8x8 Inc (EGHT) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the first quarter fiscal year 2012 8x8 earnings conference call. (Operator Instructions). As a reminder, this conference is being recorded. And now I would like to turn the call over to Joan Citelli, 8x8's Director of Corporate Communications. Please begin.

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 Chief Financial Officer, Dan Weirich to discuss our results for 8x8's first fiscal quarter of 2012 and the June 30, 2011. If you have not yet seen today's financial results the press release is available on the Investor's tab of 8x8's website at www.8x8.com. Following our comments there will be an opportunity for questions.

Before I the 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 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 factors sections of our annual report on Form 10-K and 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. Thank you.

And with that I will 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 going to provide an update and overview of 8x8's first quarter of fiscal 2012 ended June 30, 2011, and then we are also going to update you on several new services we have recently launched. Dan will then provide a detailed review of our financials and their trends, and after that we will open the lines for any questions you may have for us today.

8x8 had an exciting and productive quarter with the launch of several key initiatives including the announcement of our new channel program, the acquisition of Zerigo and the adoption of the VCE Vblock Infrastructure platform, all of which laid the ground work for future growth of our four differentiated cloud-based service offerings. We now have a complete portfolio of cloud communications and computing solutions; Voice over IP, Call Center, virtual managed hosting and cloud data services and video conferencing meeting services, all of which leverage our existing infrastructure and position us to become a trusted single source provider to the SMB market.

Alongside these efforts 8x8's revenue for the June quarter grew to a record $18.5 million an increase of 10% over revenue of $16.8 million in the same period a year ago. Revenue from business customers grew to $16.4 million for the quarter, a year-over-year increase of 14%. Net income for the first quarter of fiscal 2012 was $1.9 million or $0.03 per share, a 91% increase over net income of $1 million for the same period last year.

During the fourth quarter of fiscal 2011, 8x8 launched a channel sales initiative to accelerate adoption of our cloud-based services by small and medium sized enterprises. Our investment in channel program development and sales and marketing expenses associated with this program continued during the first quarter of fiscal 2012. While we have not seen yet a meaningful contribution from channel partner sales we expect to continue adding and training at least ten new partners and resellers per quarter and anticipate that the sales productivity of these partners will increase over time. Our first two channel partners came onboard at the end of April, and as of June 30, 2011 we have signed contracts with 16 channel partners who had generated sales to 25 new business communications end customers during the June quarter.

On May 31, 2011, 8x8 reached a new milestone with 25,000 businesses subscribing to our cloud-based services. We ended the quarter with 25,455 business customers, not including subscribers to our $10 per month Virtual Office solo service, nor subscribers to our data cloud services acquired from Zerigo. We were very pleased to see the favorable results of our churn reduction and customer loyalty efforts kicking in this quarter with a record low churn rate of 2.1%. As a follow-on to the simplified activation streamline number portability and customer survey enhancements that we've implemented over the past 12 months, we will be unveiling a new customer self-service portal later this summer which will dramatically improve the account configuration and management systems for all of our customers.

I'm also very pleased to report that average lines and services per new business customer increased once again to approximately 12.6 in the first quarter of fiscal 2012 from roughly 11.7 in the prior quarter, reflecting the continued adoption of our services by larger and larger small to medium enterprise organizations. Over our entire customer base average lines and services per business customer increased to 8.4 from 8.0 in the prior quarter and from 7.5 in the same period a year ago.

Another noteworthy development that occurred during the first quarter of fiscal 2012 was the acquisition of Zerigo, a company providing virtual private servers, managed DNS services and monitoring tools for cloud-based server operations in line with the Company's strategic plan to grow its cloud-based offerings through both organic and inorganic activities. Revenue from all 8x8 data cloud services in the June quarter was approximately 2.5% of total revenue. We plan to apply the technology we acquired from Zerigo to serve as our customer facing portal for new private data cloud services targeting the larger enterprise on the Vblock Infrastructure platform we recently acquired from VCE, the virtual computing environment company formed by Cisco and EMC with investments from VMware and Intel. During the quarter we became a licensed VMware service provider and will be launching enterprise class services based on this platform over the next two quarters.

