8x8 Inc (EGHT) 2009 Q4 法說會逐字稿

Good day, everyone, and welcome to the 8x8, Inc., fourth-quarter 2009 earning conference call. Today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Joan Citelli, Director of Corporate Communications. Please go ahead, 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 8x8's fourth fiscal quarter and 2009 fiscal year ended March 31, 2009. If you have not yet seen today's financial results, the press release is available on the Investor Relations section of 8x8's website at www.8x8.com. Following our comment 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 statement. These forward-looking statements involve a number of risks and uncertainties including factors discussed in the Risk factor sections our annual report on form 10-K, our quarterly report on form 10-Q, and other SEC filings and 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 a 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 expressions. 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.

All right, thank you, Joan, and good afternoon, everyone. 8x8's fourth fiscal quarter of 2009 which ended March 31st was a very complex quarter with a lot of moving parts. So in this call, we're going to provide some detailed explanations and color about how our business is evolving in the current economic climate.

First, the Company continued its string of eight consecutive quarters of increasing cash and investment balances on our balance sheet with cash increasing by $181,000 in the March quarter, for a total of $16.4 million at the end of fiscal '09. We did, however, interrupt our previous string of five profitable quarters by taking advantage of the low price per share of EGHT in January to accelerate the vesting of all unvested employee stock option shares and the FAS 123R compensation charges based on the $0.50 per share price at the date of the vesting valuation. Virtually all of the stock option shares are under water, and there were no modifications to the price or other terms of these options. This acceleration of future FAS 123R charges resulted in a one-time, noncash, $2.4 million charge in the fourth quarter.

We also wrote off approximately $543,000 of old analog telephone equipment, largely related to our plans to replace thee phones with our new business IP phones at our retail partners and various other reserves and writeoffs which Dan will detail in his presentation in a moment. All of these charges resulted in today's reported net loss of $3.9 million the net loss for the year of $2.5 million. While it was painful to report a loss after five straight quarters of profits, we believe that the timing was right relative to the current state of the financial markets, and we feel the Company is now well positioned to maximize its earnings per share, going into fiscal 2010, which began for us on April 1, 2009.

As reported, total revenue was down 3% sequentially, and down 3% compared to the same period a year ago. Our business revenue increased by 1% sequentially and 32% year over year, while residential and video revenue declined by 6% sequentially and 32% year over year. Our fourth-quarter results for revenue were impacted by a shift in sales strategy, which we implemented during the quarter, which resulted in a higher rate of business-customer acquisition during the quarter, setting new records for organically added net and gross new business customers. Given the current economic challenges facing small businesses today and the paralyzing effects such unstable conditions can have on these business owners' decisions to upgrade or install new IP communication solutions, we decided to enhance the up-front value proposition of our business telephony solutions to sales prospects by more extensively subsidizing the startup, one-time equipment charges associated with switching to our telephone service.

Despite the fact that our business revenue increased by just 1% sequentially, we signed up a net new 1,307 companies for the quarter. Our highest ever organic rate of growth for new business customers. We ended the quarter with 16,013 business customers with 1,169 new gross businesses added in the month of March alone. We saw this accelerated adoption rate continue in April, as well, and believe that the shift in sales emphasis will result in the acceleration of our business service revenue once the up-front increased subsidy of signing up these customers has passed.

The recurring service revenue component of business revenue increased by $410,000 in Q4 versus Q3, but this increase was offset by a $296,000 reduction in the product revenue component of business revenue resulting from this new subsidizing strategy. The $410,000 increase in business service revenue compares to an approximate $268,000 organic increase in business service revenue in Q3. And the acceleration in both gross and net numbers of new businesses signed during the quarter is readily apparent. Gross margins for product with the one-time charges for analog telephone inventory and stock-based compensation removed were approximately negative 13% with most of the negative subsidy averaged into the quarter's equipment margin during the month of March. And we are continuing to subsidize equipment to gain greater monthly recurring business revenue in the June quarter.

As I mentioned a moment ago, our April sales continued the trends I just discussed, and we believe that this more aggressive approach to converting sales leads will enable us to maintain the acceleration of our overall business revenue on a going-forward basis. Though equipment margins will suffer, we believe that accelerating the growth of our business services revenue is worth the investment. Our ability to finance equipment subsidies with operating cash flow means that we can reinvest the cash growth of our business at the best possible return to our shareholder.

