iMERGENT, Inc. Q4 2009 Earnings Call Transcript

Feb. 8.10 | About: CREXENDO INC (CXDO)

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

Executives

Steven G. Mihaylo – Chief Executive Officer & Director

Clint Sanderson – Senior Vice President & President StoresOnline and Crexendo Division

David Krietzberg – Chief Administrative Officer

Jonathan R. Erickson – Chief Financial Officer

Jeffery G. Korn – Chief Legal Officer

Analysts

Neal Goldman – Goldman Capital Management

[Robyn Locknear] – Private Investor

[Jeff Bash] – Private Investor

[Ronald Fall] – Private Investor

[Michael Seanstrom] – GBC Capital

Presentation

Operator

Welcome to the iMERGENT, Incorporated calendar fourth quarter and six months transition period ending December 31, 2009 conference call. Today’s conference call is being recorded. At this time I would like to turn the conference over to Steve Mihaylo.

Steven G. Mihaylo

I’m Steve Mihaylo, CEO of iMERGENT. With me today I have Clint Sanderson, President of our two major divisions and Senior Vice President. We also have Dave Krietzberg, Senior Vice President, he’s in charge of customer service and fulfillment. We have John Erickson, our Chief Financial Officer and Jeff Korn, our General Counsel. Before we get started I’d like to have Jeff Korn read our Safe Harbor statement.

Jeffery G. Korn

I want to take this opportunity to remind listeners that this call will contain forward-looking statements within in the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. The Private Securities Litigation Reform Act of 1995 provides a Safe Harbor for such forward-looking statements. All statements made in this press release other than statements of historical facts are forward-looking statements.

Forward-looking statements include but are not limited to words likes believes, expects, anticipate, estimate, will and other similar statements of expectation identifying forward-looking statements in this conference. Investors should be aware that any forward-looking statements are based on assumptions and are subject to risks and uncertainties that would cause actual results to differ materially from those discussed here on the call today. These risk factors are explained in detail on the company’s filings with the Securities & Exchange Commission including the Form 10K for the fiscal year ended June 30, 2009 and the Form 10Q for the period ended September 30, 2009.

iMERGENT does not undertake any obligations to publically update or revise any forward-looking statements whether as a result of new information, future events or otherwise. I would now like to turn the call back to Steve for some comments.

Steven G. Mihaylo

Before I get started let me just comment on some of the things that we accomplished this quarter. As you know we changed our year end from a fiscal June 30th to a fiscal end calendar, December 31st year end. We also selected new auditors. Our new auditors are Deloitte & Touche which is one of the largest big four international accounting firms and we’re very proud of that. I think it should give our investors another level of comfort as far as the accuracy of the numbers here. Not that there was any need for it.

I’m going to give a brief overview of the numbers, a few high level numbers, a small explanation. I’m also going to comment on some of the things that we pointed out in the press release and then I’m going to turn it over to John Erickson for a more granular look at the numbers and then we’ll open it up for questions and Clint, Dave Krietzberg, John Erickson and I will all be available, and Jeff Korn of course, to answer any of your questions.

The first thing I want to comment on is the sales for the period. We had $18.34 million in sales for the three months ended December 31, 2009. That compares with $26.85 million in sales for the same period in 2008. But, when compared to the previous three months, the September 30, 2009 numbers it’s approximately $1 million more so it looks like we’re starting to see some sequential growth over the previous period.

We had $35.7 million in sales for the six months ended December 31st versus $54.1 million. Some of this is the result of having fewer workshops and all of this is spelled out in our press release. We had $0.06 in earnings for the three months ended December 31, 2009 versus $0.06 for the previous three months and a loss of $0.89 for the quarter in 2008, the December 31 quarter. For the six months stub compared to the six months in 2008, we had $0.12 in earnings versus a loss of $1.55.

Our cash remains strong with about $21.5 million in cash plus another $1 million in restricted cash. Now, let me comment on some of the things that were in the press release. We’ve been working now for several months with a company in India that has a large customer base and we’ve been working with them with the idea of doing a great deal of our fulfillment, not all of it, but a great deal of it as scale up to bring on many more customers per day and per week. They will be able to do this because of the automation tools that our engineers in Orem are designing to make it more readily scalable. Of course this will drive our cost down. We expect to consummate this in the near future.

We’re also working on a small boutique SEO company acquisition. This is important because it allows us to have the template for direct sales offices around the country. We’re looking at small sales offices that will be manned with three to five people that will be outbound direct sales to larger customers for all the services that we offer. Plus, we expect to have a small training area that we can bring customers in and train them in the various products and services that we offer.

We’re also about to enter beta for our telecom products. As you know, we’ve had three engineers in Phoenix and two engineers in Orem Utah working on this project now for just about a year and it’s just about close to being launched. This is important because it allows us to have a very nice stream of hosting revenue along with the hosting revenue from our websites.

