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Executives

Steve Mihaylo – CEO

Jon Erickson – CFO

Clint Sanderson – SVP, President - StoresOnline & Crexendo Division

Dave Kreitzburg – Chief Administrative Officer

Jeff Korn – Chief Legal Officer

Analysts

Neal Goldman – Goldman Capital Management

Mike Shonstrum [ph] – GDC Capital

Jeff Bash – Private Investor

Craig Samuels – Samuels Capital

iMERGENT, Inc. (IIG) Q3 2010 Earnings Conference Call November 3, 2010 4:30 PM ET

Operator

Good day everyone and welcome to the iMergent Incorporated third quarter calendar 2010 financial results conference. Today’s program is being recorded. At this time I’d like to turn the conference over to Mr. Steve Mihaylo, Chief Executive Officer. Please go ahead sir.

Steve Mihaylo

Thank you. Good afternoon everyone. I’m pleased to have you on this conference call for our third quarter 2010. Normally I would be going over the numbers at a very high level. I decided instead to talk a little bit about the past and what the future means for the company, and then finally about our tender offer, and then after that, I’ll turn it over to Jon Erickson to go over all the numbers both at a high level and in granularity and talk to you about what’s happening in the company, and then we’ll open it up for questions.

As you know, when I became CEO of the company back in November of 2008, the company was plagued with a lot of lawsuits from Attorney’s General around the country, and obviously there were changes that had to be made.

Another think that I noticed when I came into the company is that we only have one revenue stream and one go to market strategy. So the first thing that I started working on was the legal issues. I can tell you today that we’ve resolved all the legal issues and we’re confident about the future. That doesn’t mean that somebody might attempt to bring up additional legal issues, but I think we’re pretty protected with the new go to market strategy that we’ve adopted.

From there we went into looking at other revenue streams and one of the most obvious ones is getting higher retention on our web hosting customers. Right now we have a small number of customers that stay with us and host and our goal is to get the number up from currently a little bit above 10% to at least in the 50 to 60% range.

The next thing that we had to do is, we had to change the type of go to market strategy in our StoresOnline division, and in that area, we had to go from what we call a license model, in other words, selling our software to a SAS model, which is software as a service. We made that transition in the third quarter of this year. We started it earlier this year and we completed the transition in September of this year.

And last but not least, we had to get additional revenue streams and that’s where our Crexendo division came in. We had to look at the opportunity of going directly to businesses, in other words, a BtoB model here. Obviously it took some retooling of our software to make it more conducive for larger businesses and we had to hire and train a sales force.

We had to look at all of the market opportunities which we think are building websites, doing search engine optimization, link building, conversion rate optimization and training. I am happy to say that we’ve also made that transition.

We’ve had a few bumps in the road, both on the sales side and on the fulfillment side, and we think that we’ve dialed that in and we’ve got that under control. So now, it’s just a case of growing that business.

Another thing that I told you about last quarter, which we’re implementing this quarter, and we’re very excited about, is our quality initiative. This company will be run on the idea of continuous improvement from here on out, now that we’ve got a lot of the other issues either under control or mostly under control.

By striving for continuous improvement, it does two things. It drives your cost down and it drives decision making as well in the organization as possible. All of the management team is on the same page. We all have the same vision and we’re all very optimistic about the future going forward, and that’s one of the reasons why we filed with the SEC today, our tender offer for up to one million shares of our stock.

And you will notice that originally we had a price range of $4.25 to $4.75. We’ve bumped it up from the lower end to $4.35 to $4.75 as an expression of our faith in the company going forward.

At this point in time, I’d like to turn this over to Jon Erickson and he’ll go through all the numbers.

Jon Erickson

Thank you Steve. So I’ll start off by talking a little bit about revenue and then give you some insight and clarity into why the numbers are the way they are.

Revenue for the third quarter of 2010 was approximately $14.3 million which included Crexendo revenue of $315,000 compared to revenue of $17.4 million for the prior year quarter, including $44,000 in Crexendo revenue.

For this current quarter, we had a net loss of $79,000 or $0.01 per share which included $117,000 income tax benefit due to the reversal of FIN48 liability as a result of a favorable outcome to a New Zealand income tax audit we had been undergoing, compared to net income of $178,000 or $0.06 per diluted common share in the prior year quarter.

I will refer you to the recently filed press release and 10-Q for additional numbers. On the Crexendo side, we had a quarter over quarter decrease in revenue of approximately 15% from $367,000 to $315,000.

