8x8 Inc (EGHT) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 8x8 third quarter fiscal 2009 earnings conference call. My name is Latrice and I will be your coordinator for today's conference.

At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this call. If at any time during the call you require operator assistance, please press star, followed by zero, and a coordinator will be happy to assist you.

And at this time I would like to turn the call over to your hosts for today's conference. Ms. Joan Citelli, 8x8 Director of Corporate Communications. Please proceed, ma'am.

Thank you and welcome, everyone, to our call. Today I'm joined by 8x8's Chief Executive Officer and Chairman of the Board, Bryan Martin, and 8x8's President and Chief Financial Officer, Dan Weirich, to discuss our results for 8x8's third fiscal quarter ended December 31st, 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 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, Chief Executive Officer and Chairman of the Board of 8x8.

Thank you, Joan, and good afternoon, everyone. Well, it's always been my pleasure to conduct these quarterly conference calls with Dan Weirich in his role as Chief Financial Officer. I'm even more pleased at this time to publicly introduce Dan in his newly assumed role as President and CFO, which we announced in November 2008. Dan has already made a number of positive and exciting changes within the organization, and we are looking forward to updating you on our growth and progress throughout 2009.

Today I'm going to address a new milestone we reached in the December quarter with our business service revenues and then update you on several corporate and equity issues which have recently transpired. I will then pass the call over to Dan, who will provide an overview of our business during the December quarter and walk you through some detailed operating results and metrics. As always, we will take any questions you may have for us at the end of the call.

During the December quarter, the Company's revenue resulting from the sale and provisioning of services to small businesses reached a new milestone, representing 66% or approximately two-thirds of our total revenue for the quarter. From this point forward, we believe that the overall operating results of 8x8 will largely be determined by the financial results associated with these business service customers, which we are proud to report, have led to the Company's fifth consecutive profitable quarter and seventh consecutive quarter of increasing cash and investment balances on our balance sheet.

To help investors gain a better understanding of these business services, results, and trends, we have provided a new table of selected operating statistics for the past four quarters at the back of today's financial 2009 third quarter earnings release. Dan will address some of these metrics and their trends in greater detail in a moment.

Next we were pleased to report that on December 18th, 2008, the NASDAQ stock market filed with the Securities and Exchange Commission a proposed rule change to continue the temporary suspension of the bid price requirements for an additional three months, until April 19th, 2009, and that any new listing deficiencies due to minimum bid price would be determined using data starting on April 20th, 2009.

The NASDAQ noted that since its initial bid price rule suspension on October 16th, 2008, market conditions have not improved, and in fact the number of securities trading below $1 per share has increased.

NASDAQ stated that it continues to believe there's been no fundamental change in the underlying business model or prospects for many of these companies, and that a decline in general investor confidence has resulted in depressed pricing for companies that otherwise remain suitable for continued listing on the NASDAQ exchange.

NASDAQ also stated that these same conditions continue to make it difficult for companies to successfully implement a plan to regain compliance with the price or market value of publicly held shares tests, a sentiment that we at 8x8 wholeheartedly agree with, as we believe our underlying business is showing continued strength, growth, and profits.

8x8 has decided, however, to take advantages of these unique market conditions afforded to us with our current stock price levels. As we announced in today's press release, on January 27th, 2009, 8x8's Board of Directors passed a resolution to accelerate the vesting of all outstanding employee stock options. The vast majority of these stock options are currently below their exercise price and they will remain below the exercise price as no pricing modifications to the options were effected by the Board of Directors by this action.

We believe this action will benefit shareholders because it will accelerate the recognition of approximately $2.4 million to $2.6 million of outstanding future stock compensation expense into the Company's fourth fiscal quarter ending March 31st, 2009. We believe that the net effect of this action will be to largely eliminate any FAS 123(R) stock compensation expenses resulting from past stock option grants from the Company's 2010 fiscal year, which begins on April 1st, 2009.