Finally, our board reaffirmed its decision back in 2006 to repurchase stock. We feel that our stock is undervalued at its current price and we expect to be in the market acquiring stock in the open market when and if there is stock available. Obviously, two of the things that we have mentioned here are pending, the relationship in India and the acquisition of the small SEO company.

We felt that we were close enough to mention these in the press release and we wanted full disclosure so it allows us to take full advantage of the approximately 30 day window that we’re going to have to repurchase stock at the open market. At this time I’d like to turn this over to John Erickson to go through the numbers in more detail. After John finishes with his comments then we’ll open it up for questions. John would you like to comment?

Jonathan R. Erickson

I think the results of this quarter really illustrate the changes in progress we’ve made over the past year. Over the past year we have focused our efforts on becoming more efficient by lowering our operating expenses in many categories which has allowed us to obtain profitability at lower sales levels while at the same time investing in Crexendo Division.

The initiatives we implemented enabled us to reduce costs of revenue as a percentage of revenue by 6% from 35% of revenue for the quarter ended December 31, 2008 to 33% for the quarter ended December 31, 2009. Selling and marketing expenses were reduced by 29% from 65% in the prior year quarter to 46% in the current year quarter and we reduced general and administrative expenses by approximately 43% when compared to the prior year quarter.

These improvements resulted in pre-tax income of $866,000 for the quarter ended December 31, 2009 compared to a pre-tax loss of $5.68 million for the quarter ended December 31, 2008. Despite a 32% reduction in revenue to $18.3 million for the quarter ended December 31, 2009 from $26.9 million for the quarter ended December 31, 2008.

In order to provide more specific insight in to our revenue I would like to briefly review the different components of our revenue. Revenue from our StoresOnline division which current represents the majority of our revenue is generated primarily through three avenues: first, cash collected on the sale of StoresOnline software licenses at our events; second, the collection of principle on our extended payment term arrangements; and third, third party commissions and other revenues.

Products and other revenue for the fourth quarter of 2009 was $13.2 million. Of that approximately 39% or $5.2 million is related to the collection of principle on our extended payment term arrangements with the remaining $8 million coming from cash sales at our various StoresOnline events. Product and other revenue for the fourth quarter of 2008 was $20.1 million. Of that, approximately 39%, the same percentage of $7.8 million was related to the collection of principle on our extended payment term arrangements with the remaining $12.3 million coming from cash sales at our various StoresOnline events.

The 33% decrease in revenue related to the collection of principle on our extended payment term arrangements is primarily due to a decrease in the dollar volume of gross contracts written over the past year as we reduced the number of sales team from six to four in December 2008 as well as an increase in the amount of uncollectable accounts which we believe is due primarily to the poor general economic conditions which has had a negative impact on our StoresOnline customer base.

The 35% decrease in revenue from cash sales at our various StoresOnline events is primarily due to a 23% decrease in number of workshops held from 244 including 73 held internationally in the previous year quarter to 188 including 17 held internationally in the current year quarter. In addition to the decrease in the number of events, we also had a decrease in number of buying units per event, down from 87 in the prior year quarter to 74 in the current year quarter as well as a decrease in the percentage of buying units making a purchase down from 27% in the prior year quarter to 23% in the current year quarter.

The decrease in number of buying units and closed percentage per event is an anticipated and natural byproduct of our direct to workshop and other sales channel tests which had a goal of streamlining our marketing efforts to allow us to be profitable at lower levels of revenue. Commission from third parties and other revenues decreased 24% to $5.1 million in the current year quarter compared to $6.8 million in the prior year quarter primarily due to a decrease in the number of leads sent as a reduction in sales.

For the six month transition period ended December 31, 2009 we had pre-tax income of $1.97 million compared to pre-tax loss of $7.3 million for the comparable period last year. The improvement in pre-tax income was driven by a 28% decrease in selling and marketing expenses as percentage of sales from 64% in the prior year period to 46% in the current year period as well as a 33% reduction in general and administrative expenses in the current year period as compared to the prior year period.

Product and other revenue for the six months ended December 31, 2009 was $25.89 million of which approximately 41% or $10.65 million is related to principle collection on our extended payment term arrangements compared to product and other revenue of $39.48 million for the six months ended December 31, 2008 of which approximately 40% of $15.89 million is related to principle collection on our extended payment term arrangements.

During the six months ended December 31, 2009 we conducted 342 workshops including 21 internationally compared to 452 workshops including 81 internationally in the comparable period last year. Average number of buying units for the six months transition period was 76 compared to 87 in the comparable period last year. The percent of buying units making a purchase decreased to 23% compared to 29% in the prior year for primarily the same reasons mentioned in the three month period.