This decrease is primarily due to a few fulfillments related issues that we experienced during the quarter. As a result of these fulfillment related issues, we delayed hiring additional sales reps until we were confident we resolved the fulfillment related issues.

We believe we have resolved these issues and subsequently have continued hiring and training additional sales reps to meet the increased demand we are seeing for our Crexendo products and services. Since the beginning of September, we have hired five additional sales reps with plans to hire an additional five by the end of the year, and additional 20 to 30 during 2011.

We would expect the ramp in Crexendo sales to correspond with the ramp in sales reps once those sales reps have been trained.

On the StoresOnline side, as Steve mentioned, we transitioned nearly all of our sales teams to the SAS model during the month of September. More than half of our sales in the months of July and August were sold under the old software license model.

As a result of this transition to SAS, we adjusted the product mix at our workshops to include additional products and services, designed to better assist our customers in the design and promotion of their e-commerce websites.

This change in product mix requires deferring more revenue under the SAS model than we previously deferred under the license model. The additional deferred revenue items are typically three to six months in duration and resulted in a reduction of revenue of approximately $500,000 for the quarter.

As we continue to adjust our workshop offer to better meet the needs of our customers, it is possible we will add additional products and services that will require additional short term deferrals.

During the quarter, specifically in the month of September, we saw good progress in our sales metric at our premium workshop events; so much so that the percentage of workshop buyers we generated from our preview attendees was the highest it’s been in nearly 18 months.

The negative issues we had in the StoresOnline division in the third quarter were not sales related issues. In fact, based on what we are seeing, we are actually more optimistic about our sales metrics than we have been in some time.

The problem we had in the StoresOnline division in the third quarter was a marketing related issue and was the result of a lower than normal response rate to our direct mail advertising. What that means is that despite spending approximately the same amount of dollars on advertising this year as we did last year, less people responded to the initial offer.

Consequently we saw significantly fewer people at our preview events this year as compared to last year. As a result, despite positive sales metrics during the quarter, we had a reduction in revenue due simply to seeing fewer potential buyers.

With that said, we believe we identified the marketing issue we had during the quarter, and have taken steps to correct that issue. We believe the issues have been corrected, which has resulted in a rebound in or response rate in October, to slightly above normal levels without a significant impact on our sales metrics with the exception of a decrease in our cash as a total percentage of revenue, which we believe is primarily due to general economic factors.

Based upon the current information, we expect this trend in slightly above normal response rate to the correction of the issue we had in Q3, to continue through the rest of the fourth quarter.

From a cash flow perspective, during the three months ended September 30, 2010 we used $601,000 in cash from operations. This use of cash was primarily a result of an increase in inventory related to new initiatives we have at our workshops.

With that Steve, I’ll actually turn the call back over to you for a Q&A session.

Steve Mihaylo

Great. Thank you Jon. At this time I’d like to open this up to comments from both Clint Sanderson on the sales side and Dave Kreitzburg on the quality initiative. Would you like to go first Clint?

Clint Sanderson

Sure. I really don’t have much more to add than what Jon has explained. We’re optimistic about what we’re seeing in the sales initiatives that we have in both the Crexendo and StoresOnline divisions, and so we’re looking at this quarter and our current with optimism, and feel like the corrections that we’ve made from quarter three are the right corrections and the right directions for our business.

Steve Mihaylo

Great. Thank you Clint and Dave Kreitzburg, would you like to comment on our quality initiative and our continual improvement.

Dave Kreitzburg

Sure. Very excited about the quality initiative and process that we’re instituting company wide. Looking and expecting as I said continuous improvement in what we do each and every day, doing things to improve our customer focus improvement towards retention and improvement of financial results top line and bottom line, and expect to see results over time in the financials.

Steve Mihaylo

Great. Thank you Dave. At this time operator, we’ll open it up to questions from our listeners.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Neal Goldman with Goldman Capital Management.

Neal Goldman – Goldman Capital Management

Good afternoon guys.

Steve Mihaylo

Good afternoon Neal.

Neal Goldman – Goldman Capital Management

First, Steve there were two areas that you didn’t mention at all. One was the Indian joint venture and the other one was our phone plan for next year, so could you just discuss them briefly?

Steve Mihaylo

Yes. The Indian joint venture and the sales initiative have been a little slower than we would have anticipated, but it’s coming online. We’re now starting to do a lot of our fulfillment in India. We’re fulfilling approximately 120 to 150 websites per week in India, which is driving our costs down.

