not alarmed about but as we've -- we had a lot of questions in the last quarter about why did your average revenue per company decline from Q1 to Q2 and as you just saw in Q3 it kind of bounced back.

So I think that these numbers kind of bounce around in a range and I would say that this is maybe a little higher end of the range. But I don't know what's going to happen in this quarter. But that's the primary reason.

Fair enough. And regarding advertising, where is the extra spend going? More banner ads?

Well, so our model is to generate leads and they are generated in a wide different variety of advertising mediums. Primarily it is web-related leads where we spend the money and if you spend more you get more leads. And so it's just kind of increasing the budget that we have in those particular areas.

The more traditional print partnerships that we've had in the past I would say that those are probably flat whereas the web side is where you're seeing more of it.

Okay, I actually have seen more 8x8 ads and I don't know if it's just because I'm more aware of them or because I'm seeing more. Either way they were good.

Just one last question, regarding the FAS-123, can you just break that out, Dan, by line item.

Yes. Give me just a minute on that.

I know it's pretty nominal but it just helps for modeling purposes.

Yes, so $7,000 is in cost of service revenue, $6,000 in cost of product revenues, $59,000 in research and development, and $252,000 in SG&A. So a total of $324,000.

Okay thanks. And I'm sorry just one more thing. Bryan, as it relates to the patent sale, was this something that came about opportunistically or have you increased your efforts in monetizing patents? And you probably couldn't put a dollar figure on sort of your total patent portfolio but what's the next and most likely step? Additional patent sales or licensing agreements or what's the plan?

Yes, I think all of the above. We've had a -- efforts underway I'll say. They kind of are concerted quarter-to-quarter depending on how busy we are just running the business. But certainly we recognize the value of the portfolio, we recognize that to date we haven't been very successful in monetizing our portfolio, and it's something that we have been focusing on a little more I'd say the second half of this year especially with all the noise going on in the voice over IP industry around patents in general.

So it's an area we're interested in. This opportunity approached us opportunistically and it was a pretty simple transaction to close and certainly didn't involve any of our patents related to our current business in the voice over IP space. But we're going to continue on all fronts, as I mentioned in our prepared remarks, and hopefully this will be the first of many results to report in the future.

All right, thanks. Nice numbers, keep up the good work.

Thanks Michael.

Chris Lahiji with LD Micro.

Bryan, Dan; excellent quarter.

Hi Chris, how are you?

Fine. I wanted to say that the big event of the year is going to be the LD Micro Conference, April 14, which is 10 miles from Joel's office. I'll make sure he gets an invitation.

Quick question you guys. I mean Colby, Joel all ask great questions, but my question is on the mobile offering that was just announced. What type of traction are you guys seeing? Are you happy with the initial results? And what are you ultimately going to do to let more people know about this product?

Yes, I'm very pleased with the initial results. All of our reviews have been positive, all of the customers I've spoken with have been extremely positive. We've certainly got a lot of Blackberry users in the financial professional space that are using it and have written about it. So we're very pleased on that side.

We launched it Thanksgiving week so we don't have any numbers to report here, it's still in the early days there. But I do think the free trial offering that we rolled out at CES definitely has some good legs and it's a risk free way to just put it on your cell phone. You just text a message to us at 408-386-4137 and we'll respond with the software you need to start using the service immediately. And we give you $2 of free calls so you can immediately call someone overseas and make sure it's going to work on your phone and hear how great it sounds.

So we had people do that right in the booth at CES and then they'd make a couple of calls and they'd come back over to us and say, okay, I'm ready to sign up. So that seems to be a great avenue.

We're looking at the pricing certainly for the non-Packet8 subscribers out there. We think we might want to tweak that a little to make it a little more attractive, maybe bundle it up in a different way, and we'll probably do that in the next month or so.

But beyond that it's really more about just adding more features to it. I think about half the people we talk to at CES wanted to know when they could use it outside the U.S. to make calls to other countries or back into the U.S. And that's a service that we're actively working on and we want to roll out as soon as possible because I think, again, that's going to have great demand.

And from my understanding, this is proprietary technology that we have developed and we have the proper IP where other companies cannot replicate what we're doing?

