8x8 Inc (EGHT) 2009 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 8x8, Incorporated Quarter One Fiscal Year Earnings Conference Call. My name is Michelle, and I will be your coordinator for today.

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

As a reminder, this conference is being recorded for replay purposes.

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

Thanks, and welcome, everyone, to our call. Today I'm joined by 8x8's Chairman and Chief Executive Officer, Bryan Martin, and Chief Financial Officer, Dan Weirich, to discuss our first quarter results for 8x8's fiscal year ended June 30, 2008.

If you have not yet seen today'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, expects, 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.

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

Thank you, Joan, and good afternoon, everyone. I'm going to make some opening remarks with an overview of our business, and then I'll pass the call over to our CFO, Dan Weirich, who will walk you through our detailed operating results and metrics for the quarter.

Our results for the June quarter indicate steady progress and growth in what continues to be a very difficult economic climate for our small business customer base.

Packet8 phone services save those customers substantial amounts of money in good or bad economic times and provide enhanced communications capabilities many of these businesses would otherwise not be able to afford.

We added 1,053 net new companies to our business customer segment, and sales of our business communications services grew to comprise 56% of our total quarterly revenues of $16.3 million. Sequentially, we saw a 12% growth rate in our business service revenues, which is up from the 8% sequential growth we saw in the March quarter. Compared with the year-ago quarter, our business services grew by 41%. All of this growth was offset by a decline of 6% quarter over quarter and 12% versus the year-ago quarter of our residential and video services, which comprised the 44% balance of our top-line revenues.

Overall revenue for the quarter was also impacted slightly by a decline in technology licensing revenue from $526,000 last quarter to approximately $12,000 due to several licensing deals that were pushed into the second fiscal quarter.

81% of our new business sales was generated by our sales force, and 14% was generated through our retail partners, with 2% of our new sales for the quarter coming from our most recent nationwide partner, OfficeMax, who we launched with in April. This month, we also went live on the Staples.com website.

Overall, our gross margins grew to a record 68%, with service margins from our business communications services coming in at 84%. We posted GAAP net income of $1.2 million, the third consecutive quarter that we've reported a net profit from our IP communications businesses, and we increased our cash and investments on our balance sheet by $266,000, the fifth consecutive quarter we've added cash to our balance sheet. As of June 30, 2008, cash and investments totaled $14.833 million, with no debt on the balance sheet.

On the technology front, we launched our new Packet8 Virtual Trunking services during the month of June. These IP trunking services enable us to address a new type of business customer, one which wishes to retain and continue to use its existing investment in business phones and phone system hardware while optimizing the use of its existing connectivity to the Internet.

Packet8 Virtual Trunking provides customers who already have phone system hardware that they wish to keep with an opportunity to reduce recurring monthly service and toll charges by delivering digital-quality dial-tone service over their broadband connection rather than a separate voice circuit from an incumbent or local exchange carrier. The customer's existing phone system equipment continues to provide the user feature set, while the Packet8 Virtual Trunking services provide dial tone, together with local, long distance, and international call routing services to that equipment from the Packet8 digital voice over IP network.

For the June quarter, revenues from our new Packet8 Virtual Trunking services totaled $166,000, and we've received great interest from potential resellers and partners regarding these services. We hope to be able to announce additional distribution and technology partners for these new trunking services in the near future.

Earlier this month, we announced three new plug-and-play business IP phones for our Packet8 Virtual Office business services. We are very excited about the new features these phones bring to our existing services, including an intercom capability, corporate directory, power over Ethernet support, on-phone Internet queries, and a wireless deck multi-handset capability on our high-end phone.

Like all Packet8 endpoints, these devices contain 8x8 software that enables them to be nomadic and completely auto-discoverable, allowing them to be plugged into any high-speed Internet connection anywhere in the world by the end-user of the phone without any special network configuration, additional software, or interaction with the PBX administrator, and we think this is a first for the business IP phone industry. Early feedback from our new customers who have received one of these new IP phones indicates a very favorable user experience.

More importantly, we also announced a new set of services that use the capabilities of these new IP phone devices to enable us to now address customers whose business needs require a key system, multi-line appearance, or busy-line appearance environment. These new hosted key system services enable any phone in the business to see and access all active telephone communications coming in and out of the business from anywhere in the world where those handsets are located. Our Packet8 key systems services enable one of the first distributed, hosted multi-office/home office shared-line-appearance services in the telecommunications market.

On the mobile front, we announced in July that we've extended our international Packet8 MobileTalk services to support the Apple iPhone platform with a Web-based dialer that does not require any software download to the iPhone itself. The iPhone MobileTalk service also connects faster than our previous MobileTalk services, and we now have more than 4,000 subscribers to our Packet8 MobileTalk services.

