IMergent Inc. Q1 2010 Earnings Call Transcript

May. 4.10 | About: CREXENDO INC (CXDO)

IMergent Inc. (IIG) Q1 2010 Earnings Call May 4, 2010 4:30 PM ET

Executives

Steve Mihaylo - CEO and Director

Jeff Korn - CLO

Jon Erickson - CFO

Clint Sanderson - Senior VP

David Krietzberg - CAO

Analysts

Robin Lochner - Deutsche Bank

Presentation

Operator

Welcome to the iMergent, Incorporated first quarter calendar 2010 financial results conference call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Steve Mihaylo. Please go ahead sir.

Steve Mihaylo

Thank you Nancy and good afternoon everyone. Before we get started I’d like to introduce you to who is on the conference call with us here and also our General Counsel Jeff Korn will be reading a forward statement. To start with we have Clint Sanderson, our President in both Crexendo division and the StoresOnline division. We have David Krietzberg, our Chief Administrative Officer and Executive VP. We have Jon Erickson, our Chief Financial Officer. And we have Jeff Jarvie, our Controller, as well as Jeff Korn, our General Counsel. And Jeff would you read the forward looking statement please before I give a brief overview?

Jeff Korn

Certainly, thank you, Steve. I want to take this opportunity to remind listeners that this call will contain forward-looking statements within 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 conference call other than statements of historical fact are forward-looking statements. Forward-looking statements include but are not limited to words likes believe, expect, anticipate, estimate, will and other similar expectation identifying forward-looking statements. Investors should be aware that any forward-looking statements are based upon assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today.

These risk factors are explained in detail in the company’s filings with the Securities and Exchange Commission including the Form 10-K for the fiscal year ended December 31, 2009 and the Form 10-Q for the period ended March 30, 2010. iMergent does not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future events or otherwise. Steve?

Steve Mihaylo

Thank you, Jeff. Before I get started here, I want to remind everyone that first of all I’m going to be giving an overview of the highlights then I’ll have Jon Erickson give a more granular overview. Then we are going to open it up to Q&A after that but I’d also like to remind everyone that we filed our 10-Q at the same time we filed our press release and I encourage all of you to go the 10-Q for any additional granularity that you may be looking for. I’m going to start with our revenue first and then I’ll talk about net income and then I’m going to turn it over to Jon Erickson.

Revenue for the first quarter of 2010 decreased 18% to $17,094,000 compared to $20,931,000 for the comparable period in 2009. The lower revenue was a result of a 5% reduction in the number of workshops conducted during the first quarter of 2010 as compared to the comparable quarter in 2009. A decrease in the percentage of attendees purchasing products to 26% in the first quarter of 2010 compared to 28% in the comparable quarter of 2009, a 21% decrease in the number preview buyers attending our workshops compared to the prior year quarter.

I might just give you a little bit of color here. We actually have more people in the previous but fewer people in the workshops. As well as a 39% reduction in principal cash collected on receivables portfolio and that’s the result of having lower sales. The remaining decrease in revenue primarily related to commissions derived from third parties which decreased 22% $2,581,000 for the three months ended March 31 2010 compared to $3,330,000 for the three months ended March 31 2009.

The decrease was primarily attributable to the decrease in commissions from third parties as a result of fewer leads sent to the third parties due to a decrease in the company’s product and service sales. The decrease in revenue from workshops was offset by an increase of $1 million as a result of the change in the Avail 24/7 contract and here again Jon Erickson will go into that.

Revenue from our Crexendo Business Solutions division was $2,42,000 compared to zero in the comparable period last year. Total operating expenses decrease 9% to $17,975,000 for the first quarter of 2010 compared to $19,704,000 for the comparable quarter in 2009 primarily as a result of conducting fewer workshop events. This netted the company for the first quarter of 2010 a $123,000 or $0.01 per diluted common share compared to $1,552,000 or $0.14 per common share on the comparable quarter last year. Income before tax provisions for the first quarter of 2010 was $248,000 compared to $2,778,000 in the comparable quarter last year.