Yes, we work with a third party for the software that actually runs on the mobile phone and that enables us to outsource all of the headaches of dealing with the -- all the compatibility issues that things like Google Android will hopefully solve in the future. But, today, making this work on all these different makes and models of cell phones is a Herculean effort and something that we were glad to let someone else deal with.

But all of the ways we connect into the Packet8 network and how we carry the call from there, certainly deal with the billing issues and all of that, that's all within our network and our software. And as you might expect we're working on some patent applications around the work we've done on the mobile stuff as well. So there's many ways to protect it.

But I think we've looked at the competitors that are out there and I think the strength we bring to this offering, number one, is that it doesn't change the user behavior and I think these little soft clients that you have to run or you have to work within a piece of software, import your contacts, all of these things that make using other services unnatural, we solve because you can just dial the number on your phone and it goes through our network and you don't even think about it.

But the other thing that's unique is most of these players that we're competing with are startups and they're having to use companies like Skype to actually carry their calls. And what we're bringing to the space is a very mature, very large network that does hundreds of millions of minutes a month and that's giving us an advantage I think both on the prices we can offer as well as the quality of the calls.

And is it possible to call Iran because I have about 200,000 cousins there that I need to hook up with?

Absolutely. That's one of our target markets that we are advertising to. And we're picking some of these different regions and ethnic groups because I agree that the demand, I think, would tend to be unlimited with some of the applications there.

Excellent. Thank you so much and best wishes moving forward.

Thanks Chris.

Ray Archibald with Kaufman Brothers.

Good afternoon; thank you. I just have a couple of follow-up questions. One, on the MobileTalk, aside from existing Packet8 customers, can you walk us through what the go-to-market strategy is because obviously this has a very extensive market opportunity beyond the current customer base.

And then the other thing is more of a housekeeping item. If you could just refresh my memory, when you bring on the SunRocket and Netzero subs were they repriced at your pricing or did you just continue with the pricing that was offered by SunRocket? And what would be the implications then if that's the case of churn going forward?

Okay, so on the go to market strategy with MobileTalk, what we've launched to date is really a direct offer, we're running an advertising campaign with some small dollars on the Internet so you'll see some MobileTalk ads out there. But our thrust is really to target these ethnic communities where there's built-in demand to call overseas and it's being done today with calling cards and we simply want to enable very easily and very inexpensively the ability to do that off of the cell phone.

So we're doing a lot of advertising in some of these targeted community newspapers that the groups read. We're doing that for certainly Iran, because we have a number of Persians that work for 8x8 here in Santa Clara, we're targeting the Indian community, the Philippine community. So that's really where the thrust of our effort is right now and it's kind of the same way the calling card types of products have traditionally been brought to market.

I think there's an opportunity though to get some of our channel partners using MobileTalk as kind of an incentive. So I'd love to get to a point where one of our office retailers with every line of Virtual Office or every IP phone that's sold in the store they can give out one or two free MobileTalk accounts or something like that. So I think it's a great spiff tool that we can use in the channel and so we're working towards that. We're haven't rolled that out yet.

The second question, with the SunRocket subscribers -- so it's a little complicated. The migration offer that they had, and we used similar offers with the folks at Netzero, was they could either join our services at $19.99 per month on a pay-as-you-go basis or we did offer an annual plan and we saw about what, Dan, 60% of their subscriber base actually picked up our annual plan, which they prepay $199 to us, which was the same price that SunRocket offered their annual plan at. The difference being that on the 8x8 plan you still do pay a small monthly fee to cover taxes and surcharges and regulatory recovery fees and so forth. And that actually adds up over the year to a substantial amount, something in the range -- it varies depending on where the service address is but something like $10 to $20 over the course of the year.

So SunRocket didn't do that, they had an all-in price and certainly had some inflexibility. If the rules changed in the middle of the year they didn't have a way to recoup that new cost center and we do. And subscribers complain a little bit about it because they don't like having that charge every month on their card, but we just explain to them we have to do it because we don't know what the FCC or some of these states are going to do next to voice over IP. So those are the two offers that we used.

Okay. And if I could just one more follow-up on the MobileTalk given the focus on ethnic communities. Partners such as Money Gram and Western Union, have you considered them or not or if not why not?