Finally, just yesterday we announced the production launch of our new 8x8 Virtual Room video cloud communications service in partnership with Polycom. 8x8 Virtual Room is the first service to seamlessly integrate a business' phone system, unified communications and conferencing and web collaboration services with room video conferencing equipment and Telepresence gear commonly used at larger enterprise customers. We introduced an introductory flat rate model as low as $99 per month for unlimited use of an 8x8 video Virtual Room which enables our customers to access these video services from a wide variety of IP phone, software and room video conferencing platforms with a simple phone number or mouse click in a web browser or smartphone.

At the high end Virtual Room support extends to some of the Telepresence systems offered by Polycom for only an incremental increase in the monthly subscription price. For business customers who lack this high end equipment the service also supports 8x8's award winning low cost Virtual Office Pro web telephony client which can use any off the shelf web cam for video, so that someone on the road or in a hotel room can see and be seen by the other Virtual Room participants from any mobile location that has high speed internet access. The 8x8 Virtual Room service is available today as either a standalone service or in combination with our other cloud-based communication services at 8x8.com.

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

Thank you, Bryan. Between June 30, 2010 and June 30, 2011 our cash, cash equivalents and investments increased approximately $784,000 to $18.9 million. During this period, we spent $8,579,852 repurchasing 3.8 million shares of 8x8 common stock in an average price of $2.26 per share as well as investing net cash of approximately $715,000 in June 2011 as a cash component of the Zerigo acquisition. The sum of the money spent repurchasing shares, acquiring Zerigo and the increase in cash, cash equivalents and investments on our balance sheet in the past year is more than $10 million.

During the first quarter of 2010 our cash, cash equivalents and investments increased $475,000. During the period we repurchased 301,800 shares at a cost of $888,964 at an average share price of $2.95. Invested net cash of approximately $715,000 acquiring Zerigo and spent $185,000 on capital expenditures.

Gross margin remains strong at 67% with service margins at 78% and product margins at negative 53%.

Operating income increased to $1.6 million or 91% in the first fiscal quarter of 2012 compared to the first fiscal quarter of 2011. This increase is due to a $1 million increase in gross margin offset by a $232,000 increase in R&D and SG&A. Our cost of customer acquisition declined to $743 compared to $818 per customer in the first quarter of 2011 due to lower advertising spend in the 2012 quarter. Our advertising expenditures for the quarter totaled $1.4 million in the first quarter of 2012 compared with $2 million in 2011.

For the first quarter stock compensation expense was $266,000 and depreciation and amortization was $364,000 compared with $73,000 and $273,000 in the same period a year ago.

Capital expenditures for the quarter were $185,000. The migration to our new East Coast data center was completed in June and capital expenditures related to this move are complete. Capital expenditures will be in the range of $1 million in the second quarter primarily related to the purchase of the VCE Vblock Infrastructure platform.

Our effective tax rate in the first quarter of fiscal 2012 was 1.4%. We expect our effective tax rate to be between 1% and 2% for the remainder of this fiscal year.

As of June 30, 2011 total shares outstanding were 62.5 million compared to 63.6 million at June 30, 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 have posted a transcript of the prepared remarks on the events and presentation section of 8x8's Investor website at investors.8x8.com.

I want to close my prepared remarks by noting that during the last quarter in keeping with our strategic growth plan we greatly expanded the spectrum of our cloud services portfolio to support our goal of becoming the one-stop turn-key provider for all of a businesses outsource communications and IT services. We now offer business phone service with desktop IP phones, web telephony clients, smart mobile phone and tablet applications, unified communications, meeting conference and web collaboration, call recording, Call Center, SIP trunking, video conferencing and Telepresence bridging services, managed server infrastructure as a service, virtual data cloud services, backup security, firewalls, DNS service, monitoring services and storage and bandwidth services; all as a cloud-based subscription service with 24x7x365 monitoring and support and a proven track record of enterprise class quality, uptime and reliability. Our capability to serve each and every need of an information technology function at any size of business customer will continue to expand as we further extend these core technologies that enable us to offer the software as a service capabilities to our customer base.

With that, Dan and I will be happy to take any questions you may have. Tyrone, if you want to open the lines for any questions.

Thank you. (Operator Instructions). Our first question is from Mike Crawford of B. Riley & Company. Your line is open.

Thank you. Nice consistence in subscriber growth as we have become accustomed to. The numbers you gave, you mentioned don't include the Virtual Office solo service or Verigo customers. Are those numbers that you can give a sense of what they look like?

Yes, the Virtual Office solo is in the hundreds of customers. We are using it more as a lead generation type product so that folks can use our Voice over IP technology to try them out and our sales folks can use it as more of an upsell situation.