We’re also selling in India and we sold several hundred Indian accounts to date. Perhaps Clint, you might want to elaborate on the Indian operation and I’ll also get into the telecom operation before Clint answers that about India.

The telecomm initiative is coming right along. We’re in beta test currently. We have a couple hundred users on the system. We expect to release that sometime in the first quarter, probably around February would be my guess, and we’re very optimistic about that.

As you know, we see literally thousands of people every single week, entrepreneurs and small office, home office type businesses and we feel that there’s a great opportunity there as well as selling our telecomm services through our Crexendo division. Clint, you want to elaborate on the Indian situation.

Clint Sanderson

So Neal, in India the delay that we saw was in formalizing the joint venture agreement with India, and there was just legalities and setting up the structure there, and that took longer than we had anticipated.

As Steve mentioned, we are doing our fulfillment there, and that’s obviously a benefit to us. We have good quality fulfillment and a significantly lower cost. But marketing initiatives are underway right now and we’re working with our partner in India and we expect to have results that we – more solid results that we can talk about in our next call in regards to our proactive marketing efforts and sales efforts in India.

Neal Goldman – Goldman Capital Management

And that’s going to be on the same SAS model where it’s a hosting type of operation?

Clint Sanderson

That’s correct. Completely a SAS model there in India.

Steve Mihaylo

And you know, that’s important Neal because the SAS model allows us to concentrate on our services as opposed to selling software, and by concentrating on the services, we can open the software up to just about anyone. In our workshops, we currently give the software away and we charge for the services on a monthly basis.

We’ve also got a program where we’re giving the software away to college students. We’re in three universities currently. We expect to be in about six or seven next year, and what that allows us to do is two things. Number one, it allows us to expose our software to university students and we do it through a contest where we offer prize money. But it’s also an excellent, excellent recruiting tool because the students that do the best job are potential candidates or becoming involved with our Crexendo division, especially perhaps in our university division.

So we’re real excited about that and there’s a tremendous opportunity in the hosting area if we get more stickiness with our existing and future customers.

Neal Goldman – Goldman Capital Management

Let’s go back to the SAS model. So now, someone goes to the all-day seminar, gets the software and is trained and then he pays approximately how much for the training versus what he used to buy as a license?

Steve Mihaylo

I’m going to let Clint answer that one because he’s obviously closer to the StoresOnline division.

Clint Sanderson

So the change Neal, is what our customers can now do is, the software, the platform itself can be accessed at any time by our customers for right now, it’s $30.00 a month, and so they go to our full day workshop now, and the products that they’re purchasing there, instead of the license the way it used to be, they’ll purchase a suite of products that include the training.

And that training is search engine optimization training, search engine marketing etc., basically how to drive traffic to that site once you get it up and running. In addition to those services, we also offer a merchant account or payment processing services and then obviously ongoing support and training from there.

So essentially, they’re giving us the website. It’s just a SAS model, $30.00 a month. What they’re purchasing now, the purchase at the workshop now is training and services to promote that website (inaudible)

Neal Goldman – Goldman Capital Management

And what are (inaudible) somewhere between five and $5,500 on the sale of the license. What are we getting now on average in terms of the services side for the training etc.?

Clint Sanderson

The average sales price is not changed. So the packages that we offer at the workshops still range from $3,400 to basically $6,000 and the average price at our workshop has not changed with the SAS offer versus the license model.

Neal Goldman – Goldman Capital Management

OK. And then getting back to, now that you’ve fixed the problems in terms of getting the number of people to the workshops back to the normal, when you said that your conversion rate is higher, what does that mean at the workshop itself?

Clint Sanderson

What that means at the workshop itself is simply, well let me explain. If you go back into our metrics in our businesses, there has typically been an inverse correlation between the marketing response rates and then sales rates. Typically as marketing response rates go higher, sales rates in the past have gone down.

What we’re finding now is our marketing response rates have rebounded in October and we have not seen any kind of a decrease in our sales rates.

Neal Goldman – Goldman Capital Management

It sounds like you’re getting a better quality of customer in a sense from the response, no?

Clint Sanderson

At the workshops, somewhat yes. What we’re doing is, we’ve made changes in our business model at the preview to where the sales price at our free 90 minute preview, the offer there is a higher price. We’re offering it at $99.00 now versus $58.00 or even lower was what it was in the past.

So that in and of itself, is more of a qualifier, and then also, the presentation and the offer at our previews also better qualifies those individuals who are going to the workshops. We feel that’s why we’re seeing the rates, the conversion rates we are at our workshops right now.