Our patent portfolio grew during the month of July to a total of 73 patents, with the announcement of a new patent award related to Voice over IP communications technologies.

And, finally, we just announced yesterday an agreement with Minneapolis-based Avtex, Incorporated calling for the migration of approximately 1,500 businesses who were subscribers of their iTELConnect-hosted PBX phone services over to the Packet8 platform.

In addition to acquiring these new business subscribers, we are also putting in place relationships with Avtex's resellers and channel partners, who will be applying their expertise in selling hosted communications services to small businesses to selling our Packet8 solutions.

With that, I'll 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.

Churn for the quarter was 3.5% compared to churn of 4% in the fourth quarter of fiscal 2008 and 4.6% in the year-ago period. The Churn Task Force we implemented in January is making great strides in reducing our churn.

Non-cash items in our financials this quarter included a $69,000 non-cash mark-to-market gain on the value of our warrants, a $328,000 stock compensation charge, and a $339,000 depreciation charge. In addition, we released a $590,000 sales tax accrual. This was a one-time event.

As Bryan mentioned, overall gross margins were 68%, compared to 67% in the March quarter. With our service margins at 75%, which is an all-time high, and product margins at negative 13%, business service margins were 84% and residential video service margins were 64%. The average monthly recurring service fees billed to business customers were $237 per month in the June quarter, compared to $234 in the March quarter.

The cost to acquire a new business customer for a virtual office service was $1,217. The contribution margin of business services, which is business service revenue less business service cost of services, customer support, and billing, was 66%.

The payback for a business customer, which is the cost to acquire a business customer divided by the monthly contribution margin, was approximately eight months. Cash outflow for inventory purchases was $1.75 million during the first quarter, an increase of $891,000 over the fourth quarter. Capital expenditures for the quarter were $168,000, or 1% of revenue. Advertising, lead generation, and promotion-related expenditures totaled $2 million for the quarter.

On the balance sheet, inventory increased by $178,000 due to the procurement of new business IP phones we began selling in the middle of July. Accounts receivable declined by $249,000 between March 31 of 2008 and June 30, 2008 but was still high at $1.6 million relative to the first three quarters of the fiscal 2008. Approximately $630,000 of the accounts receivable balance is related to one retailer to whom we have a payable of $400,000 that partially offsets the money due to us.

On billing, cash collected in the quarter divided by billings we attempted to collect was the highest in the Company's history, surpassing the record we set in the March quarter.

As of June 30, 2008, total shares outstanding were 62 million, and total shares fully diluted were 80 million. The difference between the outstanding and fully diluted share count is 7.8 million warrants and 10.4 million options.

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

Thank you, Dan. We have posted a transcript of these prepared remarks on 8x8's corporate website at 8x8.com in the Events section for your reference and convenience.

With our new Packet8 Virtual Trunking and Packet8 Key Systems services, we can now save any business of any size significant telecommunications costs by leveraging their existing high-speed Internet connection. This enables us to tap into a much broader segment of the business market, from the smallest home office to larger, more established enterprises, and tailor a new or replacement solution that reduces their telecommunications costs with little or no upfront or recurring capital investment and substantially reduced monthly billing costs.

This quarter, we will be presenting at the Securities Research Associates Technology Conference on August 18 in San Francisco and at the Kaufman Brothers Investor Conference the week of September 1 in New York. We will also be exhibiting and keynoting the Internet Telephony Conference and Expo September 16 to 18 at the Los Angeles Convention Center. We look forward to seeing you at one or more of these events.

That concludes our prepared remarks, and I'll now turn the call back over to the operator for any questions you may have.

(OPERATOR INSTRUCTIONS)

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

Great. Thanks for taking my questions.

Just one issue in terms of just a little confusion in the terminology that you're using. Looks like you guys are now talking more about business, opposed to virtual office specifically, so I was wondering if that had any impact on your net adds during the quarter; in other words, was it just virtual office, or were there other things in that number? And is that an apples-to-apples comparison compared to last quarter?

And then, two, if you could just expand on that strategy because it does look you are obviously adding a lot of new services to your product suite, and what could we expect from that going forward?

And then I will have a follow-up question. Thanks.

So, Colby, this is Dan. On the first question, it's pretty much an apple-to-apple comparison on the gross and net adds. We ended the quarter with roughly a handful of virtual trunking customers, but for the most part, it's an apple-to-apple number.

And, Colby, we've actually had a really busy summer here because we've rolled out all of these new devices and new services, and what I'm trying to allude to in our prepared remarks is basically any business out there, from the Intels and Ciscos of the world down to the smallest home office, should be calling us up to get a quote on our telecommunications services because we can now service any size business with any equipment in any environment, and we think lower their monthly telecommunications costs by at least 50%, and depending on who their existing provider is, as much as 80, 90%.