For the last three quarters ended December 31st, 2008, the Company's net income has been reduced by approximately $0.8 million due to recognition of these stock compensation charges for employee stock options that are currently below their exercise price. In other words, 8x8's net income of $1.4 million for the three quarters ended December 31st, 2008, would have been approximately 56% higher without these charges.

Going forward, we anticipate that these charges will be largely eliminated in our next fiscal year. We also plan to transition future stock-based compensation to restricted stock granted under our existing stock plan at much lower gross amounts which will also benefit from the accounting rules for stock compensation by setting fixed expenses for the vesting life of the restricted stock as of the date of the grant.

We'll be happy to answer any questions regarding these actions later in the call. With that, I'm now going to turn the call over to Dan Weirich, the Company's President and CFO, who will walk you through the detailed financial results and operating metrics of the business.

Thank you, Bryan. The third quarter of 2009 was a busy quarter for 8x8. Business sales set a new record in terms of gross new businesses subscribing to our services, number of business services sold, and new order cash receipts for the sale of business services.

For the first time, new order cash receipts for the sale of business services during the quarter exceeded $2 million and new business services sold exceeded 80% of total services sold in a fiscal quarter.

Business revenue grew 41% compared to the same period a year ago and 8% sequentially, while residential and video revenue declined by 32% compared to the same period a year ago and 12% sequentially. Business revenue in the third quarter exceeded $10 million for the first time and represented 66% of revenue in the third fiscal quarter of 2009.

Currently we have four major initiatives underway. The first is continued investment in research and development to develop new technologies and services for our business customers. Second is continuing our efforts, which have produced churn over the past 12 months. The third is expanding our sales force, and the final item is managing our cost of acquisition for new business customers

In the research and development area, we are working on new technologies and services to round out our current business product set and to more deeply integrate our services into our customers' daily lives. As you can see in the selected operating statistics table that Bryan referenced earlier in the call, we are beginning to see a meaningful improvement in churn with our business customers.

While we did see cancellations due to financial hardship increase to approximately 40% of total business cancellations in the third fiscal quarter compared to approximately 33% and 34% of total business cancellations in the first and second quarters of 2009, the total business churn actually declined both sequentially and year-over-year.

The third initiative I mentioned is a continued expansion of our sales channels. We ended December 2008 with 56 quota-carrying sales executives and 75 total employees in our direct sales group. This compares with 37 quota-carrying sales executives and 43 total employees, and with 43 quota-carrying sales executives and 56 total employees at the end of June and September 2008, respectively.

Currently, we believe that we have the sales management infrastructure in place to build our direct sales force out to 85 to 100 quota-carrying sales agents. As we reported last quarter, we continue to benefit from a very favorable hiring environment in Silicon Valley.

Finally, in the latter part of the third fiscal quarter, we terminated sales channels and lead generation relationships that did not provide us an adequate return on our investment and redeployed our resources to channels that provide the greatest return. This change is reflected in the cost of acquisition of a business customer of $933 in the third quarter, which is 17% less than the average cost of acquisition of a business customer in the preceding six quarters.

Moving on to average revenue per user, you'll see in the selected operating statistics table that we began billing approximately 1,154 customers who subscribed to the Find Me, Follow Me services that we acquired from AVtech Solutions at the end of the second fiscal quarter. These customers have an average service revenue per business customer of approximately $40. The inclusion of these customers in our average service revenue per business customer calculation reduced this figure in the third and second quarter of 2009 to $208 and $220 from the $237 in the first quarter of 2009. Excluding these Find Me, Follow Me customers, the average service revenue per business customer would have been approximately $226 in the third fiscal quarter of 2009.

Gross margins were 67% in the third quarter of 2009, with service margins of 74% and product margins of 9%. Product margins are positive for the first time in a year, due to the elimination of ineffective sales channels and increased control of discounting by our sales force. We're also seeing positive contributions towards product margins from sales of our new IP phones, which were introduced this past summer.

Non-cash items in our financials this quarter include a $66,000 non-cash mark-to-market gain on the value of our warrants, a $206,000 stock compensation charge, and a $314,000 depreciation charge. Cash outflow for inventory purchases was $929,000 during the third quarter, compared with $1.4 million in the second quarter. Capital expenditures for the third quarter were $291,000 or 1.8% of revenue, compared with $218,000 in the second quarter.

