8x8 Inc (EGHT) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 fiscal year 2011 8x8, Inc. earnings conference call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Joan Citelli, 8x8's Director of Corporate Communications. Ma'am, you may begin.

Thanks, 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 30th, 2010.

If you have not yet seen today's financial results, the press release is available on the investors tab of 8x8's website at www.8x8.com. Following our comments there will be an opportunity for questions.

Before I turn the call over the 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 reflect 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 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. I'm very pleased to report that 8x8 generated all-time record revenue for the first quarter of our fiscal 2011, ended June 30, 2010, as we saw strong performance in metrics across all of our business service offerings.

Total revenue for the quarter of $16.8 million represented a 6% sequential increase over $15.9 million of revenue for the previous quarter, and an 8% year-over-year increase for the same period of fiscal 2010.

Additional records were also set in the quarter for new monthly recurring revenue sold of $665,000, up from $606,000 in the previous quarter, along with record average lines and services sold of approximately 12 per new business customer, up significantly from 9.6 a year ago.

This revenue growth is attributable to small business customers purchasing more services from our expanding portfolio of offerings and larger businesses than our historical norm adopting our services over legacy alternatives.

We were pleased to see the return of top-line revenue growth resulting from all of these achievements and expect that the continued trends in revenue growth from business customers will continue to drive our top line upwards.

In May 2010 we brought on new business customers for the Company's managed hosting services, and see a growing pipeline of new prospects for these services, based on the number of outstanding quotes we now have for managed hosting and cloud-based computing services. The enterprise sales team we assembled earlier this year to focus on customer opportunities with more than 100 lines is working diligently to bring these larger SMB and government customers on board while creating the processes and procedures necessary to win and maintain that business.

We believe attributes such as service, maturity, reliability and breadth of feature set, combined with 8x8's technologies, customer support advantage, and overall financial stability are the qualities these enterprise customers are seeking and are what set us apart from competitive business voice over IP service providers.

During the first quarter of fiscal 2011, business customer churn decreased to 2.5% and we added 2,756 gross new businesses to end the quarter with a total of 21,362 business customers.

Alongside increased revenue in the first quarter of fiscal 2011, 8x8 posted its fifth consecutive profitable quarter with net income of $1 million, and we grew cash by $36,000, even after significant cash outflows in the quarter, which included $1 million for the purchase of the managed hosting provider, Central Host, investing $250,000 in a new company called Stonyfish, paying off approximately $175,000 in liabilities to transfer ownership of our French subsidiary, repurchasing approximately $120,000 in our common stock and spending approximately $600,000 in launching our new mass media advertising campaign in the San Francisco Bay area.

With all of these expenditures, we did not expect to increase the cash on our balance sheet but we did, due to the incremental contribution of new monthly recurring revenue sold and forecast-beating collection rates and lower churn. The Company ended the quarter with a total of $18.1 million in cash and cash equivalents.

Last week we completed substantial enhancements to our installation and configuration workflows and Web portals used to provision and install our voice services to new business customers. We believe that these new improvements will positively impact the 30-day return rates of new business voice customers, as it will now be substantially quicker and easier to activate our IP phones and configure the base business functionality of our phone services for new customers.

With that I'll now turn the call over to Dan Weirich, the Company's President and CFO, who will walk you through our detailed financial results and provide additional information regarding our business. Dan?

Thank you, Bryan. I am pleased to announce $1 million, or $0.02 per share, net income in the first quarter of 2011 and the increase in cash and cash equivalents compared to the prior quarter and the same quarter a year ago. This is the tenth out of the past 11 quarters we have generated net income and 11th out of the past 12 quarters we have sequentially increased our cash and cash equivalents.

We ended the first quarter of 2011 with working capital in excess of $10 million and stockholders' equity of nearly $15 million. Gross margin was 68% in the quarter, with record service margins of 78% and product margins of negative 38%. Average monthly service revenue per business customer was $208 in the June quarter.