Okay. And another question. It looks like your churn improved this quarter, and I think, Dan, you mentioned in the beginning of your comments that the retention policy that you guys had put in place in January was coming along nicely. But, obviously, the residential continues to be an area of weakness. If you look at your revenues quarter over quarter, it was flat, although you guys did a great job in the business segment.

What's going on there, and are we seeing an increase in customers churning off there? Is it having to do with ARPU? Just some idea in terms of why that's continuing to fall off the way it is and what we should expect going forward. Thanks.

So a little bit of it is related to ARPU on the residential side. ARPU was down about 2.9% quarter over quarter, so we are starting to see for the first time at a couple of quarters a little bit of pressure on the ARPU.

But we've actually seen -- we saw improvement in churn, but it was across the board on all of our segments, so we are starting to see a reduction in churn on the residential side as well.

But I think some of the -- a reason for part of the reduction in residential is that the gross adds that we're seeing on the residential are a little bit lower than we had had historically.

Okay. And, also, just related to that, it's about a year now since you guys signed up the SunRocket customer. I think it was about 25,000 at the time. Any update on what the renewal process has been there, and from a cash flow standpoint, what's going to happen there since I think a lot of those did take the annual package about a year ago? Thanks.

Yes, so we started renewing the annual plans on the anniversary date of these customers about two weeks ago. So far, we're about 65% of the way through the renewals, and the renewals look like about 85% are renewing. And so there's going to be kind of a blip to churn this quarter related to that 15% of the customers, and I think it's probably about a 0.3 to 0.4% impact on churn. But you have to remember that this is a one-time event for churn because next summer, presuming that these 85% stick, we might have a similar situation a year from now.

Okay. And how many of those were taking the annual package, and can you just remind us how much that was?

Yes. It was -- we added about 25,000 SunRocket customers. Approximately 60% of those, or 15,000, subscribed to the annual plan. So we think that the kind of net cash out of this is in the $2.5 million range.

Great. All right. Thank you very much.

And your next question comes from the line of Rai Archibold of Kaufman Brothers. Please proceed.

Thank you. The customer that you picked up from Avtex, can you give us a little bit of background in terms of their profile? How do they compare with your customer base in terms of ARPU and number of lines, etcetera? Are they materially different?

Hi, Rai. This is Bryan. It's a good customer base. It is heavily weighted to kind of a unified communications, meaning one, two, three-line type of customers. So I would say, overall, when you average it out, it will probably be a smaller number of services per account, but they do have a good 90 or 100 which are good sized businesses that will be taking the full PBX package with Virtual Office.

And the way the deal is structured is it's an opt-out. They've already been notified by Avtex that we are their new service provider. This week, they received notification from us that -- in terms of how we're going to take over their service and the timeline for that. And we're hoping that in addition to picking up some new service capabilities because we're actually going to support a piece of the Avtex platform going forward that we can offer to all of our customers, as well, we think it's a great opportunity to introduce these folks to all of our services, our mobile services, and everything else we do, and hopefully be able to up-sell them, as well as migrating over their existing services to something equivalent on Packet8.

And I guess in the early [submits], you're going to be giving them free equipment, so can you give us a sense as to what the value of that equipment is expected to be if this goes through, or do you really have to wait till you see who opts in?

Yes, I think -- I don't know that we have an exact number today, but I think the free equipment is mainly directed at those 100 or so businesses that have a lot of IP phones across the enterprise, and we think the best way to migrate them is to move them over to our new IP phones that we just introduced. So I think the free equipment piece will probably be limited to that handful of customers, those 100 customers or so. And those of you that have followed the Company since SunRocket a year ago, you remember we had a huge hit to product margins that quarter, and as Dan said, that was about 25,000 customers, and we had to give each and every one of them free equipment in order to move them over.

This deal, just given the relative size of it and the fact that only these larger companies are going to be getting the free IP phones, it may have some impact, but I don't think it's going to be anything like the hit we took a year ago when we took on that residential customer base.

And those 100 or so customers are -- can you -- do you have a sense as to what the average number of lines are?

I think it's very similar to our average, which is in the seven to eight lines or services per business, but there's a mixture in there. Some are quite large, and some are smaller than the average. But we think it's a very -- the reason we did this deal was it was a great fit, and I think Avtex's recognized that we'd been servicing this size of customer quite successfully for some time and realized we were the best ones in the business to take them over.

Okay. And then on the ARPU related to the residential, I guess, one, I'm just curious what -- as far as the renewal on the SunRocket, is that a function of the SunRocket renewals, or did that -- I guess that started after a quarter, so I'm just curious what drove the lower ARPU for the residential business?

