iMERGENT, Inc. Q4 2009 Earnings Call Transcript

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 |  About: CREXENDO INC (CXDO)
by: SA Transcripts

iMERGENT, Inc. (IIG) Q4 2009 Earnings Call February 8, 2010 9:00 AM ET

Operator

Your next question comes from [Robyn Locknear] – Private Investor.

[Robyn Locknear] – Private Investor

I just had three quick questions. I’ll rattle them off and then I’ll get off the line to give you a chance to answer them. The first one is just to clarify something that you answered when Neal asked, was I correct to interpret what you were kind of guiding us towards was that Crexendo would probably be breakeven or maybe even slightly profitable in the June quarter of this year? Then the second one is for the buyback, how was the figure $7.25 chosen? Then finally, for your marketing efforts in calendar 2010 what do you see kind of as the balance between domestic efforts versus international efforts?

Steven G. Mihaylo

Let’s start with Crexendo. I feel that we will have more profitability. Whether that gets us to breakeven or not, I’m not really sure because we’re ramping expenses as we’re ramping income. We want to be in a position to be able to provide the services to larger enterprises anywhere in the United States to start with. But, as you know if we consummate our relationship, our joint venture relationship in India we’ll also be providing those services and products to that market as well.

I think we’ll be closer to breakeven but I’m really not sure [Robyn] whether we’ll achieve that or some slight profitability. There’s certainly the chance of that happening but no certainty to it. As far as the $7.25 buyback, we chose that number based on several factors. We think it’s a more reasonable price for our stock based on the dynamics and what’s happening. We have right at $2.00 in cash on our balance sheet, no debt, a very strong balance sheet. We also would like to acquire as much of the stock as possible and that’s why we’d like to do it at lower amounts instead of higher amounts.

Last but not least, on the marketing even though we can go in to markets outside of the United States and we’re doing that. We’ve been holding workshops in Canada. We’ll probably confine our marketing to Canada and the United States, primarily the United States as we make the transition more in to the Crexendo side of our business. Once we get everything up and running the way we’d like it to be running then we’ll move in to other markets, other English speaking markets.

That’s one of the nice things about India, even though they have three primary languages there, English being one of them, most of their advertising, most of their website, in fact just about all of them are in English so that make it a very easy market to attack and one that we would have a very strong partner in. I hope that answers your questions.

Operator

Your next question comes from [Jeff Bash] – Private Investor.

[Jeff Bash] – Private Investor

I have a couple of questions. Let me attach the Crexendo thing slightly differently, you said you expected it to be a meaningful percentage of annual revenue by the end of the year. So I assume if you ignore whether it is this quarter or next quarter, a year from now Crexendo is going to be something that is clearly visible in the financial results?

Steven G. Mihaylo

Yes.

[Jeff Bash] – Private Investor

It is very interesting on these other initiatives in India and elsewhere but I have a couple of questions with respect to the past quarter. The way that we use to look at this on an accrual basis, we would figure out what net contracts written where which would take in to account the changes in deferred revenue from one quarter to the next and if you look at the September quarter where deferred revenue dropped by $4 million and the December quarter where it dropped by $8 million, it looks like the net contracts written relative to the current operations dropped in the December quarter versus the September quarter. Could Clint or someone who is familiar with this comment?

Steven G. Mihaylo

I’ll make a few comments first and then I’ll have John Erickson and Clint both address it. A lot of this has been planned. We’re trying to get a higher quality customer, one that is more able to pay for our products and services. We’re also starting to direct our marketing in to specific areas so that we cull out any potential customers that really have little or minimal need for the product. Then some of this has to do with the economic situation. A lot of it is directly related to the customer’s ability to pay so you’re going to see an acceleration as the economy drags on in legacy receivables.

Going forward we think we have a better chance of collecting those receivables. I’m going to let John comment further on the financial aspects of it and then Clint, if you’d be kind enough to go over some of our strategic initiatives in that area.