The income tax provision for the first quarter of 2010 was $125,000 compared to an income tax provision of $1,226,000 in the prior quarter. The higher the normal income tax provision in the current quarter is primarily due to the expiration of the Federal Research and Development Tax Credit. At this time I’m going to turn this over to Jon Erickson who will go through the granularity at which time we’ll open it up for questions after he is finished.

Jon Erickson

All right, thank you Steve. So in order to give a better understanding of this decreasing revenue and our revenue in general, I want to put into context our different components of revenue. In the stores online division we have three main components of revenue. First, cash collected on the sales of stores online software licenses at the events. Second, the collection of principle on our receivables balance and third, third party commissions and other non-event revenues.

Cash collected in the sales stores online software licenses and other products at our events decreased approximately $700,000 year-over-year. This is inclusive of approximately $1.3 million in legal refunds in the prior year which reduced revenue in the prior year. This decrease is primarily attributable as we’ve talked about to the decrease in number of workshop attendees as a result of fewer preview buyers at our events in the current quarter as well as a lower cost rate. The decrease in cash collected on the sales at StoresOnline software licenses year-over-year was offset by an increase in revenue related to the change in the Avail 24/7 contract terms which resulted in a one-time recognition of revenue of a $1 million per total net increase in event revenue over the prior year to $300,000.

Collection of principle on our receivables balance decrease approximately $3.1 million from $7.9 million last year to $4.8 million this year. This decrease in cash collected under our receivables is primarily due to a decrease in the balance. The accounts receivable balanced will increase or decrease depending on the number of sales teams the company has had in the prior two years, the number of customers financing and fluctuation sales rate.

In the past two years, we have reduced a number of our sales teams and we have seen a decline in our sales rates, which has resulted in lower accounts receivable balances. Third-party commissions and other non-event revenue decrease by $1.3 million. As you see the top line decreases we have, you’ll also see the commission decreased as fewer leads are sent to these independent third parties. On the expense side, we continue to control costs with the increase in cost as a percentage of revenue primarily due to an increase in the percentage of revenue related to collections of our receivables which have relatively little cost, approximately 10% cost to the collection receivables revenue.

For the three months ended March 31, 2010, revenue related to principle collected on receivables was 28% of our total revenue, compared to 38% of our total revenue for the three months at March 31, 2009. Now, I will review our cash flows and balance sheet. From a cash flow perspective, we used $493,000 in cash from operations for the three months in the March 31, 2010 compared to a use of $76,000 in the prior year.

As of March 31, 2010 cash and cash equivalents were $20.2 million, working capital was $16.6 million and working capital excluding deferred revenue was $30.1 million. Total current long term net trade receivables were $20 million at March 31 2010. As we discussed in the last earnings call, we’ve experienced deterioration of accounts receivable over the past year. This quarter we continue to see deterioration of accounts receivables but it’s [deteriorated] at a slower velocity. We haven’t quite seen the bottom yet but we are nearing it we believe.

And with that I will turn the time back over to you Steve.

Steve Mihaylo

Thank you Jon. At this time Nancy we’d like to open it up for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions). And we will go first to Robin Lochner.

Robin Lochner - Deutsche Bank

It looks like the Crexendo revenue approximately doubled I think from [$127 to $242] , what sort of growth trajectory would be appropriate for that going forward and looking forward into 2Q what needs to happen for income from operations to be positive in the second quarter.

Steve Mihaylo

Well, first of all as you know we don’t give guidance on any of these issues but with respect to revenue in Crexendo at this point we are still in the process of developing our direct sales force, we are still in the process of developing the VAR channel which has been slow to develop I might add. Most of the sales in this quarter came from our CastleWave acquisition as well as direct sales through the direct sales force in Crexendo. And what was the second half of your question? Oh, income from operations. Let me let Jon Erickson handle that.

Jon Erickson

So, Robin from an income from operations perspective, as you know we have significant interest income which is in the other income category, that interest income primarily comes from interest received on our receivables balance which kind of flows into StoresOnline revenue. So when we look at it internally we consider interest received on receivables balance up in operations which would indicate income from operations in this quarter.

