8x8 Inc (EGHT) 2009 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 8x8, Incorporated Earnings Conference Call. My name is Shamika and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will conduct 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, Director of Corporate Communications. Please proceed.

Thank you, 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-- second quarter results for 8x8's fiscal year 2009.

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, 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. 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 and then I'll pass the call over to our Chief Financial Officer, Dan Weirich, who will walk you through our detailed operating results and metrics for the September quarter.

I'd like to begin today by addressing the effects the macroeconomic issues are having on 8x8's market capitalization and on the business communications services we provide and offer to both existing and prospective customers. First of all, the price per share of EGHT has declined precipitously since our June 30th closing price. We believe that the change in price is due to the macroeconomic weakness that is causing sector wide redemption calls and volatility. As you will see in our results for the September quarter, our growth rate of business services revenue has not slowed. I want investors to know that we are very concerned about the decline in 8x8's stock price, and that our board of directors is evaluating all possible options and opportunities to rectify the disconnect between our market valuation and the positioning and growth of our business.

I also want to remind you that 8x8 has no debt on its balance sheet. We have no need to access the capital markets at this time. In the September quarter, we added $938,000 to our cash and investments versus the June quarter, and year over year, we have added $2.9 million to our balance sheet. Cash at September 30th was $15.8 million, the 6th consecutive quarter that we have demonstrated positive cash flow from our business.

Next, I'd like to address how the macro economy is affecting new sales to the prospective businesses we are targeting. Historically, the months of July and August are our slowest and most difficult months of the year for new business sales due to the fact that all of the business owners go on vacation and are otherwise unavailable during those month. In the past two years, we achieved record sales numbers during the month of September, which more than offset the slow sales performance of those years in July and August. For this September quarter, July and August were slow and difficult, as anticipated. Then in the month of September, we began to hear from all of our sales agents that the sales cycles with prospective customers were lengthening, and that customers were pushing out decisions to adopt our business communications services.

So while we still saw increased growth in September, we did not see the usual month-end ramp and acceleration that we would have normally expected from the past couple of years performance. New organic sales grew at a linear rate throughout the entire month of September. This slower organic growth was offset by the inorganic migration of approximately 1,000 businesses from Avtex, LLC on September 30th and Dan is going to address that migration in his section.

In September, we launched a $24.99 per extension per month unlimited calling plan bundle with our IP phones with one year of service in order to hammer home the savings message in our quotes to prospective customers. Given the current mix of sales of unlimited extensions and our lower priced metered extensions, we believe that this IP phone bundle price point will accelerate sales of our IP phone unlimited extensions without dramatically impacting the ARPU numbers that Dan will discuss in a minute.

Even with all of these factors, our revenue growth for business services held steady during the September quarter at 8% growth quarter over quarter and 41% growth year over year. Business revenues were $9.8 million for the September quarter. Our overall revenues, including business, residential and video, and licensing and royalties for the September quarter were $16.4 million, a 1% quarter over quarter increase, and an 11% year over year increase.

Our overall revenue growth was impacted by a 12% sequential and 18% year over year decline in the Company's residential and video customers, as all of our former SunRocket residential customers renewed in the July and August timeframe at a success rate of approximately 80%. This resulted in a one-time drop in monthly residential revenues during the quarter as approximately 1,900 annual customers and 1,700 monthly subscription customers from SunRocket opted not to continue their service after their one year anniversary with Packet8.

Our overall churn for all services increased to 4.2% from 3.5% last quarter, due to the one-time impact of these customers who did not continue service on our residential services. Carving out the impact of this effect on churn, overall churn would have been unchanged versus the previous quarter at 3.5%.

I also want to address the impact that the macro economy is having on our existing small business customer base. We saw our business service churn remain flat with the previous quarter, and the number of businesses cancelling service due to nonpayment or businesses going out of business also remained flat with our historical average of approximately one-third of our total business churn. This is good news and implies that while we know that the macroeconomic issues are impacting the small businesses we provide service to, our business customers are retaining their 8x8 Virtual Office services at the same historical rate, as the cost savings and operating efficiencies we enable are more valuable and relevant in this cost containment environment than ever before.