Yes, we're in the process of really rolling out kind of a partner channel strategy around MobileTalk. We do have existing partners, people like American Wireless and folks that have carried the Packet8 product, and certainly we're looking to add MobileTalk to their offered services. But I'd still say it's early days on -- we certainly haven't talked to someone like the names you mention. But I think those are both good suggestions and I'm sure our channel team will pick that up right after this call.

Colby Synesael with Merriman.

I just have one quick follow-up. The last three or four, maybe five quarters that you've broken out Virtual Office your net adds have been roughly 1000. And I was just going back through my notes and this time last year you guys talked about how you thought that that might be able to accelerate. Can you just explain to us why that's been so consistent over the past year and is there an opportunity to accelerate that, is it just a matter of pouring more cost into advertising? Just a little bit more color there would be helpful. Thanks.

That's a great question Colby, that's what we fixate on around here quite a bit. And I would say at least it's been consistent so at least we have a baseline there. But certainly we'd like to see some growth in those numbers as well.

Couple of things to point out. If you assume just flat churn over the last 12 months we're having to add about 360 more gross companies each quarter in order to keep that net number flat. And so there is growth that you don't see which is masked by the fact that we lose companies due to churn.

And I will say that one of the ways -- beyond just increasing advertising, which we are going to do as our cash flow increases, we have a big focus this year to really reduce the churn rates. There's about a third of the churn that we probably don't control because it's businesses that are either downsizing or going out of business and I don't think they go out of business because of their phone system. So I don't think there's a lot we can do for those customers. But we are focusing in on different areas including providing the tools we need to really allow these customers to solve any local network issues they might have. Dan mentioned in his remarks the voiptest.packet8.net site.

We're also working on -- basically at the end of the every call as we write the billing record for the call we're recording a bunch of quality information about that call, how good the latency and buffering and jitter was on the call, so that we can actually begin to mine data in real time from our network of customers that might be having quality issues.

One of the things we found is a lot of these customers won't call us when they have quality issues. They just assume they're paying so little and they go well, this is kind of voice over IP, it's just like Skype and that's the price I pay for having voice over IP. And so if they don't call us we can't solve their issues. And I can tell you 99.5% of all these issues related to quality issues we can solve. But it assumes that we're able to talk to the customer. So we want to get a lot more proactive about calling the customer. We've also continued to automate and streamline a lot of our internal processes. Our billing engines are getting faster and better. And customer service, in general, I think we're doing a great job.

At this CES I certainly had one or two customers a day that would come up to me and they had an issue they wanted us to solve, but I would say the ratio of happy customers that just wanted to come up and shake our hands and thank us for providing service was way up. And so I've not been to a CES show where we saw so many happy customers and so few customers with issues and I think that's just a testament to the job we're doing in customer service.

So we're going to continue to try to improve those metrics and if we can ever make it a significant dent in that churn, even if we keep sales flat, you'll see an increase in that company count. It's a very powerful lever we have to work with.

Thank you.

[Naveed Rasouli] with LD Micro.

Hey Bryan, Joan, Dan, good quarter. Congratulations. My question's pretty much already been touched on but I'll try to -- I basically wanted to ask you about MobileTalk. You had mentioned to me, Bryan, that the international newspaper is what you've been targeting. I was just curious to see the feedback on that. Is it hard to get people away from these calling cards? Are they skeptical? Things like of that nature.

And in the future do you think that even more of the ad budget will be allocated to a more aggressive marketing campaign to kind of deal with your market share?

Yes, I think MobileTalk is a service -- one of the reasons we're so excited about it is you don't have to have special hardware from us in order to start using the service. So literally anyone carrying a cell phone around in their pocket, and there's 240-some million of them in the U.S., can basically start accessing our services right away. And we think it's a great way to introduce people to the Packet8 services and voice over IP in general so that we're able to upsell them to a home line or a business line later.

And so yes, we're going to be pretty aggressive on getting MobileTalk out there because it's just a great way to try our network.

I think it's too early for me to try to qualify difficulties or what the challenges are in that channel. We've really just started running these ads; we've only had about a month of even having the service out there. The free trial's only been out there for about three weeks. So I think next quarter we might have a better update for you.