From a specific perspective, in order to gain income from operations simply increasing the sales rates that we had at the workshops increasing the number of attendees at StoresOnline and increasing our Crexendo revenue and from a costing perspective we’ve reduced our cost. We are quite efficient in the way we are costing right now, it’s strictly a function of revenue.

Robin Lochner - Deutsche Bank

And then the company repurchased about 10,000 shares, is it fair to assume that there will be additional purchases by the company in the current quarter and that the target threshold is still the $7.25 area?

Steve Mihaylo

Well, first of all it was a little more than 10,000 shares. I think it was about 13,000 or 13,500 shares.

Jon Erickson

Subsequent to the quarter end we’ve purchased an additional 13,000 shares in this quarter already. So a total of 23,000 have been repurchased?

Steve Mihaylo

Yeah, as far as the price, the target prices dependent on market of course, we felt this stock was under priced or undervalued to $7.25 and with today’s close, I don’t know exactly where it closed but I think it was somewhere around that $6.10. We feel it’s still undervalued so there will be continued repurchasing of the stock.

Robin Lochner - Deutsche Bank

On the last conference call you had talked about the transaction involving India. Is there any update on that?

Steve Mihaylo

Yes, there is an update on that and I’m going to turn that over to Clint Sanderson, who is managing that relationship. Clint would you like to address that?

Clint Sanderson

Yeah, thanks, Steve. The relationship in India, the two main benefit of that are number one, the ability to have a lot of our fulfillment processes that we are currently doing for our StoresOnline customers being fulfilled with that group in India at a lower cost and that is underway and we have a lot of steps right now being done in India. That’s the first benefit of that relationship. The second benefit of that relationship is we have an opportunity to go to that business’ customer base. They have a base of small businesses in India who need our services, need our platform. So we’re white labeling our branding, our platform and we are going to be able to offer our platform through them in India and that process is underway and expect to start seeing results from that here in the coming quarter.

Operator

(Operators Instructions). And we’ll take our next question from Jeff Bash.

Unidentified Analyst

Hi Steve. Two questions, on the Avail 24/7 change, am I correct that that was in effect a differed income item previously because you had the liability of providing a $35 value service at any point in the future and since you changed that to the company which terminated the [331] or whatever?

Jon Erickson

That’s correct Jeff. What we had before in the contract was that they could set up the Avail service at any point in the future. We had several customers who had not set it up at that point in time. We send out letters. We switched it to the: you have to set it up by March 31. If you don’t set it up by March 31, you’ll be subject to a $34.95 activation fee. For all those customers who had not set it up by March 31, we got to recognize that $34.95 activation fee and that’s where $1 million comes from.

Unidentified Analyst

So in effect there was a revenue recognition item previously which has since been eliminated.

Jon Erickson

That’s correct. I mean we’ve still deferred the $34.95 activation fee today. It’s done over a 60 day period though instead of until they activate.

Unidentified Analyst

Yes, I understand. But before is forever (inaudible).

Steve Mihaylo

That’s correct.

Unidentified Analyst

Now I noticed that the buy rate in the first quarter of 2010 is 26%. You said compared to 28% in the comparable quarter of 2009 but if my memory serves me right it’s a considerable improvement over the buy rate in the immediately preceding quarter. Is that right?

Jon Erickson

That’s correct. Its quarter-over-quarters in improvement.

Unidentified Analyst

A nice improvement. Do you see that trend continuing or are you stable at the current point do you think.

Jon Erickson

So far in April we would expect it to continue. We are one month into the quarter, so.

Unidentified Analyst

Because if my memory serves me right, your bottom line is heavily leveraged to that buy rate.

Steve Mihaylo

Absolutely

Unidentified Analyst

And the fact that it has improved as nicely as it has from the preceding quarter, is very helpful.

Steve Mihaylo

Yes.

Unidentified Analyst

In terms of India I think you may have said before the number of small businesses that this relationship has available to it with your new initiative. Could you quote that or perhaps my memory is wrong.

Steve Mihaylo

I don’t believe we did but it’s a significant amount, it’s in the thousands.