We added 1,846 net new businesses to our customer base during the September quarter, and we ended the quarter with more than 13,700 businesses using our IP communication services. Overall revenue distribution for the quarter was 60% business services, 39% residential and video services, and 1% license and royalties. During the September quarter, we introduced new products and services that enhance the user experience of our services and further expand our addressable market. In July, we introduced a family of IP phones designed for use with our 8x8 Virtual Office hosted PBX phone service and our new Hosted Key System services, that emulate the shared line appearance functionality many small office environments are accustomed to using.

In September, we announced a new technology and marketing partnership with Microsoft and we announced the certification of the 8x8 Business Phone Service with the Microsoft Response Point small business phone system. This partnership is facilitating a significant expansion of our reseller and VAR channels through joint marketing efforts and channel promotions. We continue to maintain a nationwide presence of our phones and services in Office Depot, Office Max, and a small number of Staples locations, and continue to invest in growing the sell-through rates with these partners.

The potential of 8x8 business communication services to cut fixed costs to businesses of any size, and drive increased efficiencies and capabilities into the telecommunications infrastructure of these companies, is more relevant than ever in this economic environment, and it's always relevant in a down market cycle. We intend to continue to refine and drive this message home to existing and prospective customers and we see the current economic environment as a truly unique opportunity to accelerate our growth.

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. The migration of approximately 1,000 former Avtex customers to 8x8 was completed on September 30, 2008. We did not recognize any revenue in the second quarter related to Avtex customers. We expect this customer base to generate approximately $200,000 in quarterly revenue with gross margins of approximately 68%.

Overall gross margins were 65.3%, compared to 67.8% in the June quarter. Our service margins declined from 74.6% in the June quarter to 73% in the September quarter while our product margin increased from negative 13% to negative 10%. 90 basis points of the 159 basis point decline in the service margin is related to regulatory fee increases we have elected to not pass onto customers and the balance of the margin decline is due to the aggressively priced promotions Bryan mentioned.

Business service margins were 81% and residential/video service margins were 61%. Non cost of sales operating expenses increased from 61% of revenue in the first quarter of 2009 to 67% of revenue in the second quarter of 2009. This is a quarter over quarter increase of approximately $1 million. $590,000 of this increase is related to the one-time release of a sales tax accrual in the first quarter. Approximately $107,000 for the acquisition of the Avtex customer base is a one-time commission expense in the second quarter. An additional one-time expense is approximately $50,000 in credit card fees related to the renewal of the former SunRocket customers' annual service plans.

Approximately 90% of the $108,000 increase in research and development is related to compensation and recruiting expenses. A combination of our increasing cash balances for six consecutive quarters, generating net income for four consecutive quarters, and a softening job market in Silicon Valley has made hiring extremely talented developers easier than in the past. Customer service increased $70,000 sequentially. The remaining $100,000 is miscellaneous sales and marketing expenses related to growing our sales force and the launch of several new products during the quarter.

Non cash items in our financials this quarter included $190,000 non cash mark to market gain on the value of our warrants, a $336,000 stock compensation charge, and a $322,000 depreciation charge. The average monthly recurring service fees billed to a business customer were $230 per month and a cost to acquire a new business customer was $1,222. The contribution margin of business services, which is business service revenue less business service cost of services, customer support and billing, was 62%. The payback for a business customer, which is the cost to acquire a business customer divided by the monthly contribution margin, was approximately 8.6 months.

The cash outflow for inventory purchases was $1.4 million during the quarter, a decrease of $315,000 over the first quarter. Capital expenditures for the quarter were $218,000, or 1.3% of revenues. Advertising, lead generation and promotion related expenses totaled $1.9 million for the quarter, which is an approximate decline of $100,000 sequentially. On the balance sheet, accounts receivable declined sequentially by $848,000 to $710,000 while accounts payable declined by $1.9 million during the same period.

We are pleased that the accounts receivable balance is back down to historical levels after two consecutive quarters with accounts receivable balances more than two times the current level. Deferred revenue increased by $1.2 million primarily due to the large number of annual service plans renewed during the quarter. Working capital has increased year to date by $2.2 million to $8.3 million and stockholder equity has increased by $2.1 million to $10 million over the same period.