Business service margins, at more than 80%, and contribution margins at more 60% remain strong. Cost of acquisition was $818 per business customer in the June quarter, compared to $638 in the same period last year. The increase in the cost of acquisition compared to the same period a year ago is due to the Bay Area mass media advertising campaign.

Payback in terms of number of months of contribution margin to repay the cost of acquisition is approximately six months. Our advertising expenditures total $2 million for the quarter, versus $1.4 million in the prior quarter and $1.2 million in the same quarter a year ago, due to the increased marketing efforts, such as our Bay Area radio campaign.

The Company's $1 million of net income includes $73,000 of stock compensation expense, $158,000 non-cash benefit to account for the change in fair value of our warrant liability. Depreciation during the quarter was $256,000 and amortization was $17,000.

During the quarter we purchased Central Host, Inc., for $1.6 million. The $1.6 million consisted of $1 million of cash and 600,000 shares of unregistered 8x8 common stock. Sorry, $600,000 of unregistered 8x8 common stock consisting of 432,276 shares.

This will be accounted for as $1.2 million of goodwill, $308,000 for the customer base, and approximately $100,000 for the fixed asset. The customer base will be amortized on a straight-line basis over 36 months.

The investment in Stonyfish will be carried on our balance sheet at a value of $356,000, consisting of $250,000 of cash investment and approximately $106,000 of assets of 8x8 Europe SARL that were transferred to Stonyfish.

Capital expenditures for the quarter were $629,000. As of June 30th, 2010, total shares outstanding were $63.5 million and total shares fully diluted, including stock option and stock purchase rights, award grants and warrants were $75 million.

The warrant shares related to the non-cash benefit have a strike price of $3 and an expiration date in December of 2010. 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 these prepared remarks on the events and presentation section of 8x8's investor website at investors.8x8.com.

We will be presenting a week from Tuesday at the Oppenheimer Annual Communications Technology and Internet conference in Boston, and we will be conducting investor meetings in New York City the following Wednesday and Thursday. Also, 8x8's annual meeting of stockholders will be held on August 31st at the Company's headquarters in Sunnyvale, California. We hope to see you at one of these events.

With that, we'll now be happy to take any questions you may have. Operator, go ahead.

(Operator Instructions)

Our first question comes from the line of Mike Crawford from B. Riley & Company.

B. Riley & Company. Thank you. Can you talk about what you're seeing with the Virtual Office Pro bundle?

Yes, Mike. So we're seeing the sales for that product are still going very well, and it's very consistent to what we reported at the end of our fiscal 2010, and we're seeing these option rates are very consistent to that. So we're still seeing new customers are subscribing to it at the rate of roughly one to two subscriptions per new customer, and we're seeing good upsell into our installed base of customers.

Okay, thank you. Also, it's clear that you continue to add Virtual Office accounts at the same rate, although these accounts look like they're getting a little bigger, which I think is healthy. That's probably one reason your churn's going down. But, what else can you do to accelerate customer addition? Could you subsidize more? Have you experimented with that?

Yes, so that is the price of the handset is -- obviously if it's lower you can convert higher on your sales opportunity, so that's something that we have definitely been playing with recently and something that we were actually a little bit more aggressive at the end of June related to that.

Historically we have had very slow periods at the end of June and throughout July as the summer months kick in, and we experimented with some more aggressive subsidies at the end of June and the return was very strong. So that's something that we're continuing to play with.

Well, let me ask you this way -- if you experimented with subsidies and it was strong at the end of June, sounds like then you didn't continue that in July and it was weaker. So why wouldn't you go back and subsidize further? The payback is six months, as you say, as was mentioned in the script, and with a 2.5% churn you're getting accounts that are going to last about three years. So it seems to be a no-brainer.

