8x8 Inc (EGHT) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the 8x8, Inc., First Quarter 2010 earnings results conference. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to 8x8's Director of Corporate Communications, Miss Joan Citelli. Please go ahead.

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 first fiscal quarter ended June 30, 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. During today's conference call, we will be presenting a series of slides through our new Virtual Meeting web conferencing portal which we are currently beta testing. To view those slides during the call, please click on the link which can be found at the end of today's press release, or at investors.8x8.com.

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. 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. 8x8 returned to profitability in the first quarter of our 2010 fiscal year. As you will recall from our call last quarter, our focus is on maximizing net income this year and growing our revenue from business customers. While it is not yet visible in our overall quarterly numbers, I am pleased that the strategies we put in place during the month of March are producing favorable results in our monthly billing and operating metrics. We are beginning to see an increase in overall monthly revenue and note that services revenue from business customers would have increased sequentially except for the initial full quarter impact of the equipment subsidies we introduced during the month of March. Dan will have more details on these results in a minute.

You will also recall that at the end of April we cut our indirect channel and channel-related support efforts and eliminated approximately 35 positions. There were no one-time or special charges during the quarter. An additional point I would like to highlight is that we have entered what we like to call around here the SunRocket renewal quarter for the quarter ending September 30, 2009, and we have already begun to renew annual subscriptions for telephone service for approximately 10,000 customers that pay in advance.

We are continuing our strategy of subsidizing upfront equipment sales to business customers in order to convert more leads and grow the business faster. This is reflected in the quarter's negative 75% equipment margins. You will see, however, that service margin expanded to 76% with overall gross margins at 66%. Further, the number of gross businesses added during the quarter exceeded the March quarter's record number.

During the June quarter, we added 2,907 new business customers, as compared to 2,792 for the March quarter. The number of lines and services purchased by these customers was also larger with a total of 27,937 gross lines and services added by these new customers, which works out to be an average of 9.6 lines and services per customer.

Over our entire customer base, these new customers increased the number of average services purchased per customer to 6.9 in the June quarter, versus 6.6 in the March quarter. We currently have three customers that we bill more than $10,000 per month in recurring monthly billings. We have nine customers that we bill between $5,000 and $10,000 per month, and we have 35 customers that we bill between $2,500 and $5,000 per month.

Business customer churn in the June quarter versus the March quarter was flat at 2.7%, and our customer acquisition cost continued to decrease to $638 per new business versus $785 per new business in the March quarter and it $933 per new business in the December quarter.

Our new marketing, lead generation, and sales strategies are paying off, as a year ago for the June quarter, our acquisition cost per new business was $1,217. Now we're only at $638 per new business, which is an improvement of 48%. In addition to our first quarter 2010 operating results, we also announced today that our board of directors authorized the Company to repurchase up to $2 million of our outstanding common stock from time to time until July 28, 2010. Share repurchases will be funded with available cash. Repurchases of our common stock may be made through open market purchases at prevailing market prices or in privately negotiated transactions. The timing, volume and nature of share repurchases are subject to market prices and conditions, applicable securities laws, and other factors, and are at the discretion of 8x8's management. Share repurchases may be commenced, suspended or discontinued at any time.

Before I turn the call over to Dan, I would like to also discuss a new web conferencing service that we are readying for introduction to the market, part of a long term strategy of expanding our business portfolio to include unified communications services as well as hosted telephony solutions. In addition to broadcasting today's conference call on Shareholder.com, we are broadcasting and recording this call on our new 8x8 Virtual Meeting web conferencing portal. 8x8 Virtual Meeting has been in an internal testing phase for several months, and we plan to launch a public beta during the month of August. We expect the service to officially launch to paying customers in September.

Virtual Meeting provides interactive web conferencing from any flash-enabled web browser on any computing platform. It includes voice conferencing, both from any telephone or native within any web browsing environment, presentation slide sharing, desktop and application sharing, chat, chair control, conference controls, and recording services. No software downloads are required, and a meeting attendee can participate with voice right from his or her web browser.

No telephone is required, as attendees can all speak directly through the web browser URL. The entire service is integrated with our 8x8 Virtual Office platform and we plan to offer the service to both existing 8x8 Virtual Office customers, as well as new web conferencing customers on a standalone basis when the product launches. Preliminary survey results indicate that upwards of 60% of our existing Virtual Office customers use some form of web conferencing, so we believe there is a significant opportunity to up sell our existing business customer base to this meeting service.