On the Zerigo side, the company is extremely small and I would view it as more of a technology related purchase, but it definitely does have a subscription base of services. And the primary reason that we excluded it is you can go on their website and see that they sell a DNS service for $7 or something like that. The absolute number of subscribers is actually fairly large. It is more than a thousand, but it is extremely small in revenue terms, so we just decided to exclude that for the time being.

Okay. Thanks. If you look at the infrastructure you are putting in place with the Vblock and the customer facing Verigo piece, it looks like -- I mean you only spent $715,000 cash component for Verigo. I don't know what earnouts you have there, but --why is that number so much different from like what Citrix paid for Cloud.com recently?

Yes, so we are going to file our 10-Q shortly with the exact figures of what we paid for Zerigo, but I'll just throw them out there right now, so everyone has an understanding. Up front we paid $1.5 million. $750,000 in cash, less $35,000 cash that they had on their balance sheet. That is why I mention a net of $715,000. And it was a $750,000 in 8x8 stock. And then there is a remaining earn out of $500,000 in cash based upon hitting some certain milestones.

Yes, we saw that Cloud.com news and, yes, we think we got a fabulous deal on this. I mean we got a fabulous developers along the way and a great product.

Okay. Just maybe just to finish out the part of your business that's changed really is what you are doing here, in my opinion, and let me get this straight. So you are spending $1million to I guess in this quarter to really adopt this VCE Vblock and then you will be a VMware service provider going forward. What does being a licensed VMware service provider mean? Does that mean that there is a component of revenues that need to get paid to VMware? How does that work?

Yes. Mike, this is Bryan. It is a program they have put in place relatively recently which enables multi tenant use of VMware licenses, so we can buy a fixed bucket of VMware licenses and use them in a dynamic cloud fashion so that they can move from end customer to end customer as the demands of the compute cloud fluctuate. And it is not hard to become a VMware service provider so there is no test involved.

But I think the important thing to note here is to date both our managed hosting services on dedicated infrastructure as well as the on demand type of services that we started selling back in February which are based on an open source zen Platform. I think the functionality that we are achieving by rolling out the Vblock in conjunction with the VMware licenses is really targeting a much larger enterprise class private cloud, a government type of cloud, a Hollywood type of cloud that is needed to post processed movies and other media like that.

So we are really trying to move the spectrum of our cloud computing services up into a market that is going fulfill or back fill the gap that is being left by folks like Terremark leaving the space. And so we are really trying to move this upmarket. It is primarily going be sold through our channel partners and some of these providers even are vectoring leads to us because there is very few independent if you will, independent of very large long distance carrier type of company out there that is running that class of services these days, or at least very shortly will be running that class of services.

Okay. Thank you, Bryan. Thank you.

Thanks, Mike.

Our next question is from Mike Latimore of Northland [Capital]. Your line is open.

Great. Thanks. Just on the churn, is it roughly still half economic churn, half standard turn? Is that a fair way to look at it? And I guess have we hit bottom here, or do you think there is more improvement to come?

Yes, so on the economic churn it was 48% of total cancellations in the quarter compared to 52% in the fourth quarter of fiscal 2011. On the churn side we are very pleased it is continuing to move down. And we have a massive initiative underway that we expect to be released this current quarter that we are in, is a new self-service portal that potentially could have another step down in churn, but that still remains to be seen. But we are very pleased by the reduction in churn.

All right. And then on the new channel side of things here, can you talk a little bit about the time it takes to train the new channels and then go through a sales cycle and do install? How do you think about that general timeline because you have been adding, obviously, a lot of new partners here?

Yes Mike, this is Bryan. I think it is consistent with the expectations we had on the last call when we scoped out what the cycle time was going to look like. We still believed that from bringing the channel on -- that channel partner may come with one or two deals already on the table at the time that they really start working with us, and of course, we can close out business right away, and primarily I think that has been the case with a lot of the deals that I mentioned that closed in the June quarter. We expect a 6 to 12 month rampup period to really, like you said, get these channel partners trained. Really get them to understand the breadth of different services that we are offering here.

It is interesting because in a converged IP communications and cloud data services space like we are in, what we are finding is the skill sets of these different channel partners are actually pretty varied in terms of the types of hardware and services that they might be selling today. So, while they come in and might be very quick to adopt one area of our services we are doing a lot of work to make sure they really understand the full breadth of once-off turn-key services that can be provided to the IP function within an end customer. That is what it is looking like still. We are on schedule with that and pleased with the results to date.