I think that we're just -- one issue that we've had in the past is that when you subsidize too aggressively you tend to attract some more poor credit quality customers. So when I say experimenting, we're just trying to figure out what is the right mix there to do elements of subsidy that you're actually getting the right kind of credit quality customer.

Okay, thank you. Hey, Bryan, I noticed that there's this new company that just came about as a combination of YMAX and what's it called, Vocalocity?

Vocaltec, yes.

Vocaltec. It seems like there could be some synergy between that business and your business. Do you think there's some room for collaboration there?

Yes, I don't know how similar the businesses are, just because they address different customer segments. My understanding of the product that YMAX is selling is it's directed at consumers and that's where I see their advertising directed at. Obviously, I think we're selling to kind of a different application of our service as a replacement phone service, but to the extent that we're still selling products that work on smart mobile phones and some of our click-to-call applications, and some of our stuff is still certainly addressing that side of the space.

There could be some interesting things there, but I'm glad to see another small-sized, publicly traded comp out there because it looks like their market cap is well north of ours, and there was another company that went public during the quarter called BroadSoft that has a nice market cap right now.

So I think it's -- hopefully we're through this consolidation and downsizing and going out of business phase with some of these voice over IP service providers, and you've got some new kids on the block that can join EGHT and Vonage and the others that have been here, and hopefully we'll go into another phase of growth and innovation again.

Okay, thanks. Last question relates to residential. On the last call you talked about maybe looking at that business with more of a strategic alterative perspective, perhaps try to sell it. Is there any chance we could see that as a discontinued operation, thereby freeing up for everyone to see the underlying growth that Virtual Office has had?

A couple of things have happened, Mike, and I would say the update is number one, the last three to four maybe months we've actually seen the rate of decline on that business moderate quite substantially. So I would say the last three months in particular, our current rate of decline on the revenue side, they're just due to the natural churn and the fact that we're not adding very many new customers because we're not advertising at all to add new customers.

We're losing about $30,000 a month in billable revenue month after month, so it's declining at that rate, or you can think of it as a $100,000 decline or offset over the quarter to -- I told you that we added about a little over $650,000 of new business, recurring monthly revenue, through our new sales efforts there.

So those results are actually substantially better than what we were seeing even one quarter ago, looking back over that same relative time frame. So again, it's very difficult for us to predict what the future holds for that business. We believe that a lot of these "call the world" offers that were launched by people like Vonage and Skype in the fall certainly attracted away those customers who use our residential services primarily as a way to save money on their international calls, and we think a lot of that movement occurred and then the people that are left are the ones that don't make international calls and there's no real reason for them to move their service.

So to the extent that it moderates the decline, the cash flow from that business is actually pretty attractive over the next couple of years. It could actually generate $10 million to $15 million of revenue still to be played out there. So we continue to have discussions with a couple of parties. There are some folks that have made some reasonable offers in terms of what the cash flow value of that business is, but I'd say the discussions have been kind of slow and certainly we're taking a second look at what we would need to get up front in order to offset what we're going to get over the next couple of years just by riding that out.

But I think the good news from my perspective, as I mentioned in my remarks, is just that I think the decline in that business, again, to the extent it continues at the moderated rates we've seen in the last couple of months, isn't really going to mask our top line growth anymore, because the effects of the decline are so much smaller than the new business service revenue we bring on every month in new sales. So that's kind of where it is, but we continue to look at what strategic options there might be there.

Actually, I lied -- one more question. It looks like revenues are on track to grow, I don't know, as much as 12% this year. How much would you expect operating expense to grow if that was the case?

We don't provide forward-looking guidance related to questions like that, Mike. Sorry.

It's a good question. All I would say, to add a little color, Mike, is we are hiring people and you can go on our website and we've got a long list of people that we are trying to hire to take advantage of the growth opportunity we see. But again, for the most part we tend to hire -- the majority of our openings are in sales, they're in our installations group, they're in our customer service group, and those don't add a lot to OpEx.