The slides we are referencing during this call today are being presented through the 8x8 Virtual Meeting web conferencing platform and we look forward to hearing your feedback.

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 the quarter.

Thank you, Bryan. Revenue from business customers represented 69% of total revenue in the first quarter of fiscal 2010, compared with 56% of total revenue in the same period of fiscal 2009 and 68% of total revenue in the previous quarter.

Sequentially, business revenue was flat because we increased the equipment subsidy, which is product revenue less cost of product revenue, in the first quarter of 2010. During these same periods, the equipment subsidy, excluding the one-time $543,000 write-off of older Virtual Office analog telephones in the fourth quarter of 2009, was $239,000 in the fourth quarter of 2009 compared to $783,000 in the first quarter of 2010. Product revenue is recognized at the time of shipment less a returns reserve. The discounting of equipment or increased equipment subsidy has a short term impact on revenue as product revenue has declined and the corresponding service revenue has not been recognized.

During the first quarter of 2010, service revenue generated from Virtual Office business customers increased by approximately $600,000 compared to an average of $347,000 in the preceding three quarters. If you're viewing our Virtual Meeting presentation, you can see the rate of growth of our Virtual Office recurring revenue is accelerating over the past four quarters from an increase of approximately $230,000 between the first quarter and second quarter of 2009, since I just noted approximately $600,000 in the most recent quarter. As you might recall, we added roughly a little over 1,000 customers from a company called Avtex in the third quarter of fiscal -- we actually added the customers in the second quarter of 2009, but the revenue kicked in on October 1, of 2009. It represented $150,000 to $200,000 of the change between the second quarter and the third quarter of 2009 which is this graph is approximately $460,000. So roughly $150,000 to $200,000 of that increase is related to the Avtex acquisition.

8x8 ended the June 2009 with 65 quota carrying sales executives in our direct sales force, compared to 43 quota carrying sales executives on June 30, 2008. Cost of acquisition was $638 per business customer in the first quarter compared to $785 in the fourth quarter and $1,217 in the first quarter of 2009.

Advertising expense in the first quarter was $1.2 million compared to $1.8 million in the fourth quarter and $2 million in the same period a year ago. The average monthly service revenue per business customer in the first quarter was $196 compared to $202 in the fourth quarter.

Business service gross and contribution margins remained strong at 82% and 63%. The payback in the first quarter, which is cost of acquisition divided by contribution margin, was 5.2 months. Cancellations due to financial hardship in the first quarter represented 35% of total business customer cancellations compared to 33% in first quarter of 2009. Non-cash items in our financials this quarter included a $43,000 stock based compensation charge which is predominantly related to our employee stock purchase plan, a $7,000 non cash mark-to-market loss on the value of our warrants, and a $287,000 depreciation charge.

Cash outflow for inventory purchases was $1.6 million during the first quarter. Capital expenditures for the first quarter were $219,000, 1.4% of revenue. We expect this number to increase two to three times in the September quarter due to expenditures related to our corporate headquarters relocation to Sunnyvale, California. Gross margin was 66% in the first quarter with service margins of 76% and product margins of negative 75%. Because product margins were lower than we would like them to be, we adjusted our sales representatives' discounting capabilities on equipment throughout the quarter to address this issue.

We ended the quarter with $15.5 million in cash, an $891,000 sequential decrease and $652,000 increase from the same period a year ago. Cash declined sequentially because of a $250,000 royalty license payment, a $207,000 increase in inventory payments, $100,000 of employee termination related expenses, an $80,000 payment related to the buyout of future residual commission payments, and the balance primarily related to the increase in equipment subsidy that was not yet offset by an increase in recurring service revenue.

As of June 30, 2009, total shares outstanding were 62.7 million, and total shares fully diluted were 76 million. If not exercised, 1.6 million warrants with a strike price of $3.61 will expire in September 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, as we always do, we have posted a transcript of our prepared remarks, which today include the Virtual Meeting presentation slides that we utilized in this meeting, on the Events and Presentations section of 8x8's Investor website at investors.8x8.com. Also, if you have any feedback on our Virtual Meeting platform, we welcome your input which can be sent via e-mail to virtualmeeting@8x8.com.