Great. And just a last question. Sounds like you are selling more lines per customer, more services per customer. ARPU came down a little bit. Can you help me understand the difference there, how ARPU goes up a little bit? And then do you still feel like ARPU is at 200 to 210 throughout the year here?

Yes, in your last point in the range of 200 to 210 this year we are very comfortable with that. So I guess your question is why is the average revenue per service declining on average when the overall is 8.4 lines now per average customer and it is $200 in revenue per customer? Essentially what is happening is more customers are subscribing to more features. As we rolled out lots more features over the past couple of years, people are subscribing to these. We have seen a recent upstick in our unified communications subscriptions and I believe we actually had record subscriptions in this most recent quarter related to that, and those are priced at the lower price points, so we are spreading the services more into the organizations these days.

And then the other side of it is on the price of the service plan that we sell on our physical phone extension we had been selling in the price range of like $40 to $50 a few years ago, and in the last couple of years we have moved down to like the $25 range or so. And so what is happening is some of those older customers who had been at the higher price points have either left the service or they are coming back and requesting more market rates today. And so I get a fair amount of questions from time to time regarding like [GC] pricing compression today relative to a year ago, and I would say no. I mean the change from today to a year ago there is little to no change. But if you look back like three or four or five years there has definitely been a reduction in the service price per physical extension. But that was in the early days of the market. We are still trying to flesh out where do we need to price this at to get to where we are moving 5,000 plus units a month.

And Mike, this is Bryan. I would just add to that as well that as we stated the data cloud services were only 2.5% of revenue. The monthly ARPU on those services is much higher than our voice services, and we expect as that percentage contribution continues to grow you will start to get some benefit from that on the overall number as well.

Right. Okay. Makes sense. Thank you.

Thank you.

Thank you. The next question is from J.D. Abouchar of GRT Capital. Your line is open.

Hey Bryan, maybe one area that you could touch on that you haven't spoken on yet is the initiative into large enterprise and government sales.

Yes. Hi, J.D. Thanks for being on the call. What we have done is as we have launched some of the channel infrastructure and support needed to support these channel partners. Under [Don Trembell], who heads our channel organization, we have really combined the existing enterprising government resources all within a combined organization. So one organization is working with channel partners and with direct leads to the type of government and large enterprise types of customers. And we just believe that is going to be a cooperative and of lead sourcing situation where one side will help the other and help on implementation and vice versa.

We are not breaking out because the numbers right now are just so small in terms of what is come in from the overall group, but we continue to see massive interest especially from potential government prospects for both of our cloud-based voice services as well as some of the VMware based and private cloud infrastructure that we are bringing to bear with the new partners we talked about in the script.

So things are going the right way and we are in the right place at the right time in terms of having a full suite of solutions that are fulfilling the requirements that we are seeing time and time again in the RFPs, especially those that are coming out of the federal government. I know we were just looking at another RFP opportunity that just came to light with a very large government agency and it fits our services perfectly. So we will continue to make progress --

So are you transitioning from direct sale to those large accounts to working in concert with these new resellers, or is it -- obviously as many of them are going to be bringing the deals to the table, but is that evolving to that way or is this still a separate effort?

No. I think it is going to evolve to where the predominant source of leads into these large opportunities are going to come through one of the channel partners which is why we have moved this direction. I think our ability to source leads directly is quite limited, and it is really just driven by the fact that a lot of these large opportunities are relationship based at the beginning of the sale, and if the person or the entity or the partner that the end customer is turning to for advice is not aware of 8x8, then 8x8 is not going to be brought in to quote the deal and work the deal. We are seeing good traction and good lead generation from these partners.

We get the growth of people that do their own research, and then they may call in to our direct sales team that is targeting the SMB marketplace, and they say, "Hey, it is your lucky day. I want to place a large order with you today." We are getting those sales more by luck rather than earning them, and we want to earn them so that we can really start growing that segment of the market.

Got you. That makes sense. I assume that the Navarre has additional services they are selling that aren't in the scope of 8x8.

Yes, absolutely. They are doing gigabit switch upgrades and PoE upgrades and all sorts of other stuff that cost a lot of money. Navarre is a peer. They were doing fine before we showed up with this new program, and now we are going to enable them to sell even more of that gear as well.