Another point worth noting is that conversion rates on leads acquired in the month of March were the highest we have ever seen. We attribute this change to the new equipment subsidies and the focus on driving monthly recurring revenue in our direct sales team. In addition to convincing more businesses to make the transition to our money-saving services, these changes improved our average cost of customer acquisition, which reached its best level in more than two years at $785 per new business added, which compares with $1,135 in the same period a year ago, and $933 in the prior quarter. Going forward, we plan to continue to maximize our conversion rates on existing and future leads and grab market share right now while our competition is consolidating to a few surviving players, and our services continue to be perfectly applicable to the economic conditions affecting our prospective customer base.

Finally, to address one of the most frequently asked questions we receive in this economic climate, business customer churn in the March quarter improved to 2.7% compared to 3.6% compared to the same period last year and 2.9% in the prior quarter. Dan will address some more specifics related to customers canceling due to economic hardship, but let me say that we are very pleased that our customers are retaining our services in greater numbers, and we believe that a number of the initiatives we put in place earlier this year to reduce churn are yielding very beneficial results.

I will now turn the call over to Dan Weirich, the Company's President and Chief Financial Officer, who will walk you through our detailed financial results and provide additional information regarding our new sales approach.

Thank you, Bryan. Business services revenue grew to 68% of total revenue in the fourth quarter of fiscal 2009 compared to 50% of total revenue in the same period of fiscal 2008 and 66% of total revenue in the previous quarter. For fiscal year 2009, business services revenue grew to 62% of total revenue from 47% in 2008. We ended March, 2009, with 63 quota-carrying sales executives in our direct sales force compared to 56, 43, and 37 quota-carrying sales executives on December 31, September 30, and June 30, 2008. And we're starting to see productivity increases in our quota-carrying sales force.

For the five months from October, 2008, through February, 2009, the average gross new monthly recurring revenue or new monthly MRR added by our sales force was approximately $125,000. In March, 2009, the new monthly MRR was approximately $213,000. April sales were consistent with March. At then of April, we halted efforts to grow our indirect sales channel and had a reduction in work force relating to our sales -- our channel team, and the corresponding support requirements to more appropriately size our head count to the opportunities we are seeing in that area. The channel generated approximately 4% of our new monthly MRR but represented between 15% and 20% of sales and marketing-related expenses in the fourth quarter.

Cost of acquisition was $785 per business customer in the fourth quarter compared to $933 in the third quarter, and $1,135 in the fourth quarter of 2008. The cost of acquisition calculation includes the equipment subsidy Bryan mentioned that we began offering new customers at the end of the fourth quarter. So we are seeing the subsidy almost entirely recouped with the increased sales to lead conversion rate. The average monthly service revenue per business customer in the fourth quarter was $202 compared to $208 in the third quarter. Approximately 42% of new business customers added in the quarter, signed up for service during the month of March. These customers are included in the calculation of the average monthly service revenue per business customer. They did not begin producing any monthly service revenue in March.

Business service gross and contribution margins remained strong at 82% and 63% during the quarter. The pay back in the fourth quarter, which is cost of acquisition divided by contribution margin was 6.2 months. Cancellations due to financial hardship in the fourth quarter represented 36% of total business customer cancellations compared to 40%, 34%, 33%, in the third, second, and first quarters of 2009. Cash collections as a percentage of attempted collections continues to be near record numbers. But I have read the notes on every business customer that canceled during the quarter, and the macro economic conditions appear to be impacting our customers in terms of cancellations of entire systems and cancellations of additional lines of services. The number of business services sold during the quarter divided by the number of business customers added in the quarter was eight. But our average number of services subscribed to per business customer across our entire customer base remained the same as the third quarter at 6.6 services per business customer.