$136,000 of the capital expenditures increase in the third quarter relates to the acceptance of the technology platform we purchased from AVtech. We ended the third quarter with $16.2 million in cash, a $423,000 sequential increase, and the seventh consecutive quarter that cash, cash equivalents, and investments have increased.

As of December 31st, 2008, total shares outstanding were 62 million, and total shares fully diluted were 79 million.

That concludes my prepared remarks, and I will now turn the call 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 presentation section, for your reference and convenience.

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 our first question comes from the line of Mike Crawford with B. Riley. Please proceed, sir.

Thank you. That's a good job on getting the subscriber acquisition costs down. What are your thoughts on this metric going forward?

It's something that we started to put when we made a lot of improvement on it in the latter part of the quarter. So if you look at our cost of acquisition throughout the quarter, it trended down pretty significantly. So I would say that we don't exactly know where it's going to come out when it -- everything is kind of as efficient as we think it could be, but I don't think that this is the floor.

Okay. Have you changed your paid search strategy as well? You didn't mention that in the prepared remarks.

Not exactly. I mean, we've --

Optimized it.

We pretty much are optimizing it. So essentially, what we've done is we're spending a lot more time on looking at all of our lead generation channels and seeing which one we make the greatest return on and which ones we don't make as good a return on, and so spend from the second quarter to the third quarter from an advertising standpoint was down a few hundred thousand dollars.

A good chunk of that was related to reducing keyword searching on Google and Yahoo, and a bit of that was we just kind of reined it down in the quarter, because we had a lot of leads and we had more leads than we had salespeople. So we worked through that in December, had a phenomenal December in terms of sales and costs of acquisition. And since then, we've ramped up the keyword spending in January a bit, but not extremely aggressively.

So there's kind of a limit on what you can spend on keyword searching because there's only so many people bidding on words, but it's still kind of a work in progress. So I think in the next quarter, we'll probably be able to get to the end of this project.

Right. So your churn was below 4% for the quarter. If you're able to keep your churn, say, under 4.5%, what do you estimate then as the average -- like, the net present value for the business subscriber added?

Yes, so, on our business customers, we actually have -- our overall line churn, we have a table at the end of our press release. The overall line churn was 3.9%, and the business customer churn is actually 2.9%, so this is the first time that we've actually publicly disclosed the specifics on our business customer churn.

But the metrics around our customers, of a $208 average revenue customer, is the contribution margin, which is just simply all the network costs, the people that are running our network, our customer service and our billing expenses, is approximately 60%. We model it at about a 30-month customer and the IR, and that is about -- at $933 acquisition cost, is 141%, annualized.

So clearly, if you didn't add any customers next month then you'd be generating a lot more free cash, but it's almost kind of intuitive that if you were to accelerate your customer acquisition that cash may actually dip in the near term. Is that correct?

Our cash balances?

Uh-huh.

We just had seven straight quarters of increasing cash balances, and we don't intend to have our cash dip due to kind of poor operating activity.

Okay. All right, well, thank you very much.

Thanks.

And our next question comes from the line of Brian Horey with Aurelian. Please proceed.

Thanks. Congratulations on a nice quarter in a difficult economic situation.

Thanks, Brian.

Thank you, Brian.

Thanks for the detail on the business side of the stats. I think I heard you say that you guys had shifted the focus of your marketing efforts to different channels. Did you guys kind of drop out of some of the print-based stuff that you had done in the past? Is that one of the areas that you've deemphasized? You know, like the airline magazines and things like that?

Yes, so a year to 18 months ago we were in three airlines. The only one that we're in today is Southwest. We're still kind of in the analysis of whether Southwest in print makes sense, but Southwest is where we are now. And the other print that we do is billstoppers in primarily financial institutions or products -- billstoppers -- so Wells Fargo, Chase, US Bank, those types of channels. And it's interesting, some of those are effective and some of those are not effective, depending on the bank, so we have cut some of those, but we are keeping some as well.