Commission and other revenue decreased 33% to $9.8 million compared to $14.6 million in the prior year period. Revenue from our Crexendo Business Solutions division was in line with our expectations at $127,000 for the six months ended December 31, 2009.

Now, for a review of our cash flows and balance sheet; cash provided by operating activities was $1.615 million for the fourth quarter of 2009 compared to cash used for operating activities of $5.57 million for the comparable period in 2008. Cash provided by operating activities was $2.57 million for the six month transition period compared to cash used for operating activities of $6,083,000 for the comparable period last year.

As of December 31, 2009 cash and cash equivalents were $21.54 million. Working capital was $17.6 million and working capital excluding deferred revenue was $33.4 million. Total current and long term net trade receivables were $20.4 million as of December 31, 2009 which included additional reserves taken for the six months period of $8.7 million as we continue to see deterioration in our accounts receivable portfolio.

I’ll now turn the time over to Steve for closing comments.

Steven G. Mihaylo

One of the things that I forgot to mention is the Crexendo revenue. The bulk of the $127,000 of revenue came in the fourth quarter for Crexendo and that’s important because as you know we’ve been investing heavily in that division. We’ve got a direct sales force, we’ve got a number of VARs that we’ve put on and we’ve been making our products ready for larger enterprises so there’s been a lot of moving parts both from an engineering standpoint, a logistics and fulfillment standpoint and from an outright sales standpoint.

So that’s important that we’re now starting to see revenue. We expect the revenue to increase as we go forward. I’m not going to make any predictions as to how much but overtime and especially by the end of this year we expect it to be a meaningful percentage of our overall revenue in the company.

We also changed, as I mentioned earlier, a June 30th to a December 31st year end and that’s significant too because a lot of preparation and work is necessary in order to do that. And, we’ve been working diligently on this small SEO acquisition and the relationship in India. At this time I’d like to open it up to questions from the participants. We’ll be happy to answer those in the order received. Go ahead.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Neal Goldman – Goldman Capital Management.

Neal Goldman – Goldman Capital Management

First of all, going back to the buyback, what is still authorized to buy back in terms of number of shares?

Jeffery G. Korn

I don’t have the exact number open. As you recall, we had two buybacks that the board had authorized. The first was fully subscribed and the second I think still has over $10 million. John, is that about accurate?

Jonathan R. Erickson

It is. Let me get the exact number for you.

Jeffery G. Korn

That was the buyback Steve was referring to. The prior authorized one that the company still has money available for?

Neal Goldman – Goldman Capital Management

So even if you got it up to $7.25, it’s still close to 1.4 million or so in terms of shares?

Jonathan R. Erickson

There is a little over $10 million remaining.

Neal Goldman – Goldman Capital Management

Basically even at $7.25 it’s close to 1.4 million shares that you could buy back if you paid up to that price as you mentioned.

Steven G. Mihaylo

Right. I was looking for John’s actual answer.

Neal Goldman – Goldman Capital Management

Number two, I guess this is for Jeff, are there any legal issues still currently outstanding in terms of the prior stuff with [inaudible] or Australia, etc.?

Jeffery G. Korn

Yes sir, there are two issues which is pending. One you mentioned which is Australia and most of the issues in Australia are resolved. There were a few issues raised by the ACCC. The first and primary one was violation of the former declarations which the company had admitted it had done some of. We had resolved with the ACCC that we would continue to operate under what were previously temporary injunctions which we have sold in Australia on on several occasions and we have resolved all potential financial prospects.

We made a payment to the ACCC which involved payment to them and payment to any people who may make a claim. There’s one issue open and that was whether the prior sales practice of the company which has not been used in years which was comparing the workshop price to say and MSRP which was what we called the 90 day offer was deceptive. The ACCC claimed it was not, we claimed it was simply comparing to an MSRP and not much different than say a car dealer who would do the same.

The court has taken that matter under advisement. There will be no further hearings or trial work so there should be no substantial attorney fees if we were to lose that and no additional fees which would be paid either to claimants or the ACCC even if we lost that which we certainly believe we’re on the right side of.

Then there’s the open issue in North Carolina which involved refunds of claims which we in fact believe to be fraudulent. We had a hearing where the trial court ruled we would have to pay them even if they were fraudulent and our redress would be to sue them. We had appealed that but when we started to look at the cost and the expense involved and the potentiality of winning, we continued to negotiate with the AG and we have come to a resolution where we will pay the face amount of the claims, retain our rights to take any action against the claims we believe are false, we will make a determination if that’s worthwhile or not, and the AG has waived any additional fees, costs or interest they may be entitled to.

We’re in the final aspect of negotiating that and getting it approved by the court but that should be done shortly. The numbers which were commented on by John includes the full accrual for that expense.

Neal Goldman – Goldman Capital Management

In the fourth quarter?

Jeffery G. Korn

Yes sir.