Unidentified Analyst

So it's significant relative to the current size of iMergent?

Steve Mihaylo

Well, for one thing the market there is very price sensitive because the size of these businesses is very small. Pricing and competition doesn’t allow us to get the same kind of sales amount that we would from a comfortable customer here and finally and most importantly we are too early in process to really be able to gauge exactly how much that’s going to relate to. But there are other opportunities down the road that might be available to us as a result of this relationship.

Unidentified Analyst

Now, with respect to telecom, I think you indicated that you will be starting limited distribution in this quarter with a full rollout at the beginning of next year. Could you tell me a little bit more detail about that or may be a little color?

Steve Mihaylo

I am going to turn this over to David Krietzberg. He’s been personally responsible for managing that process.

Dave Krietzberg

Yes we are announcing on a limited basis of product in the second half of this year and then based on regulatory approvals we expect to have more of a national launch towards the beginning of next year.

Unidentified Analyst

Now in terms of distribution, Steve has discussed having some challenges with VARs with respect to I presume the StoresOnline product. Do you think there will be the same challenges with this or it’s a product that the VARs are more familiar with and they'll be less challenges? I mean how would you characterize the difference between the reception by VARs to these two different product lines?

Steve Mihaylo

I’m going to give you my thoughts on that Jeff and then Dave will give you additional comments. First of all we’ve got a lot of moving parts to the telecom hosting business. The primary market as we get full functionality of the product will be small, everything from a SOHO to small, to medium-sized businesses. Probably no more than 50 or 60 telephone instruments in the business. So that’s still a fairly small business. But we have to get more business functionality to the product before it’ll be good for larger businesses that are brick and mortar businesses. The current StoresOnline customers are ideal for the product as it sits today.

In January or in the first quarter of next year when we roll it out, we’ll have more functionality that’s geared more towards the small business, the 10, 20, 30, 40 instrument business. There will be multiple channels that we'll be selling this through. We'll sell it through our Crexendo division, we’ll sell it through our StoresOnline division, and we’ll also have a website where people can go onto the website and order various configurations of the product without having anybody involved in the sales process. Much the same way you would go in and order cell phone service and all the different features and functions you can get on your cell phone. With that I am going to turn it over to David if he wants to add anything to it.

Dave Krietzberg

No Steve you did a good job.

Steve Mihaylo

But the main thing is we’ve got multiple channels here to sell it. We would hope at some point in time that it’s more of an automated service that we drive customers or potential customers to our website through various methods including some form of advertising.

Unidentified Analyst

Okay and one last question I wouldn’t call the buy back in the last quarter or today has been especially aggressive. I would think that if you thought the company had a potential to be let’s say a double digit stock in a year or two you would be buying more along the lines of what the SEC limitation is than you are, is there any comment you can add to that?

Steve Mihaylo

Well, the main comment and Jon Erickson is going to add a little bit to it since he has been managing that process. The main thing is the low volume in our stock really is gauge, it’s a throttle if you will or a governor as to how much we combine. Jon why don’t you add your thoughts.

Jon Erickson

I mean we have a [25/1] plan in place right now. We are not going to give you level at which we are repurchasing. But it’s in place right now and while the repurchase is based upon the SEC rules and what we are allowed to repurchase.

Unidentified Analyst

Okay. Not to be argumentative, but I'm quite familiar with the SEC rules and I see that the average trailing three month volume is 17,781 off my screen right now, which the 25% limit would indicate you could buy a little less than 4,500 shares a day. So I guess my only observation is that you certainly could be buying 50,000 shares a month under the SEC rules and I'm sort of surprised you didn't buy a little more than you did.

Steve Mihaylo

Well, we could have if we want to keep hitting the asked price but we are usually at the bid price.

Jon Erickson

And we have a simplified one in place that’s active.

Operator

(Operators Instructions). And it appears we have no further questions at this time.

Steve Mihaylo

All right, thank you Nancy and thank you for all of you who have joined our conference today. We look forward to speaking with you after our second quarter results.

Operator

That concludes today’s presentation. Thank you for your participation.

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