Jonathan R. Erickson

The majority of the reason for that decrease is related to the additional reserves for bad debt we took in a six month period. As I mentioned earlier, we took $8.7 million additional on top of what we normally take related to deterioration in our accounts receivable. Like Steve mentioned, most of that comes from customers who have been with us for a year, year and a half. Older customers dropped off like they hadn’t in the past.

What we’ve been seeing in our accounts receivable statistics is that new contracts are in from the perspective of first payment defaults and things like that are actually slightly improving if not stabilizing but where we’re seeing deterioration is older customers who have been with us nine months, a year, 16 months, etc. So that’s a big reason for the decrease in deferred revenue and your net dollar contracts written that you spoke of earlier. I’ll turn it over to Clint for a little insight on the sales aspect.

Clint Sanderson

On the sales side of it Jeff you notice there’s a smaller sales percentage this year compared to last year and that’s driven primarily by the direct workshop tests we’ve been doing. We thought going in to it we would be able to eliminate a major expense in doing our previews by sending people directly to our workshops and moving from there. Without the previews we knew we would have a lower close rate when it comes to a workshop sales close rate, that was expected. What we found is we did have that lower close rate but what we found is that our previews are an essential part in our business model in qualifying our potential buyers.

Ultimately on the direct workshop test that we did, we found that the mix of our buyers was not what we needed it to be. In other words, we were not getting as qualified a buyer to those direct workshop events so what we found was the preview event allows us to better qualify the buyers or attendees that come to our workshop events and we get a better mix of buyer in that model and that’s why we have ended the direct workshop test we have done moving forward.

[Jeff Bash] – Private Investor

How does the cash payer percentage compare in the December quarter with the preceding quarter, the September quarter?

Jonathan R. Erickson

It’s about the same, it was 42% in the September quarter, 43% in the December quarter which incidentally is higher than it was a year ago. A year ago it was upper 30s, 39% to 40% so we’re up slightly in that. That being said, that’s really a market by market statistic. Some markets pay cash better than others. Particularly with Canada, it’s been a high cash paying market for us which we had a decent amount of workshops in the quarter so that’s part of the contributor factor of the higher cash percentage.

[Jeff Bash] – Private Investor

The last question I have has to do with the tax rate. I know for a period of years there every quarter you’d see 40% or something like that. Now, we have 29.4% and it looks like something that is varying by quarter. Is there a reason for this change that has to do with the settlement with the IRS and something occurred with respect to that?

Jonathan R. Erickson

An appropriate expectation for a tax rate on a go forward basis is around 40%. We had some trickle through on the IRS as well as an issue we were having in Canada trickle through as well in the six month period that’s why you see the lower tax rate.

[Jeff Bash] – Private Investor

So NOLs, do you have any left?

Jonathan R. Erickson

We do. We’re able to use $462,000 per year that relates to the IRS settlement. Incidentally, we did lose $233,000 in this six month transition period because we were limited to half of that for the transition period so we lost a little bit this transition period but we’re still able to utilize $462,000 on a go forward basis through I believe it is 2015.

[Jeff Bash] – Private Investor

So if we get past this transition period we’re in now and the company becomes materially more profitable then we should look to a 40% tax rate?

Jonathan R. Erickson

That would be my expectation.

Operator

Your next question comes from [Ronald Fall] – Private Investor.

[Ronald Fall] – Private Investor

I’d like to just follow up on Jeff’s question about meaningful and we’re talking a year out by your statement that it would be meaningful. Can you just quantify is that meaningful being 5% to 10% or is it being 20% to 30% or some broad range, whatever you would feel comfortable?