But, in general, I think there certainly is skepticism when someone who does make international calls on their cell phone and they think they're getting a great rate from their carrier and I say well, where do you call and they say well I pay an extra $5 a month to get a supersaver international plan. And I say, well, what are you paying per minute? And they say, well I'm paying about $1.02 a minute. And we look up what the corresponding rate would be on the Packet8 network and it's typically in the $0.02 to $0.05 a minute range. And at that point people can't believe that they could possibly save that much and still have the convenience of their cell phone.

So, I think it's just an issue of getting the name out there, letting people know how easy it is to use the service, that they don't have to change the way they use their cell phone in any way. And, like I said, we were signing people up right on the show floor taking credit card numbers in our booth. So the attraction of the service kind of speaks for itself.

Great, that's fantastic. And any timeline for the initiative of being able to make international calls when you're traveling internationally or is that still far off?

No, it's pretty close. I don't have an exact timeline but certainly in the next -- it's within the next three to four months at this point.

Okay. Because that would create I mean just a huge loyal customer base in my opinion if you're able to offer that for people traveling on business and all sorts of things.

We agree. And I think we just were exposed to -- something like half of the attendees to the Consumer Electronic Show come from outside the U.S. so we had a huge international audience at the show and that was, like I said, the number one question they were asking.

Great. Well great work and thank you for answering my questions Bryan.

Very good, thank you.

Paul Packer with Globis Capital.

Hi guys, how are you? A quick question for you. I know you were talking about how the amount of NOLs you guys have. Just off of that comment, do you guys believe you could be sustainable here and positive cash flow going forward?

As we said, that's certainly our goal. And certainly one of the reasons we threw the NOL remark into our prepared comments was we want to remind people that we're sitting on some large NOLs and should give us some tax preferred status here for some time in the future.

And going forward, just on the MobileTalk, are you guys going to be throwing out type of numbers like you are doing on the work on the --- for numbers of subscribers like you are doing for the Virtual Office?

Yes, I think as we get more of a base established there and the numbers become significant we'll certainly break out various metrics the way we do with our other services.

Okay great. Thanks guys.

Brian Horey with Aurelian Management.

Thanks. A couple of questions. You said that you were able to step up advertising somewhat this quarter. Does that reflect some new venues on the web that you guys have found that are productive or does that just reflect kind of growth in the web in general or can you add any color to what's behind that?

Yes, I think it's a mixture. We certainly did some targeted geographic advertising. We certainly added the MobileTalk advertising for a little bit there. We did -- the Internet advertising is something where we're constantly refining and even changing where we run these ads in order to keep it effective.

So we like to have between 11 and 15 campaigns that are very effective campaigns and if a campaign starts becoming less effective we remove it and take a campaign that's on the ramp up and stick it in.

So there's a lot of places. We're very addicted to this Internet advertising because the feedback is in real time, it's reaching a customer base that is relatively technically sophisticated, they can understand some of the messages we're putting out there in terms of how our services work. And we're just continuing to try new and different things to reach a wider audience and make our advertising as cost effective as possible.

So this is just some incremental progress, I guess, on trying to find new places to generate leads.

That's right. And we also limit it based on just what our cash flows will allow. So, as cash flow continues to increase we certainly intend to continue to increase the size and reach of our advertising.

With the liquidation of Comp USA, do you expect that to have any measurable impact on Virtual Office revenues or growth of subscribers? And are there any potential fill ins for them?

Yes, so we actually -- we were with Comp USA on the consumer side two to three years ago and then we reengaged with them in November. And then when they started their wind down on the 7 of December we really -- we had equipment in their stores but we hadn't even really gotten going yet. So effectively there was nothing in the quarter related to Comp USA and so therefore we're not going to miss out on -- we're not going to lose anything that we had but we're going to miss out on the opportunity that we had with them.

But yes, so as we'd mentioned before, Office Depot is working well particularly when we have end cap with Office Depot. And as we've mentioned in the past we definitely are in discussions with the other big name retailers that are competitors of Office Depot.

Dan, I think you mentioned that there was a 90% renewal rate on annual as plans came up for renewal on their anniversary. What had that been historically?