Neal Goldman – Goldman Capital Management

And what are they getting for that $99.00 now?

Clint Sanderson

The $99.00, again because it’s the SAS model right now, they get 60 days of free access to the Store builder platform. So they have 60 days of access. They have the full day of training and then as a bonus, at the end of the workshop, there’s also a premium for completing the workshop.

Neal Goldman – Goldman Capital Management

OK. All right, so basically, assuming October trends continue we should turn nicely profitable in the fourth quarter.

Clint Sanderson

That’s what we would expect with the caveat being it depends on what our cash percentage, our cash percent in October dropped, but the sales metrics we believe will make up for that drop in cash percent.

Neal Goldman – Goldman Capital Management

OK. And in terms of the burn that you’re experiencing in Crexendo and the other which was fairly sizeable this quarter, what do expect to stay at that level for another six months or so?

Steve Mihaylo

Well, that’s dependent on how quickly we can ramp our sales force Neal. I would think it would stay at the level for sure during the quarter and probably part of the first quarter. But as we start ramping our sales force and get more experienced on the fulfillment side, I think that the numbers are going to come together and then go positive.

Neal Goldman – Goldman Capital Management

OK. And to what extent have the VAR’s been successful today in getting the Crexendo in front of the businesses that are capable of handling it and their response to it.

Steve Mihaylo

We’ve h ad the most success in our direct sales for on the Crexendo side. The VAR’s, we’re tempted to go to telecomm VAR’s to sell the web services, and frankly there were a lot of training issues and just the resistance to change.

We think we’ll have a better chance of penetrating that channel once we get the telecomm product available, and where they start with the telecomm product and then later on, we can go in and get the web services products.

I will say this though, from what we’ve learned in India and we’ve also looked at other international markets and we’ve made a few trips overseas, we feel that that’s another opportunity, especially with folks that are more in tune on the web services side. We also think that it’s a better opportunity for VAR’s on data VAR’s and VAR’s that are in that space, router network VAR’s, that sort of thing, computer VAR’s.

By going from software license model to a SAS model, that will now allow us to open up this product to additional sources where they can actually get the software for free, build a website, or convert a website, and then we will get the hosting from that.

And right now, our average hosting is around $25.00 or $30.00 a month. It will be a little higher than that probably in the $30.00 to $40.00 a month range with enterprise customers. When that happens, you can do the math. We’re seeing literally thousands of prospects per week, and if you start retaining or getting a higher stickiness out of your customer base, that will grow nicely along with our telecomm hosting and before you know it, we’re going to have more of a continuing revenue stream than we have in actual sales.

Now that may take a couple of years, but that’s the direction we’re going into; a more predictable revenue stream and a stickier customer.

Neal Goldman – Goldman Capital Management

My last question is what’s going to be your telecomm offering that you expect to introduce by February.

Steve Mihaylo

Well, we’re still playing with the numbers there. Probably each primary telephone, if you go on our website right now, you’ll see what some of the rates are. Its avail24.7.com is the website, and you’ll see what the offerings are.

We are still tweaking some of those numbers. That’s our beta offering, and frankly I think for each primary telephone number, you’ll get one phone. But most businesses don’t have a one to one ratio. In other words, they don’t have one line for every one telephone. It’s more like two or three to one, so they’ll have two or three phones for every one telephone line.

And that’s where I think the offer will change slightly. For each additional telephone without adding a line, it’ll be substantially less than the primary line. That’ll put us in most cases, at the cost of your local exchange carrier for the service, and you’ll be getting the phones virtually for just the cost of installation in essence.

And most business customers, I would think even small business customers, are going to be in the range of $400 to $500 a month, and larger customers could be in the range of thousands of dollars per month, and larger, just a company with 30 or 40 phones. So by being in the small to mid-end of the range through Crexendo, and the phone (inaudible) and entrepreneur range in StoresOnline, I’m pretty optimistic about where that will go, but it’s still early to predict with any certainty where it’s going to be.

We’re also working on a lot of mobile applications. It’s pretty obvious that mobile is the way things are going, so we’re going to have applications for all the hand held devices like the I-phone and the Droid and the Blackberry and that sort of thing. We’ll also have applications for the I-Pod and other tablet type applications as well as PC and Mac applications.

But that’s going to take a little bit longer from the standpoint of development. So we probably won’t hit our stride in the telecomm division until maybe the third or fourth quarter of next year.

Clint Sanderson

One correction, is the URL for that is availbcs.com.

Neal Goldman – Goldman Capital Management

Yes. Okay. Thank you.