Steven G. Mihaylo

My crystal ball generally when it comes to making predictions has a lot of snow in it I guess is a good term. But, I would expect somewhat exponential growth quarter-over-quarter, that’s not to say that it will necessarily double each quarter. At some point you get to the point of diminishing returns on that. But, I think it would be with the acquisition of this company if it occurs and the natural growth in our Crexendo division, I think it would be easy to say that probably 2% to 4% of revenue this year will come from that division. Next year it could be as much as 4% to 10% and we’ll see it continue to grow as we move forward.

Our goal here and part of the reason why we’re seeing fluctuations in the StoresOnline division is because of the fact that we’re testing a lot of different methods of selling. We’re selling more training as opposed to software licenses. We expect that trend to continue but again it’s going to be choppy. We’re going to start introducing our hosted telecom services in to that channel first and at best our hosted telecom services will be a very basic business type of service or a very high level type of residential service.

It will certainly be a lot more than a Vonage for instance but it will be less than your traditional PBX. But, we see in the neighborhood of 5,000 to 6,000 prospects on the StoresOnline side every single week. Of those 5,000 to 6,000 we think that a high percentage of them, even if they don’t buy our traditional products will sign up for our hosted telecom which will be starting we think at $29 per month.

It doesn’t take much to ramp that and the telecom division even though we might be selling in the StoresOnline channel, is part of Crexendo. So there is a great opportunity but until we start seeing actual sales it’s hard to predict.

[Ronald Fall] – Private Investor

Just one more, the North Carolina settlement, it’s been all fully reserved. Are we talking $200,000 or more than that or less than that?

Steven G. Mihaylo

Less than $200,000.

[Ronald Fall] – Private Investor

No Steve, we had already reserved $750,000 and there were some additional paid out with that.

Steven G. Mihaylo

I meant the additional reserve was less than $200,000. Was that correct John?

Jonathan R. Erickson

Correct.

[Ronald Fall] – Private Investor

But then we would have the ability to go against the original $700,000 or case-by-case whether it’s worth it or not?

Steven G. Mihaylo

I think the way the settlement is written and I’ll let Jeff give you the absolute answer but I think whatever is left over goes to the state of North Caroline. Is that correct Jeff?

Jeffery G. Korn

No sir, what we actually what we agreed to pay is what the claim amounts are. The state of North Carolina has agreed to not accept any fees or costs. To answer your question, we could on a case-by-case basis determine if in fact we wanted to sue the individuals. It may be cost prohibited because keep in mind the average sales is in the range of $4,000 so it would be an awful lot of law suits.

[Ronald Fall] – Private Investor

Right, you’d have a lot of ambulance chasers.

Steven G. Mihaylo

Yes, we don’t think that’s a good area to be spending our time and money.

Operator

Your next question comes from [Michael Seanstrom] – GBC Capital.

[Michael Seanstrom] – GBC Capital

I didn’t hear a comment on the purchase per unit, dollar volume per unit purchased in the quarter?

Jonathan R. Erickson

It was fairly consistent. There wasn’t much change in the average purchase price.

[Michael Seanstrom] – GBC Capital

It was $5,170 in the September quarter so was it around there?

Jonathan R. Erickson

Around $5,200.

[Michael Seanstrom] – GBC Capital

Just elaborate a little bit if you could on the deferred revenue side of the equation going forward. I think first quarter was about $5.4 million contribution in the September quarter and then $5.2 and as we look forward in to the upcoming calendar year what do you see that number being? Is that going to continue to decline?

Jonathan R. Erickson

That’s difficult to say with certainty. We believe that we’ve started to [inaudible] from $5.4 to $5.2, we’ve started to see some stabilization. That being said, that could change. We have seen deterioration in our accounts receivable from primarily our older customers. It’s also dependent upon what our cash percentage mix rate is at the workshops as we sign up additional contractors. The more A buyers we sign up versus B and C the more likelihood we will add to the cash collected in any quarter so it’s really dependent upon a lot of factors. What we’ve seen though over the past two quarters is somewhat of a stabilization in the dollar volume we’re collecting on a monthly basis.