Neal Goldman – Goldman Capital Management

Steve, can you tell me what the current burn – what happened to your spending on Crexendo? What’s the burn until we get it to profitability?

Steven G. Mihaylo

Yes, it’s probably better for John Erickson to give you those numbers. I would have to give it to you in round figures, he can give it in actual numbers.

Jonathan R. Erickson

Neal, we spent about $1 million in the six months ended December 31, 2009. We had revenue of $127,000 so current we had a burn of about $400,000 per quarter.

Neal Goldman – Goldman Capital Management

Do you see that increasing or starting to decline? Obviously, a function of sales but in terms of the actual spend is that continuing to climb now?

Steven G. Mihaylo

That’s sort of double edged question Neal. We’ve got the acquisition of the small SEO firm. If that gets consummated this quarter it’s going to add revenue to the Crexendo division but it’s also going to add expenses. So the burn rate will go up but the revenue will go up with it. Will it be enough to make the division profitable? It will be close but we don’t know yet. We’re also going to be adding sales people. We’d like to open at least one more direct sales operation besides the acquisition in the next two to three months but that may be delayed depending on how the acquisition goes. We will definitely add at least two or three more sales people.

Neal Goldman – Goldman Capital Management

Excusing my lack of knowledge, what is the term for SEO? What does it stand for?

Steven G. Mihaylo

That’s search engine optimization. That allows companies that have websites to get a higher page rank and once they’re put in to it the products or service that they offer when that’s put in a search engine like Yahoo or Google or Bing, the results will hopefully get them higher in the pages and allow people to see them on the first page.

Neal Goldman – Goldman Capital Management

Wasn’t that part of the Crexendo offering though also?

Steven G. Mihaylo

Yes, yes it is but this just adds another layer of expertise to what we’re already doing.

Neal Goldman – Goldman Capital Management

How many VARs do we have now that are marketing?

Steven G. Mihaylo

It’s somewhere in the neighborhood of 20 VARs. The issue there, and this is one of the reasons why we’re particularly interested in the SEO company, the issue there is getting their attention and getting mind share. They all sell other products and although we’ve had some traction, it hasn’t been as good as we’d like. We’re adding additional types of VARs, they’ve been mostly telecom VARs. I’m going to let Clint Sanderson talk about that because we’re widening the net here to go after additional types of VARs and we’ve added some affiliate programs and other things. Clint, could you comment on them?

Clint Sanderson

We’ve first of all established as Steve said, we have actually right around 25 value added resellers right now. All of those are in the telecom space. They’re trained and are starting to get traction but as Steve said, it just takes time to get them ramped up and get them effective. So the strategy there is to also diversify that to where we’re going beyond telecom VARs and establishing relationships with businesses that are more apt to be able to move our products, the SEO products and web design web development products that we offer in the Crexendo division to their customer base.

That’s the first on the VAR front. Then, we’re also establishing a direct sales team and establishing an affiliate referral program for businesses. It’s a less formal relationship than a value added reseller but it allows us to leverage relationships with those businesses and that combined with our direct sales force we expect to see better results and more traction in the coming quarters.

Neal Goldman – Goldman Capital Management

One last question, I know you haven’t signed it year either but can you give us more information on the potential India operation?

Steven G. Mihaylo

The India operation is really exciting. We’ve been working on automation tools in Orem, our engineering group has to automate the process of implementing a website. In other words, when we get a new customer we want as much of that to be automated as possible. We’re also automating the ability to SEO the site. In other words search engine optimize the site and to do the link building on the site which is all part of the process.

We have people in India currently as we’re speaking training our partner there in building websites and implementing all of the various options and other services that we offer. The thing that is really exciting about this customer, I don’t want to tell you the business they’re in because if I did you’d be able to figure out who the company is and I think that would be something that has not been disclosed but the company has we believe somewhere in the neighborhood of 50,000 to 70,000 customers and they have a very large sales force of around 1,000 sales people that are adding customers on a daily basis.

All of which is it is their intent to migrate in to an electronic form so they can have greater access to the world wide web and also allow their customers to sell more of their products and services. So, it’s an exciting thing that will allow us to add customers to our web hosting. We expect to host all of the customers that are put on to our software platform. The software itself, as part of the joint venture, we would allow them to have ready access to software licenses so that the hosting revenue is the main thing we’re going after.

Hosting can range from as little as $29 a month up to several hundred a month. What this will allow for is as we get more and more hosting customers both in the telecom space and in the web hosting space is a more predictable revenue stream. Currently, our hosting is between $4 and $5 million a year of our overall revenue. I’d like to see the hosting with the telecom space and the web tools space be the lion’s share of our revenue over the course of the next several years so that our analysts and our shareholders can more predictably predict where we’re going. This is more of a model like a cell phone company or other companies that have recurring revenue.

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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