Operator

We’ll hear next from Mike Shonstrum [ph] with GDC Capital.

Steve Mihaylo

Good afternoon Mike.

Mike Shonstrum [ph] – GDC Capital

Hey, how are you doing?

Steve Mihaylo

Excellent. Thank you.

Mike Shonstrum [ph] – GDC Capital

Good. You used to give out just a bunch of metrics for your workshops. You didn’t comment too much on them. I see in the release that your number of workshops dropped about 24%, which is figure is around 118 in the quarter. You didn’t mention the average.

Clint Sanderson

All those are included in the MDA&A in the 10-Q, all the traditional metrics that we’ve given.

Mike Shonstrum [ph] – GDC Capital

Are you focused on that or are you focused on driving the number of workshops up?

Steve Mihaylo

Well yes. You have to, both workshops and the number of attendees and the conversion rate. We had some very good indications of where we’re going in October. It improved slightly on the response rate. Normally it’s around .76, it slightly above that. Above 8 actually, .8, so that was nice.

The number of people that bought has increased. That’s good. However, the cash purchases went down slightly. I’m not going to say that’s bad. It’s just we don’t know. We don’t have enough experience at this point in time. We’ve only been totally SAS for one month, so there’s a lot of things we’ll find out as we go further.

We also had to change the offer slightly because we got a lower response rate in the third quarter. We feel that’s been corrected as well. But most of that is in the MDMA of the 10-Q and I think Jon Erickson also addressed some of those in his commentary.

Jon Erickson

And Steve, let me add a little bit to it. So Mike, the decrease in number of events is directly correlated with the decrease in response rate. Because we didn’t drive enough people to the preview, that also reduced the number of workshop events. As the response rate increases, naturally the number of workshop events will increase as well.

Mike Shonstrum [ph] – GDC Capital

Your corrected your direct mail promotion to those people and I’m just curious what the correction was. You weren’t sending them to the wrong address were you?

Clint Sanderson

No, it wasn’t that. The mail pieces were getting there. The people weren’t responding as well to the message that were on them as they had previously. We corrected that message and it increased the response rate, which resulted in October, adding several workshops that we didn’t originally plan on.

Steve Mihaylo

And one thing you have to remember Mike, just an order to change in our mail piece can change the response rate dramatically, and it’s a constant – it’s a dynamic market, so it’s a constant challenge to get the message correct in any given time period.

Mike Shonstrum [ph] – GDC Capital

Great, so I’m assuming that if I look at the third quarter, the 117, 118 workshops or so, you’re expecting that to grow in the fourth quarter and into 2011.

Steve Mihaylo

That’s correct. We’re also expecting the actual number of people to grow in the fourth quarter as well as in 2011. As Jon pointed out, we had approximately 10,000 fewer participants in our workshops during the third quarter. We expect that to reverse itself and hopefully grow beyond that.

Jon Erickson

So that was actually 10,000 fewer at the preview, which flows into the workshop.

Steve Mihaylo

I’m sorry.

Jon Erickson

(inaudible) spend just drew fewer people to the previews which appears to be corrected in October.

Mike Shonstrum [ph] – GDC Capital

Are you still running for teams, workshop teams?

Steve Mihaylo

Yes we are, but we’ve – I’ll let Clint talk about that. We’ve doubled up the number of workshops they’re conducting. So we’re actually getting better performance or better productivity out of our teams. Do you want to add anything to that Clint?

Clint Sanderson

Just to clarify. We haven’t – we’re not doing – the teams aren’t doing double the events. Each team is now doing more events than they did in quarter three on a per week basis, and so the two metrics there; we have four teams. We plan on having four teams going into 2011 as well, and just adding events as we need to, but also we’re increasing the number of buying units per event, per workshop as well.

Mike Shonstrum [ph] – GDC Capital

Great. Another question I had, a slightly different angle, the fulfillment that’s being done in India, is that a person to person work through with setting up websites directly with your customers here in the United States? Is that how that works?

Clint Sanderson

No, Mike. This is Clint. The way that that works, we have account managers here in the U.S. who interface with our customers, so the work is being done in India, but the actual communication and voice to voice communication with our customers is done through account managers here in the U.S.

Mike Shonstrum [ph] – GDC Capital

I got you. All right. Now it looks to me like you had a slight sequential decline in Crexendo sales Q2 to Q3.

Steve Mihaylo

We did. And Jon Erickson addressed that, but Clint, would you like to give it a little bit more color?