I'd now like to provide a bit more detail on the additional reserves and writeoffs reported this quarter. First we wrote off $543,000 of virtual office analog telephone inventory, primarily due to the plans to replace this equipment in the retail channel with our new 8x8 55-I business IP phone. Second, due to nonpayment by a large European technology licensing customer, we have reserved $226,000 by reducing service and license revenue related to this matter. If past due revenue is collected from this customer, we will recognize the revenue on a cash receipt basis. Additional noncash items in our financial this quarter included an $11,000 noncash mark-to-market loss on the value of our warrants, and a $293,000 depreciation charge. Cash outflow for inventory purchases was $1.422 million during the fourth quarter compared to $929,000 in the third quarter.

Capital expenditures were $124,000 or .8% of revenue compared with $291,000 in the third quarter. For 2009, capital expenditures were $801,000 or 1.2% of revenue compared to $699,000 in 2008. Gross margin was 59% in the fourth quarter of 2009 with service margins of 71% and product margins of negative 50%. Service margin was impacted by the $226,000 reduction in licensing revenue as well as increases in cost of service revenue expense of $339,000 for the royalty and licensing expenses. And $197,000 of stock-based compensation related to accelerated options. Product margin was impacted by the $543,000 expense to cost of product revenue for the writeoff of analog telephone inventory. For 2009, gross margin was 65% compared to 62% in 2008. We ended the year with $16.4 million in cash of $181,000 sequential increase, and a $1.8 million increase for the year. As of March 31, 2009, total shares outstanding were 62.7 million total shares fully diluted were 79 million. If not exercised 2.1 million warrants with a strike price of $2.79 will expire in June, 2009.

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

Thank you, Dan. For your reference and convenience, we've posted a transcript of our prepared remarks on the Events and Presentations section of 8x8's Investor web site at Investors.8x8.com. Beyond the progress we've reported in today's call, 8x8's fourth quarter was marked by some additional highlights. We were awarded an Internet Telephony Best of Show Award for the Company's recently introduced, unique hosted Key System services. We completed the development and launch of new software and infrastructure to increase the scale and applicability of our services to the enterprise market. We added a very talented Chief Marketing Officer from a former competitor to our team, and are completing the development of new conferencing and unified communications services for our business customers.

Last, but not least, we were also pleased to see that Nasdaq extended its temporary suspension of the continued listing rules that require a minimum closing bid of $1 through July 19, 2009. We intend to take advantage of these developments throughout our fiscal 2010 year, which is already off to a good start.

With that, we will now be happy to take any questions you may have. Operator, please open the lines for any questions.

Thank you, sir. (Operator Instructions). We'll take our first question from Mike Crawford with B. Riley and Company.

Thanks. You mentioned the rate of customer signups in April. What about in May? I mean, we're pretty far through May now.

Yes. So-- unfortunately, our sales team signs up a large percentage of the sales in a month, and the last week of the month, and so all I can tell you is that -- through yesterday it was tracking consistent with what weather it was tracking in April at the same time. But I just -- we just don't know until the Sunday night of May 31st. Just to be perfectly honest with you.

Okay. That's fair enough. So can you talk about the nice work on the churn? Is there something you're doing differently, or is this the result of the exit interviews you're having, or --

So, Mike, this is Bryan. We've-- I know you've only recently picked up the coverage on the stock. But for probably more than four quarters now have had a number of initiatives across the organization. We have a weekly meeting, sometimes a twice-a-week meeting across departments just focused on the topic of how we reduce or business churn. And we've detailed some of those strategies in past calls.

But essentially, the biggest chunk of our churn occurs during the first 60 days of the customer buying our service and getting it installed and getting it configured. And so we've put a lot of effort into the customer experience during that period. We've been much more proactive about recommending to our customers that they schedule an installation appointment with us over the phone so that we can have one of our technicians work with the customer to configure the devices, get everything set up the way the customer wants. And we've just seen that process in particular result in a much more favorable experience in terms of getting the customer situated once they've made the decision to switch their business phone service over to us. So that's a big chunk of it.

But, across the organization from operations, the reliability of our network, the ease of installation and things that we're still working on there, our customer service organization has been refining all of their functions including how we port numbers and how we notify customers of status related to open cases. So it's been a big effort, and it's been something that has taken, I think, quite a while to start showing up in the churn numbers. But as you can see just looking across the last four quarters, there's a very substantial, almost a 4% reduction in Company churn. So we're just very pleased to see that.