We will also be broadcasting our Annual Meeting of Shareholders tomorrow at 10:00 AM Pacific time on the 8x8 Virtual Meeting platform, for those of you who are unable to attend in person. The link to that meeting is posted on investors.8x8.com. On September 24th, we will be hosting an open-house celebration at our new corporate headquarters in Sunnyvale, California, and would welcome seeing you at that event. Please contact Ms. Joan Citelli if you would like to receive an invitation. And, if you missed the KTVU Fox TV news segment on 8x8 that aired earlier this month, you can find a link on my blog which is located at community.8x8.com.

We are very optimistic about the prospects for all of our services, but especially our new Virtual Meeting service, and some additional unified communications services that are still in our R&D labs. We believe that our technological base of delivering profitable business services will enable even further growth and distance from our competitors who rely on off-the-shelf, "me, too" solutions. We are pleased by the profitable results delivered in the June quarter, and believe that the best is still to come. We will now be happy to take any questions you may have. Operator, please open the lines.

(Operator Instructions). Brian Horey, Aurelian Management.

Hi, thanks for taking my question. A couple of questions. I'm wondering with the change in sales approach that you've been working on I guess now for about four months, whether you have seen any change in the profile of customer that you're acquiring.

Yes, the customer has gotten a little bit larger. In the most recent quarter ended June 30th, our average customer subscribed to 9.6 lines. In the quarter ending March it was about 8 lines. And in the previous four quarters before that, it was in the range of 7 to 7.5 lines per customer. So the customers are actually getting a little bit bigger.

Okay. Any other distinction in terms of vertical or any other characteristics?

No. We still have -- our average customer has four to five to six employees and it's just, it's not really a vertical, it's just a horizontal niche.

Okay. Can you talk a little bit about the virtual meeting conferencing opportunity and how do you guys size that from a revenue opportunity and where do you see yourselves fitting in the market? I mean obviously there's a bunch of people in the conferencing market now, so who do you think you're going to be competing against and how do you sell against those folks that are already in the market?

This is Bryan. I think number one, we're bringing to market an installed base of existing businesses, many of which I think find some of the commercial solutions that are out on the market today from some very big names and very expensive names, to be very expensive. I can tell you that our sales team for a number of years used one of those products and we had a very large bill at the end of the month, but it was certainly worth it in order to use those tools in order to -- we would use it to demonstrate how an administrator would control the PBX functionality if you were to buy our services. And so it was a very useful sales tool.

And we have of course moved all of our sales people over the last few months to using our own product. I think there's lot of opportunity, again it's a very small business area that we play in, for companies that want to promote themselves through webinars, that want to do a presentation like this and record it and make it available. And most of the commercial services for doing that will easily run into $1,000, $1,200 per event. So we're not announcing pricing today, Brian, but we're going to make it obviously a bargain for existing customers. And we view it as a way, yet another way, along with our mobile services and some of the other things we've rolled out lately, to actually try our network and our business quality phone service without having to wait for a piece of equipment or go down to a retail store and purchase a piece of equipment.

So we'll have more plans. We do need to finish the beta that just got kicked off and we're expecting to launch this commercially in September and I think by the time of the next call we'll have a lot more details that we can share with you on pricing and positioning relative to the competition.

Okay. Are there a handful, any particular competitors that you think you'll end up seeing most often in the market?

Well I think we write big checks to Cisco and we write big checks or used to write big checks to Citrix, so those are certainly two that are I think in control of the market right now.

Okay, thank you.

(Operator Instructions). Chris Lahiji, LD Micro.

Hi, guys. Quick question. On Office Depot, is that an exclusive deal? And when do we actually roll out on that?

Hi, Chris, it's Dan. Office Depot is not exclusive either way. And we rolled out Offices at the end of May, so roughly a little over 1,000 stores.

And my next question is, in regards to you guys moving to Sunnyvale, is there any cost savings there on an annualized basis? Or it's too small to really talk about?

We filed an 8-K in early May with the details on our lease. It's -- we're paying just a slightly -- we're paying slightly more money in Sunnyvale but -- it's roughly $10,000 per month more. And we were on a five year sublease here that was -- we couldn't find anything as low, so we got as close as we could get to it.