Okay, great. One other question just was at this point is the home and individual subscriber number de minimus? So they are not going to affect both churn because that had been declining over time?

Yes, I mean again I think we touched on this in our last call. There is still a negative effect as the consumer numbers come off. I think what all that we are guiding to is through the end of March versus the previous year March the decline in revenue there was negative 35%. We don't know what it is going be this year, but if we just assume it is another negative 35% instead of an approximately $5 million decline in revenue from the consumer segment we will see something like a $3 million decline this year. There is an element that affects the number, but it is getting smaller and smaller.

Excellent. And just one anecdotal question. What percentage of your hardware at this point going out the door or tied to new subs is Polycom based? Just a ballpark.

Dan and I are both guessing the same number which is about two thirds is probably Polycom.

Got you. Terrific. Thank you so much.

You're welcome. Thanks, J.D.

Our next question is from Steve Shaw of Sidoti & Company. Your line is open.

Hi, guys. Two quick questions. First, the CapEx number for the quarter. And second, any plans to add to the sales force?

Yes, so capital expenditure in the quarter that just ended was $185,000. We've included a cash flow statement in the press release as well that has all that information.

And the addition of sales people. So we ended the quarter with 72 sales people. At the end of March we had 70 sales people and we are definitely budgeted to add additional sales people primarily around our channel efforts and federal efforts throughout the remainder of the year.

Any specific number in mind?

We don't have a specific number that we are disclosing but it is more than two. I mean definitely more of like a team. I think we said that in the past maybe like a dozen people or something of that magnitude.

Okay. Thank you.

Thanks, Steve.

Thank you. Our next question is from Patrick Lin of Primarius Capital. Your line is open.

Hi, guys. Congrats on the quarter. I have two quick questions. The first one is can you shed a little light on the road map for your M&A going forward and what the pipeline looks like? And the second question is, Bryan, we have talked in the past about just the momentum and gathering in terms of revenues especially with the resellers, and wondering if you can shed more color on where you see that in terms of getting to an inflection point of accelerating even faster? Thank you.

Yes. Hi, Patrick. Your channel numbers are not included in these numbers, by the way.

Our M&A activities, we are in active due diligence at several opportunities right now. We are not going to say anything about them, but in general the strategy is we are looking across the spectrum of services that we are either providing to our customers today and those that we are trying to develop so that we can provide more services, and again the goal is to be a one-stop shop for all of the different IT types of functionality that a small to medium enterprise customer would need. And figuring out how we are going to fill those holes either organically or inorganically, and all of our current due diligence work is focused on potential acquisitions that would accomplish that goal.

I didn't really follow the second part of your question. Would you mind repeating that again? Patrick?

Can you hear me?

Yes. Patrick?

Hey Bryan, you there?

Yes, I'm here.

Okay. Sorry about that. My second question was business is fine and you guys are growing, but I was wondering with the addition of all of the resellers when we might be able see a potential acceleration of the revenue growth that you guys have seen in the last couple of years?

Yes. Okay. I've got you. So again consistent with what we said in the last call, it is still going to be a quarter or two before you see the needle move from that program because the contribution is obviously very small right now. But we would expect that within the next 9 to 12 months that you actually start to see some very sizeable contribution, and given that we expect that these customer opportunities to be larger, it won't take a lot of them to start moving the needle if we can land some of these big deals through working with these partners. And I think it will be a self-fulfilling thing because if the partners bring a large deal they get paid more as well which makes them bring more work and more deals and opportunities.

So that is kind of the time frame and we are right on target with what we are trying to execute there. The program is off the ground. It is getting a very good response. We have gotten some very good media coverage around it, and we are actively on a very regular basis signing up these partners, and more importantly closing some early deals with the ones that have come on board.

Great. Thank you.

Thank you, Patrick.

Thank you. And ladies and gentlemen this is the Q&A portion of today's conference. I would like to turn the call over to Mr. Bryan Martin for any closing remarks.

Alright. Thank you, Tyrone, and thank you everybody who was on the call today. Again, we really expanded the number of services and the different types and variety of services we sell, so as I always do I want to encourage you if you are not already a customer, go on our website, take a look at the many diversified cloud-based services that we have. They are all available there at www.8x8.com. So with that we will conclude today's call and please go ahead, Tyrone.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. And have a wonderful day.