I mean there are a couple of things that are driving that, but the primary thing is that actually the ARPU on an annual [playing] customer is actually -- it's roughly about $20.

So to answer your question about the renewals, that didn't affect the ARPU because the bulk of those are actually happening right now. So it's what we're having happen is that some of the customers that are on the higher-priced plans are either canceling or they're calling up and threatening to cancel or getting a reduced -- due to some retention mechanisms -- to a lower-priced plan.

Okay. Very good. Thank you.

Thanks, Rai.

(OPERATOR INSTRUCTIONS)

And your next question comes from the line of Michael Coady of B. Riley. Please proceed.

Thanks. Good afternoon, Bryan, Dan, Joan.

Good morning.

Could you talk about the competitive landscape with -- for the Virtual Office and if you're seeing any more entrants, in particular, from MSOs or the telcos coming down in size?

Yes, I think, in general, we see more competition. We're certainly -- I think our sales team is active in having to quote against probably new names that we haven't seen before, but in general, these continue to be kind of -- to characterize them as small company or start-up names, as opposed to established players, like we used to compete with. We've seen a lot of advertising from Comcast, in particular, but we haven't seen them in the market at all, and their services still seem to be confined to a residential line that's been rebranded as a business service with a correspondingly higher price.

We saw a press release from a company named [Jaja] about a week ago, and I know I went to try to sign up for their service, and I was told on their website that someone would contact me within seven days, so that seems to be vaporware. But I would say we are seeing more quotes, but they're from players where I think the history and reputation of 8x8 being a public company in the space for so long, we can still usually win against those quotes even if the competitive quote is at a lower price just because we tell them, who are you going to trust your business to over the next couple of years? Do you want to go with this company no one's heard of or go with us? And that usually seals the deal. So that's kind of the environment we see right now.

Okay. And as you get into the Virtual Trunking and -- who are you going to be facing there, and also what the new key systems --

Yes, so the previous -- I think my previous remarks were definitely limited to the virtual office kind of space and that customer.

In trunking, we're the new entrant, and there are some established players there. But, again, most of the folks that have been in that market have tied their voice trunking lines to their data services and their data connections, and so I think what we're trying to do is introduce this nomadic nature and over-the-top nature that we've done with all of our other voice services into the trunking realm and really tell people, you don't have to worry for a data line to be provisioned. You don't have to switch your data service over to us in order to get access to our voice trunking services.

Just like everything else, we can trial it in place, literally in a couple minutes, hook into an existing Internet connection, unplug a T1 connection, and hook ours in and show the customer that it works and let them play with it before they sign up.

So I think there's a lot more competition there, but I think the market has some interesting opportunities because of the technologies that we're bringing to the space, and I think that goes -- those remarks go hand in hand when you go to the key system market, as well.

It's an established market with players that are using the same technology they were using 10 years ago, and we're coming in with a hosted nomadic functional equivalent with a few extra hooks on our IP phones that really upgrade the user experience and feature set and enable you to drop these phones anywhere in the world, not just within one building or on a -- dedicated lines hooked into a key system. So, again, we're kind of changing the game there, and we'll see what kind of progress we can make here in the September quarter to upset some of that old balance that's there.

Okay. And then, Dan, on the sales tax accrual that was released in the June quarter, what are your expectations relative to future quarters?

Yes, we currently have an accrual outstanding related to sales tax of approximately $800,000 as of June 30, and we don't expect to release any more of that. We've -- over the last year have been pretty busy working with a lot of these states on settling with them. Many of them had sent us notices, and we're pretty much done with settling with most of these states, and we began to collect or remit sales tax in a large number of these locations.

Okay. Thanks for answering my questions, and good luck in the balance of fiscal '09.

Thanks, Michael.

And your next question or comment is a follow-up from the line of Rai Archibold. Please proceed.

Yes, I don't know if you mentioned this in the call. I didn't pick it up. But can you tell us what the percentage of sales were from the retail channel, OfficeMax, Office Depot?

Yes, what we mentioned, Rai, was 14% of our total new business sales came from retail, and we broke out that 2% of our total new sales were from OfficeMax, which I think is pretty good. We launched with them in April, so it means we were basically on the shelf and really up and running in late April/early May, and to have 2% of the sales -- we're not there yet, but certainly, it is selling, and we're encouraged by that.

And with the Staples.com announcement, that was in this month, so that fell outside the quarter, and we'll have hopefully an update on that in our next call.

Very good. Thank you.

You're welcome.

And that does conclude the question-and-answer session. I'll now turn it back to Bryan Martin for closing remarks.

All right. Thank you, and thank you, everybody, for listening. If you're not already a customer, I encourage you to look into and sign up for our services. You can do it today at www.Packet8.net. Thank you, Operator.

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