And it's a little understated, I think, because during that time as Dan talked about we've seen the percent of our total churn coming from customers who are having financial hardships or going out of business rise from 33% in Q1 to a peak of 40% in Q3. And it was 36% in Q4. So over that same period that total churns come down, the percent of total churn due to conditions that we really can't control has been rising. So I think it underscores the progress we're making there.

Great. So I mean, if you just take the inverse ratio of the churns, you get to three-year-plus duration per account where -- at the cost you're paying your customers now, your pay back is in about six months. So the -- what is the contribution margin that you get to enjoy for the next 2 1/2 years for these accounts on average?

63%.

And could you provide the average monthly bill for virtual office customers today?

Yes. It was $202 compared to I think it was $208 in Q3.

Okay. And as I recall, last quarter that number itself was -- was that -- was that just a virtual office number, or was that all customers where there was some revenue coming from some -- from some prior bulk acquisition?

Yes. So it's -- it's all business customers. So, you know, 95%-plus of these customers are subscribing to our virtual office service. But the number that we're telling you of 202 and, you know, all of the numbers relating to average revenue per business customer that's in this operating statistics table that we provide in the press release is all business customers.

Okay. And final question relates to the $785 you ended up spending for new virtual office customer acquired -- do you expect that number to stay around there now? Or is there still more improvement to be had, proved several quarters now?

I would say that most of the low-hanging fruit improvement in that number has already -- you're witnessing that right now. And so I -- I really don't know if it can go lower. I mean, there is a significant component of that number in this quarter, includes a subsidy. It-- we've always included the subsidy calculation in there. And, the piece that of the most interesting to us was that when we decided to subsidize the equipment, we had such a higher return on our leads that it essentially recouped it all at the -- the entire subsidy was recouped by more effective conversion of our advertising dollars.

Okay. Great. So I guess it's fair to say that this new strategy seems to be kind of pushing out near-term free cash flow, but at the same time, it appears to be creating greater value for the business over the next several years, the acceleration of accounts.

Yeah. You incur some short-term pain. The pain is that, one, you're not collecting as much cash up front from the customer and you're not recognizing product revenue which hurts your short-term revenue. But roughly it's a three to four-month pay back of that product subsidy.

Okay. Thank you.

Thanks, Mike.

(Operator Instructions). We'll go next to Brian Horey with Aurelian Management.

Hi, thanks for taking my question.

Hi, Brian.

Hi had a few questions. The royalty licensee that -- revenue that you had to reverse, can you just give a little color on why they were unable to fulfill their commitment on the payment.

It's a European licensee customer, and their business has -- I guess their sales have deteriorated recently. And they appear to have some sort of working capital issue.

Okay. And I also noticed that you guys had a royalty licensing expense. Can you just give a little color on what that relates to.

Yes, Brian, this is Bryan. So about a month ago, a lawsuit was filed in the eastern district of Texas against us. It was filed by a company that has been in touch with us for a number of years going back to 2004, I think. And so a week after that was filed, we reached a settlement agreement and took a license to their patents. And, it's a relatively new settlement. I can tell you our lawyers as we speak are working on the disclosure language that's going to go into the K regarding that event. So we're not going to identify them on the call, but they will be in the K that we file in a few days.

Is that a one-time license?

Yes. I mean, it's -- yeah. For the most part. I mean, there's not an ongoing royalty related to customers and things to that effect. But from a cash flow standpoint, it's paid over a period of time, and from a -- an expense on the income statement it's amortized over the life of the statements.

Got it. So Dan, you said that the hardware subsidy, the phone subsidy is included in the cost of acquisition. But presumably -- I federal funding what you said it sounded like March was the only month that had that phone subsidy in it. Is that accurate?

Yes.

Okay. So would that number go up if you had a full quarter's worth of equipment subsidy in the cost of acquisition?

The equipment subsidy amount in Myrtle Beach was roughly a quarter million dollars. And so the -- yeah, so I guess to answer quarter question is if we were doing the same thing in January and February and March and the sales were consistent with March, it would have been three quarters of a million dollars. But the cost of acquisition when you include advertising commissions and the subsidy in March was identical to February.

Okay. Okay. In terms of the switch on the marketing approach, was any of that driven by competitive factors, or was this -- do you guys run a trial and kind of highlighted this conversion rate that you were getting? Or can you give a little detail on how it all came about.