Well, we rolled that product out in August of 2006, so we started the renewals in August of 2007 and so it's been very consistent for the five months that we've been doing renewals.

And then I know it's new and you don't want to get too far out in front in terms of guidance, have you guys thought about what would be success for the mobile product say as a percent of revenue for this year? What would make you guys particularly happy with the rollout?

Yes, I don't think we have a number there. But, as I hinted, I think it's a service that could certainly get into some big volumes and I think that would be our hope. But, again, I think one of the most valuable aspects of it, just because it is kind of a lower margin product, we're trying to make these international rates as cost effective as possible, but I think it's invaluable as a tool to introduce people to the Packet8 service and how well our network works, how good the calls sound, how inexpensive they are. And I think our bigger hope would be that it becomes a significant lever and lead generator that can be consumed by some of our other services and upsell a customer from MobileTalk to a fixed line solution.

And then finally I think Dan you mentioned that the product gross margin was negative 15% due to some promotional activity at the end of the year. Is that something you expect to continue or where do you see product gross margin settling out here as we go forward?

Well, so in the first quarter it was negative 4% and then in the second quarter it was negative 77% because of the SunRocket piece. But if you remove the SunRocket segment it would have been negative 4%.

And so we ran promotions over about a 10-day period around Thanksgiving and then did a 10 to 15 day period around Christmas. And so I mean I would hope that it's going to be closer to the negative 5% number than negative 15% number, but in kind of absolute dollar terms it's a small dollar amount. I mean the 10% difference in percentages sounds a lot bigger than it really is in dollar terms. So it's a little hard to determine where it's going to come out.

Okay, thank you.

[William Boreham] with [Inductive] Capital.

Hi guys. Just a quick question for Dan first on cash flow from operations. What was that in the quarter?

It was -- for the nine-month period it was $2.6.

Okay, so that's about a 1--

Yes, it was 1.6, yes.

1.6 okay.

For the quarter.

And that's up from around 750, 800 in Q2.

Yes. Well, the fist six months of fiscal '08 was about positive 900.

Bryan, could you just talk a little bit about maybe outside of the retail partners, but are there other indirect channels that you guys are pursuing in addition to the retail side for the small business effort? Or are you really just focusing online and retail at this point?

No, there are other partners. It's historically been a pretty low percentage of our business sales but we do have catalog partners, people like Hello Direct, that put out a monthly magazine of kind of office productivity tools. We work with some just standard resellers and VARs and compensate them on a kind of per bounty basis.

I think historically the VAR channel wasn't really that successful for us because our services and certainly the equipment are priced so much lower than like a traditional [Avia] PBX that the problem was the telecom VARs would rather sell those expensive boxes and get a $1500 commission rather than sell Packet8 Virtual Office at kind of a $500 per month service fee and get a very small commission.

But I think one of the interesting dynamics in this space is we're seeing so much competition and price erosion in the legacy PBX offerings that I think we're seeing a little bit of renewed interest from some of these VARs. Both because they're beginning to recognize that hosted voice over IP is such a unique proposition and that it really does fit very well at the small business solution as opposed to one of these other boxes, but also as their commissions start coming down from the legacy solutions we're hoping that we will actually begin to see more sales through some of those channels because we're going to get a little more competitive on the spread in what we can pay there or what they're going to make there.

And I guess just finally, in terms of the patent portfolio and some of the actions you guys have taken there, I noticed in your prepared statement in the press release you had covenant-not-to-sue agreements. You did not have cross licensing agreements in there. I was just wondering if the cross licensing is on the table or not.

Oh yes, we do cross licensing as well. Cross licenses tend to not end up in numbers on the income statement at the end of the quarter but, yes, we do those all the time as well.

You do do those all the time? Okay.

Yes.

Thank you.

At this time we do not have any more questions in the queue. And I would like to turn the call back over to Mr. Martin for closing remarks.

Okay, thank you Jijada. Thank you everybody for listening. If you're not already a customer of our services, I encourage you to sign up today for Packet8 services for your business, home, and mobile phones by visiting us at www.packet8.net. Thank you very much. Go ahead Jijada.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.