But we are hiring across the board, so you'll see open reqs for operations people and engineering people we're always looking to hire. But I don't think it's going to be -- I would just look at our historical OpEx management and expect to continue to see really good cost containment on that side as we get bigger here.

All right, thank you.

You're welcome.

Thank you. Our next question comes from the line of Mike Latimore from Northland Capital.

Hi, Mike.

Yes, good afternoon. Nice quarter there. Just on churn, that improved in the quarter nicely, do you basically attribute that to not having that residual effect anymore from the Internet service providers in the first quarter, or was there some other dynamic there?

Yes, I would say that the largest component of the decline was related to the outage in January that you were just alluding to, so we saw churn at an elevated level through April, and then that was in the range of roughly 90 days after the outage we were still feeling effects of that. Then it corrected itself beginning in May and stayed fairly consistent throughout the remainder of the quarter.

We did see those declines due to people going out of business did continue to go back down, so I think it was 41% of our total cancellations last quarter.

Yes, and it was 36% of our new cancellations.

36% this quarter, so we've seen improvement and it's getting back into our normal historical ranges for that category as well.

Yes.

All right, guys. How did July play out here in terms of churn? Similar to June?

July's still going.

Yes. This is our busy week. July's not over till Saturday night. But July and August are our seasonal -- it's the one period of the year where we have seasonal slowness on the business side, and for whatever reason we have a nice yin and yang because we go out and those residential subscribers we talked about in Mike Crawford's question, we have a bunch of those that renewed our annual subscriptions with us during this time. So we can be busy taking their money while we wait for the business owners to come back in it's usually about mid-August as it gets close to school time and we can start making those sales again for the September quarter. But July especially and the first part of August are kind of seasonally slow for us.

I was just going to say another thing to note is that our collection rate has moved back in this most recent quarter to the historic levels prior to the financial crisis, so we took a little dip in our collection rate and it kind of mirrored the financial crisis and it's moved back to the pre-financial crisis figures.

Okay, I got it. Let's see -- I guess just to clarify on the Virtual Office Pro, so about what, 25% of new customers are taking that subscription or buying at least one subscription?

20% or 25%, in that range.

Okay. Then on Central Host, maybe you don't want to break this out, but roughly what was that in the quarter and could we see you make more acquisitions like that going forward?

Yes, so the Central Host business generated approximately $200,000 in revenue in the quarter and yes, we are constantly looking at [technical difficulty] acquisition opportunities.

Okay. Bryan, did I hear you right -- did you say that the consumer business could be in the $10 million to $15 million range, is that right? Or did I misunderstand you?

(Inaudible--multiple speakers) top line billable revenue potential, something like that. Yes, that's going out a couple of years.

Okay, got it. How about the new spend, the new advertising in the quarter in the Bay Area -- any feedback there? Will you spend the same amount in the September quarter too?

Yes, so we are approximately, as we sit here today we're kind of at the halfway point of the trial we had outlined for you. We began the advertising in earnest on April 21st and we have spent roughly $600,000, something to that amount, in the quarter, so we've spent about half the budgeted amount.

We collected a lot of data, reams and reams of data. We haven't seen a lot of sales from it but we've certainly continued to see name brand recognition and people are definitely hearing the advertising, so we're in the process of fine-tuning both the messaging as well as the channels that we're putting that advertising out, and we will certainly continue to try new avenues to get this messaging out to folks and intend to continue to do that.

We're a little over. I think we've given you a range on the acquisition costs of $600 to $800 in the last call, and we overshot that a little bit. But I think with our fine-tuning we'll be able to pull that back into that kind of $800 upper range right now. But we are continuing with it and it's a lot of fun to get the message out beyond the pages of Google and Yahoo and Bing. So we will continue those efforts.

Great, thanks a lot.

You're welcome. Thanks, Mike.

(Operator Instructions)

Our next question comes from the line of Brian Horey from Aurelian Management. Sir, you may begin.