I mean, it was a combination of all though factors. I mean, one is just a little bit competitive from the standpoint is one has been with AT&T and has been with AT&T for 10 years. They call us up and talk to us. Just to get 'em off the fence and three out their AT&T service and sign up with ours would address the competitive aspect a little bit. Then the other piece is that for us we feel fortunate that we've got some cash in the bank, and --

Not making any interest on it --

And we're not making any interest on that cash. So it's kind of like a land grab. We've got a lot of people calling us and why convert 13% if you can convert 25%. That's kind of the combination of multiple factors.

Okay. Makes sense. So were you able to -- to get any lift on -- on the price of the monthly recurring service as a result of the equipment subsidy?

Yes. So if you come in and you buy the equipment at list price, you're going to pay a lower monthly recurring rate than if we're giving you the equipment at a subsidized rate.

Okay. Okay. And lastly, did you guys -- I know you had a negative number in the licensing revenue because of the -- the reversal, but did you guys have any licensing, any positive licensing revenue in the quarter? Aside from that?

Yes. We reduced revenue by $226,000. You're seeing a negative 199 there. So there was $17,000 in licensing revenue. From other parties.

Okay. Okay. Thank you very much.

Thanks, Brian.

We'll take our next question from Kyle Krueger with Apollo Capital. Please go ahead, sir.

Yes, hello. You guys have great balance sheet, are generating cash on an ongoing basis, the business looks like it's selling very inexpensively in the -- in the market. Any thoughts to be more aggressive about buying back stock? I mean, why -- why hold that much cash I guess?

Yeah, Kyle, we've certainly discussed it at the Board level many times actually over the past year. And at this point in time the Company is not buying stock. There was a research note that came out on us, what, two days ago, Dan, that kind of the headline of the research note was that the Company has a "precariously low position" of cash. So I guess when you say we've got a lot of cash, it's all relative. Especially when you're dealing with our big competition comes from people like AT&T and Verizon and Qwest and these types of folks. So I think the Board just feels that we like having the cash cushion.

We can sit here and argue whether it's a lot of cash or we should be using some of that cash to buy stock. But as Dan mentioned, I think we feel strategically we're much more happy putting that cash to work, getting these customers, and if we need to subsidize equipment to convince them to leave AT&T then, that's a great use of that cash. And certainly we continue to be on the lookout for acquisitions and things that will help us grow this business a lot faster. And I don't want to be using stock as my currency given the levels that we're trading at here. So that's kind of the thinking behind it. But we continue to leave open our right to re-evaluate that decision depending on what the market does with our stock.

Right. I mean, if your pay back on customer adds is under a year which Mike Crawford pointed out it's as low as six months, I'd love to see you put all $16 million to work on customer acquisition.

That's right.

Yeah. With that said, would you -- I think one of the concerns is that, with the low stock prices seeing all that cash sitting on the balance sheet and concern that you guys might do, a dilutive acquisition, what -- what comfort can you provide as it relates to, acquisitions going forward that you might make? Terms of enhancing shareholder value?

Well, I would just point you to our history. We don't have a habit with myself leading the Company of doing acquisitions that don't make sense. We've acquired three customer bases in the last two years. We did not acquire the companies that held those customer bases, but we did see some assets that we wanted to buy. And, the comfort I can give you is that I'm a big shareholder and I don't like dilution either. So I don't think you're going to be seeing us do anything stupid there that's going to wash things out. But we do want to have, the cash ready and be able to pay our employee and obviously cash is king as we're seeing -- we mention that we're seeing a lot of consolidation and just plain going out of business from a lot of our competition in the space. So you know hopefully we can use this cash to be a survivor, and we'll come out the other side a lot stronger.

Yeah. Okay. Thank you.

Thank you, Kyle.

That does conclude our question-and-answer session. At this time, I'd like to turn the call back to you, Mr. Martin, for any additional or closing remarks.

Okay, thank you, Jamie. Thank you, everybody, for listening. If you're not already a customer, I encourage you to sign up for our 8x8 virtual office phone services. You can go to our web site, www.8x8.com. Go ahead, Jamie.

Thank you, sir. That does conclude today's conference, we appreciate your participation.