And it's a larger facility. We've kind of outgrown the call center space and the bathroom space in this one, so all of our employees are looking forward to a little more room.

That's good to hear. And my last question is on subscriber acquisition costs. I mean they're down 50% year over year. I mean can investors expect to see more decreases or do you think it's pretty much leveling off at this $640 price point?

It kind of continues to amaze me that we continue to get so much more efficient in our expense management on the advertising side. It also includes the subsidy, so in this quarter the subsidy was a larger component of that figure than it was in prior quarters. There may be a little bit of room to move down lower, but as we expand some of our marketing programs, some of those might cost just a touch more. So I expect for it to be in this range in the future.

Well, congrats on everything and I'm looking forward to next quarter.

Thanks, Chris.

Mike Crawford, B. Riley & Co.

Thanks. Further regarding those subscriber acquisition costs, can you talk about how you're subsidizing customers today? I think you started off pretty aggressively in March with subsidies. Has that been toned down a little bit or what's the status of that today?

Yes, so the product margins were extremely negative in March and April and we toyed with the discounting that we allow our salespeople to, what level they can use. So we've got it at a pretty optimal level now. June was a fabulous month for us. And so there was a subsidy component, but it was not as large as the quarterly numbers of negative mid 70% that we just reported.

And how has July been progressing?

July is like our slowest month of the year historically. For the last five years or so, it's been slow. It's slow this year as well. Typically the way it works is that people came back from 4th of July vacation on the 6th, if they weren't taking that week off, so that week was very light and essentially nothing happened prior to that. And then mid last week, things started ramping up. So that's what -- we've seen this for multiple years and then we typically have a decent August and then we have a very strong September. Our strong months are September and March.

Okay. And then regarding new subscribers, what are your best channels currently for leads in terms of quality and close rates?

It's -- we've got pretty good metrics off -- our web advertising kind of broadly speaking is very good. One reason you've seen a lot of improvement in the cost of acquisition is we de-emphasized more traditional kind of media, print, things such as that. We have a referral program which is very effective. So it's pretty much referrals and web.

And how does something like an Office Depot fit into the picture? Are customers hearing of you beforehand and then just going to get their equipment at Office Depot? Or do they find out about you once they're there? Do you know? Can you tell yet?

We see from the Office Depots, we see roughly 50/50 of the sales are from people that either bought in the store or people who went to the store and picked up a flyer and called us. So they've learned about -- so it acts as a lead generator as well.

And I take it -- you still are really expending next to nothing marketing residential service, yet people continue to sign up anyway because they know the brand by now?

Yes, pretty much.

And do you -- that's pretty much the way you expect it to remain for the foreseeable future?

Yes.

Where do you think -- at the rate that you're adding new Virtual Office subscribers, while you're having a slight bleed off of the residential base, if business kept kind of operating the way it's been operating the last few months, what does this business look like in a year or two or three in terms of free cash flow, revenues?

We do not provide guidance and the only thing that we stated in the press release is that in this coming quarter that we expect revenues to start growing again and to report net income.

Yes, Mike, I think you can look that we generated somewhere around the neighborhood of $1.8 million in cash in the previous fiscal year and we're starting to feel that things are clicking and we've figured out some improvements on the growth curves and we think we're going to hopefully generate a lot of cash here very quickly. That's what we're emphasizing internally. That's what our officers, their bonuses are based on, and so that is certainly, as I started the script here, I think my first statement, that's the focus around here.

Okay, great. Thank you.

Brian Horey, Aurelian Management.

I was just wondering if you could comment on churn in the business segment. Has that reached a minimum level do you think? Or do you think that there's an opportunity to improve that more going forward?

Brian, that's the other thing we focus on all the time around here.

We don't know. Improving churn is challenging in all different types of business.

I would say, Brian, given the economic backdrop that we're trying to operate in, that we were mildly pleased that churn was flat versus last quarter, the sequential number. If you look at a year ago, we're almost one full percentage point improvement. We continue to focus on it. So I think there is a floor somewhere just because it's a credit card based billing model and I think if you look at the churn of people like Netflix and Sirius Satellite Radio, there is a floor out there when a customer is paying their bill by credit card, because you just get some natural issues with that. But we're not near that floor. But at the same time, we've done a lot of improvements around here and we need to continue to come up with new ideas of ways to improve things even further. So for the near term, most of the major improvements we're working on are kind of in place and we're going to have to get a little more creative if we're going to improve that number further.