Okay. And I think I heard you say that you had ramped down paid search in Q4 a little bit. Is that --

Yes.

I'm sorry, I picked up a little bit late on the conversation. So one of the issues from a sales force efficiency perspective going forward is whether you can keep -- you're ramping up the sales organization, can you keep them all busy enough from a lead standpoint, and I'm just wondering what kind of commentary you can make on the balance between butts in the chairs making phone calls and the leads that you need to generate to keep all that functioning at the right level of efficiency.

Yes, so it is a balancing act. We've got a lot of data on that, but there is an optimal level and we're comfortable that we are able to manage to that level. So I can tell you that we are -- our people are busy.

Okay, good. Can you share any thoughts you have about how quickly you might want to grow the sales organization over the next few quarters, or what do you think is kind of a reasonable rate of growth where you're not bringing on people so fast that you kind of lose control of the quality and the training and all that kind of stuff.

Exactly. So I provided the metrics of our quota-carrying salespeople and the total people in the sales group -- so at the end of December we had 56 quota-carrying salespeople and 75 people in the sales organization, and if you look at the numbers from the prior periods, you would see that we're getting -- it would appear that we're getting a little bit top-heavy.

There's more management than there are to reps, the ratio is a little bit off. And what we've done is we've invested in bringing people, primarily through promotion, into a more management training operational type roles, so that we can nurture the newer sales reps and actually get it to where it's able to be scaled.

And so we had a pretty good-sized hiring class in the beginning of December, and we had a good-sized hiring class in January, and so these are two classes of hires that we haven't made the call on whether it's entirely working or not yet because it takes them about 60 to 90 days to really get up to speed. But I think that this is going to be a very telling quarter, this current quarter that we're in, as to how well we can scale this thing.

How quickly.

Yes, and how quickly.

Yes, okay.

I'm sorry, go ahead.

I'm sorry, go ahead, I didn't mean to interrupt.

And it's like we are able to hire extremely qualified people in today's environment, and that's something that 18 months ago or so was a challenge.

Okay. I think I saw mentioned in the release of opening up a couple of sales offices. Can you just talk about whether there's a change in strategy at all, or is that due to account sizes getting bigger or just give us some color on -- because I think you kind of had everybody in the home office, if I remember correctly, in the past.

Yes, so we have an individual in the Rochester, New York area that we've known for a long time. He came to work for us a couple of years ago, hired someone else, and these people are effectively working out of their home. They were doing a phenomenal job. Rochester is an area where there's a lot of telecom knowledge due to --

Paytech and all those places, yes.

(Inaudible—multiple speakers) companies -- yes, those type of companies are there. It's a very kind of cost-effective location and so we have five, six, seven people there, a very small office. It's actually the only physical presence outside of our headquarters here in Santa Clara in the United States. And so we're just kind of -- it's sort of in a trial mode as to whether we can scale outside of our core office.

Okay. And last question, you mentioned that cancellations due to I think what you called business hardship had ramped up during the quarter, which is not surprising, given what's going on. Can you make any commentary on kind of the trend or velocity of that increase? Is that something that ramped as the quarter went on, and are you seeing that trend kind of continue into January, or just give us some sense as to how that curve looks?

It was pretty much consistent throughout the quarter, and it's been consistent in January as well. So it was roughly 40% of total cancellations during the quarter compared to about a third of total business cancellations in the first two quarters, and January is kind of closer to the December quarter figure, so it didn't correct itself.

Okay. Okay, thanks very much.

Thank you.

Again, to ask a question, please press star, followed by one. And there are no further questions in queue at this time.

I would like to turn the call back to Bryan Martin for closing remarks.

Okay, thank you, Latrice. Thank you, everybody, for listening. If you're not already a customer, I encourage you to sign up today for 8x8 virtual office business phone services by visiting www.8x8.com or www.packet8.net , and you can also reach one of the sales professionals that we've been talking about by dialing us at 1-866-TRY-VOIP. Go

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect, and have a great day.