Steven G. Mihaylo

One of the other things we’re doing Mike is we’re selling a higher percentage, and I can’t tell you exactly what that is but our intent is to sell a higher percentage of training and most of that will be cash because we don’t want to give training and then have them owe us for it so that could impact this a little bit. Maybe you’d like to comment on that Clint?

Clint Sanderson

What we’re doing there is we’re in the initial testing stage of modifying our model to where our offer at our workshops is more heavily weighted towards training and services versus a software license. That’s what Steve is getting at and we continue right now to test that and perfect that model and that offer. It is a substantial change in our offer and it’s a substantial shift in also the way our customers look at what they’re purchasing from us. We believe it also helps in the customers’ expectation of what we’re delivering and also what is required of them in the whole equation.

It’s something we continue to test and overtime we feel like we’ll be able to get to where the bulk of what we’re offering at our workshops is more training and service related rather than any software license.

Steven G. Mihaylo

The whole intent here is to get every single one of our training customers in to a website. If we’re able to consummate the relationship in India we’ll be able to drive our cost of implementing that website substantially lower and that will allow us to get more of our customers published and ultimately to receive more hosting revenue as time goes by.

[Michael Seanstrom] – GBC Capital

One other question on the workshop, you went to five workshop teams in the most recent quarter, do you see that increasing, staying the same, the number of workshops given trends?

Steven G. Mihaylo

Well right now we’re keeping those workshop teams busy but a lot of it is going to depend on how well they do, whether we increase it or hold it about where it is. I don’t expect for us to decrease it but Clint, do you have any comments on that?

Clint Sanderson

At this point we don’t expect any decrease in that and we also don’t expect any increase. Right now our focus is generating profitable revenue and so a lot of our initiatives in both marketing and sales is trying to go in to our markets with a more laser focus as to the marketing that we do and getting the best return on the marketing dollars that we spend. So based on that we don’t have any plans right now to add a workshop team or right now to decrease. It is just status quo right now and we’ll just continue with those initiatives and trying to improve our profitability in that channel.

Steven G. Mihaylo

One of the things that we have done Mike is on our Crexendo side we’ve used lower costs marketing methods to generate leads. Some of it has been through webinars. What we intend to do as that backlog of leads increases we’ll offer the folks at our workshops on the StoresOnline side the ability to in their off weeks, as you know they go out on the road for a week and then they’re off for a week, in their off weeks we’re going to allow them the ability to make sales calls over the telephone in to that lead backlog on the Crexendo side so we can get double duty out of the ones that want to increase their income. You might want to give a little bit more color to my comment Clint?

Clint Sanderson

We see at our preview events the numbers that have been mentioned on average 5,000 to 6,000 attendees that we see, of our attendees we see business owners who come to that event see that the services that we offer at that level they need a higher level of service and so we have a program where we’re able to cull those leads out of the StoresOnline side because those individuals needs go beyond what we can offer with the StoresOnline side for their business and so we can push those leads in to the Crexendo side of the business.

Those sales people that Steve mentioned can call in to those leads. In addition to that, on the StoresOnline side, the sales consultants that we have on the StoresOnline side will start engaging our attendees, doing our consultations actually before they come to the workshop so between the preview event and the workshop event our consultants will be able to begin the sales process before our attendees get to the workshop. We feel that will better prepare the customer, give the customer a better experience and improve our overall performance in that channel.

Steven G. Mihaylo

What we’re really trying to do is increase our productivity.

Operator

It appears there are no further questions today. Mr. Mihaylo, I’ll turn the conference back over to you.

Steven G. Mihaylo

I want to thank all of you for participating today. I noticed at least one additional shareholder private investor that joined the call and I want to thank you Ronald. We look forward to sharing our results with you for the March 31 which will be our first calendar and fiscal quarter as we go forward. We appreciate your support. Thank you very much. Have a good day. Good bye everyone.

Operator

That does conclude our conference call today. Thank you all for your participation.

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