As of September 30, 2008, total shares outstanding were 62 million, and total shares fully diluted were $82 million. The difference between the outstanding and diluted share count is 7.8 million warrants and 11.3 million options. Between November 13 and December 19, 2008, 2.4 million warrants with strike prices between $2.10 and $3.61 per share are set to expire. If the warrants with expiration dates in 2008 are not exercised and no additional warrants are exercised before the end of 2008, we will end 2008 with 5.4 million warrants outstanding. Also, the Company's $125 million shelf registration statement is set to expire on December 1 of this year.

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 our prepared remarks on 8x8's corporate website at www.8x8.com in the Events section for your reference and convenience with the numbers. Our next financial presentation will be next week at the AeA Classic Financial Conference on November 4th and 5th in San Diego, California. We hope to see some of you at that event. That concludes our prepared remarks today and I'll turn the call back over to Shamika for any questions you might have.

Michael Coady, B. Riley.

Hi, this is actually Mike Bradford for Michael. Quick question, kind of a housekeeping question here. Could you break out the stock based compensation?

Yes. So $3,000 is in cost of service revenues, $5,000 in cost of product revenues, $56,000 in research and development, and $272,000 in SG&A.

All right. Thank you.

(Operator Instructions). Brian [Huarri].

I was wondering if you could make some comments on the virtual trunking service and how that did this quarter.

Sure, Brian. Trunking was approximately $325,000 of recognized revenue. And we continued to see I think some good successes with our early deployments of kind of our traditional trunking solutions. Some of the initial customer deployments certainly encountered bugs and issues in the provisioning and sales and support processes that we have corrected as of today, so I think that's looking very good. And then I think that the big news during the quarter was the announcement we made last month with Microsoft at the IT Expo that we were certified with Response Point. And certainly we've seen probably about half of our trunking sales this month come from that relationship which is a good sign, I think. And certainly we've seen a very renewed sense of interest from the VAR channel out there since we made that announcement with Microsoft. So it's growing and I think going pretty well.

Okay. Have you seen much change in the bad debt expense this quarter?

No. So we recognize revenue on cash receipt, so bad debt from a GAAP standpoint is not really an issue for us. But we monitor-- if we try to collect $100, we look at what percentage of that are we going to collect on the credit card? And we are still at historic highs on collection rates.

Okay. And last question is, I'm just curious what the, from a kind of an advertising and lead generation standpoint, given some of the changes in the economy and presumably dollars being spent, I'm just wondering whether you guys are finding it easier or harder to find good leads these days than you were before.

I think the only change that we've seen, Brian, is that the leads-- I think there's fewer and fewer competitors out there in kind of the voice over IP sector as we weed out some of these smaller companies. And so maybe the number of people competing for some of the ad terms that we certainly compete with might be going down a little bit. In general I would say the leads haven't gotten cheaper yet either. But I certainly know in some of our lead generation channels, we've seen some of that, the effects of that consolidation. As we noted in the press release and I think in our remarks, we actually ramped the size of our inside channel by about 30% and they did 80% of our sales. So we ramp the headcount when we have the leads to give them and certainly we have plenty of leads to give them right now.

So I think we've seen this dynamic that a sale that used to take us last quarter kind of four to six weeks, is now taking us six to eight weeks. We've seen that kind of hesitation and kind of a longer decision or trial cycle on these customers. But the absolute number of opportunities has certainly not declined and in fact it's increased as we've added these heads.

Has there been any significant change in the size of account that you're getting?

No, I think -- do you have the number on the new additions, services for new customer?

Yes, services per new customers is around 7.5.

Yes, and our average in the customer base is around 7.1 services per customer, so nothing significant there.

A few quarters ago it was closer to 8 and I believe last quarter or the quarter before we mentioned that it had stepped down a little bit, but we're still pretty close to where we've been the last two or three quarters.

Right. And the pricing change that you mentioned, the $24.99, is that a permanent change or is that kind of a limited time offering or how do you guys view that?

We're offering that through December 31st. And certainly we'll reevaluate our options as we go into the new year. But definitely through the holiday season, we will be offering that bundle.

Okay. Thanks very much.

There are no further questions in the queue. I would like to turn the call back over to Mr. Bryan Martin. Please proceed.

Okay. Thank you. Thanks everybody for listening today. If you're not already a customer, I encourage you to sign up today for 8x8's Virtual Office services for your business by visiting us at www.8x8.com or www.packet8.net. Go ahead, Shamika.

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