And what have you seen competitively in the marketplace in the last 90 days or so?

We've seen a lot of consolidation from very small players that are out there riding on the backs of our key word bidding. And companies that have been coming to us and saying, we need to talk to you because we want to talk about a strategic event because we're running out of cash and we can't find more cash. So I think that's what's going on at the small competitors that we have. And as has been the case for many quarters, we lose most of our deal opportunities to either AT&T or Verizon. And so that continues to be the case and we continue to really try to use the subsidy approach as a tool to convince people that are trying to decide between us and an incumbent Bell to kind of take the plunge and at least give the voice over IP solution the 30-day try. So we're making some progress there but it's still a very competitive bid to get these customers.

And on the, speaking of competitors that are having challenges, would you say it's getting -- I'm sure there's a lot, you see a lot of stuff and a lot of it's not worth looking at, but given what's going on in the economy and the availability of capital and other things, do you think it's more likely than it has been that you guys might have some kind of acquisition on the business side of the business so to speak?

I would just say that there's a lot. We're having a lot of discussions with a lot of parties. So I believe at some point here the opportunity will present itself to acquire at least -- as we've done in that past, we've acquired three customer bases before as kind of asset purchases without acquiring the actual underlying corporate entity. But all I can say is things are a lot cheaper now price wise than they were a year ago. So some of these deals have been around for awhile and the price keeps going down. So we would like to be opportunistic, but we are very conservative on what we're going to pay for and how quick the benefit is going to hit our bottom line. Because again, that's our number one focus. So that's the parameters we're using to look at them and we'll continue to look at them and we'll see what happens.

Okay. Thank you.

Marty Parker, Unicom Consulting.

Hi, Bryan, nice presentation, and congratulations on your successes and on the introduction of the new Virtual Meeting space. I'm a consultant in the unified communications space and I'm curious, I don't see on your site any direct total cost of ownership claims compared to customer ownership of the customer premise equipment. Do you not -- I mean do you think there's significant advantage to a hosted solution? And if so, by how much? Or do you not think there's a significant difference or do you think customers don't care, which might be reflected by the lack of a comparison?

Sure, thank you, Marty. We pretty much go into every deal that we approach telling the customer upfront that we will be very surprised if we cannot save them at least 50% on either a monthly recurring basis or, if it's a fixed PBX that's out there, on a total cost of ownership analysis. A lot of the customers we speak with are still on very expensive per minute pay-as-you-go types of long distance plans. And those customers we can, we have cases where we've saved people 90%. So it really becomes, when we're dealing with a fixed infrastructure versus hosted discussion, the first thing we have to get upfront from the customer is whether they want to continue with whatever equipment they have on premise. And if they do, we steer them to one of our trunking solutions. But I'd say most customers, especially in this economic climate, we're in month 19 or 21 of this recession, most customers have not bought a PBX in the last two years and so they tend to have older equipment that they can benefit from actually making the switch to the feature set we get from the hosted platform that we provide.

Well and if you can save them 50% against a run rate, you might even be able to pay for it out of their maintenance savings if they'll quit what they're doing.

Sure.

The one follow up question is, as you move into the Virtual Meeting space, do you expect to start introducing the unified communications phrase into your marketing and branding?

Yes, so the technology we're demonstrating today on this call is a web conferencing and collaboration service. And as I mentioned in the prepared remarks, we are readying and actively engaged with a lot of R&D right now on some new unified communications services. We've not announced a timeline on the rollout of those, but it will be the next thing out of the pipe for us.

And it appears there are no further questions in queue. I'd like to turn the conference back over to Bryan Martin for closing remarks.

Okay. Thank you, everybody, for listening and the participation. If you're not already a customer of our services, I encourage you to sign up today for our 8x8 Virtual Office business phone services by visiting us, our website is www.8x8.com. Also, please look for the launch of the 8x8 Virtual Meeting service which should be commercially available in September. Go ahead, operator.

This does conclude today's conference call. We thank you for your participation.