Hi, thanks for taking my question. A couple of housekeeping issues just to start. Can you give head count on the number of quota reps you had?

Yes, so we had 61 quota-carrying salespeople at the end of June. It was the same as the number at the end of March. Head count at the end of the quarter was 256 people, and roughly six of those are summer-related interns or seasonal.

Seasonal employees.

Seasonal employees, so the more normalized figure is 250.

Okay. Can you give us a sense of what the OpEx level was for the managed hosting business in the quarter?

The managed hosting business is -- essentially from an operating margin standpoint it's about a 30% operating margin business.

Okay. Can you give us any color or any metrics on the enterprise sales effort and what you're seeing? Any sense yet of how it works out from kind of a sales model basis or what you're seeing in terms of who seems to be responding to the effort in terms of the customer base?

Yes, I can't give you any specifics. We're kind of in the process of getting or attempting to get permission to announce a few of our more recent wins there. But it's kind of like the annoying vendor problem -- we get asked by some of our vendors can they press release us, and it's not something you tend to get back to them real quick on.

We're the phone people to some of these companies and they don't want to get back to us on some of these press release requests. So I can't give you any real specific names or certainly any numbers, at least at this point, and hopefully we can get a couple of these folks to agree to announce. But the dynamics continue pretty consistently with what we talked about last quarter, that the competition is just going (inaudible). The sales cycle is long and requires a lot of usually on-site visits to convince the customer that we have the right solution.

A lot of these take the form of written proposals, and so I think we've got a pretty good arsenal built up of things that we can almost cut and paste from in order to get new written submissions off to new prospects in a very timely fashion and in a very complete fashion, and we just continue to peck away with that.

I guess the other thing that I have noticed is a lot of our customers are starting very, very small with us, so these are big entities that have the potential to roll out to something like thousands of extensions, but they want to start with five phones in one office or they want to start with 10 phones in two offices or something like that.

So we have to go in and do what would be otherwise a very normal installation of what a typical small business customer would be for us, one of our microbusinesses, but the purpose of flying someone there to actually install five phones and make sure that the customer has 100% satisfaction is because there's a lot more offices behind that if we're successful in that effort. So we're in the process of doing that at a number of different customers and it continues to go very positively for us.

Do you have any sense yet of what the progression is off those first five lines? Do they come back a month later and order another five, or is it a quarter later and they order another 50? Do you have any sense yet as to how that rolls out?

Yes, I think they just tend to roll it out in stages and I don't really know how to characterize what a typical sequence would be, but it's one office and then it's going to be two offices and then it's going to be 10 offices, and then we've got the potential to roll out everywhere.

But it does -- I would say there are very customized quotes and proposals and installations that we do, so I think every opportunity really is different and unique and that's why we've got to be there on site to make sure that we're putting our best foot forward for whatever the application is that's driving that deal.

Okay. Are these primarily highly distributed workforces? Is that still a sweet spot?

Yes. I would say primarily they are remote or branch offices of the main corporations, separate from the headquarters in almost every instance.

Okay. Any particular verticals that stand out?

Insurance is a big vertical for us. We do have a couple of features that we've enabled for some of our long-time insurance customers and those are proving equally applicable at some of the new insurance industry-related companies that we're going into, so insurance, financial, those are -- insurance is something like what, 15%?

Yes.

Something like that of the customer base.

It's a lot of service-related firms.

Okay. Okay, thank you.

Thanks, Brian.

I am showing no further questions in the question queue. I would like to hand the call back over to Mr. Bryan Martin for any further remarks.

Okay. Thank you, Operator, and thank you, everybody, for joining us today. Again, as I always pitch, if you're not already a customer of our many voice and business services and you'd like to learn more, we'd encourage you to visit our website or give us a call. The website is 8x8.com.

Thanks for joining us. We'll talk to you next quarter. Go ahead, operator.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now all disconnect. Everyone have a great day.