Clint Sanderson

The bottom line is, as we’re growing the Crexendo business, we did have some issues in fulfillment and scaling the business. So learning from our past as a business where we most definitely do not want to grow sales beyond our ability to fulfill and fulfill with a good quality product, we scaled – we basically fixed the fulfillment issues, and while we were fixing the fulfillment issues, we had to delay the recruitment of added sales teams.

So we’ve got the fulfillment issues fixed, and we’re in the process now of building those sales teams again.

Jon Erickson

What the fulfillment issues did was essentially just push some revenue from Q3 to Q4 because we were unable to complete the work in Q3.

Steve Mihaylo

Another thing you have to remember Mike is as you grow a sales force, your sales people aren’t all 100% productive. So it’s a process of hiring people, giving them 30, 60, 90 days to settle in. If they aren’t able to make it in the sales game, you have to replace them with other people. So you’re constantly hiring and back filling, and we had some of that as well.

Mike Shonstrum [ph] – GDC Capital

Got you. OK.

Steve Mihaylo

But on balance, we’re pretty optimistic about the direction that division is going in.

Mike Shonstrum [ph] – GDC Capital

What happens when in February when the telephone product is available? Does that make it a better sales presentation or are you going to be separating your internet services and search engine optimization as a separate (inaudible).

Steve Mihaylo

No, we haven’t dialed that in completely, but some of the things we can do, we could in the StoresOnline division, we could make that one of the options on the premium. There’s you know, X number of free months of telephone service along with the telephone instrument itself. That’s one way of driving revenue there.

We can reignite or reinitiate sales through our VAR channel, our telecomm VAR’s, and then last but not least, that’s an additional product that our Crexendo sales team will have available. We’re not sure yet whether it’s going to require a slightly more educated telecomm sales person, or whether we can use the sales person.

So it’s a dynamic market, and our company is becoming very dynamic because we have additional revenue streams and more opportunities here. So some of it we’re learning as we go.

Mike Shonstrum [ph] – GDC Capital

Got you. Well, sounds promising. Appreciate it.

Steve Mihaylo

Well I can tell you this. We’re excited and we hope that the future is as exciting as our optimism.

Mike Shonstrum [ph] – GDC Capital

Great. Thank you.

Operator

We’ll hear now from Jeff Bash – Private Investor.

Steve Mihaylo

Good afternoon Jeff. How are you?

Jeff Bash – Private Investor

Fine, thank you. Did I understand correctly that you might actually be using the telecomm VAR’s to sell the telecomm product only?

Steve Mihaylo

No, we think that will just be a stepping stone to get them to handle the rest of our products.

Jeff Bash – Private Investor

Oh, no, and I understand that, but they might be able to do what you did at Inter-Tel for example.

Steve Mihaylo

Oh, absolutely. No, absolutely. We still are in contact with most of the previous Inter-Tel dealers. The guy that was responsible for that channel works for us. He’s been selling the Crexendo web services while we’re waiting to launch the telecomm products, but he’s currently on our payroll, so there’s a lot of opportunities there, and we’ve got the people and the rolodex to go after those potential customers.

Jeff Bash – Private Investor

OK. Now further on Crexendo, you had $356,000 in sales in the June quarter and it’s $135,000 this quarter, but I had understood that this was a lease model, so with the low termination rate. So I’m a little surprised to see that the lease revenue from customers you already installed dropping to this extent.

Steve Mihaylo

Well it’s not lease revenue. It’s software service.

Jeff Bash – Private Investor

OK. But a lease model.

Steve Mihaylo

But a little like a lease model, but generally speaking, a lot of our revenue is one time, and we do allow them to pay for it over six, eight months. Give you an example of that. When you search engine optimize a site, or if you build a new site, you get one time revenue. It’s over a period of months.

Once you do that, if you start a link building campaign and a conversion rate optimization campaign, and some of the other ancillary services like training in there, that’s additional opportunity for monthly revenue.

But the revenue we’re seeing right now is generally one time revenue, the building the website and search engine optimizing the site. After that, the continuing revenue comes through hosting, link building, conversion rate optimization and training.

So we’re still at the front end of the process here, and as Jon Erickson and Clint pointed out, we had some issues with the sales teams themselves and some fulfillment issues on the back end that will push some of the revenue into the fourth quarter from the third quarter.

Plus, we’re seeing a higher sales rate now that we’ve got issues on the front end ironed out. We expect a nice bump in revenue in Crexendo going into the fourth quarter.

Jeff Bash – Private Investor

OK. Next, I think you said in your remarks that, or someone did, that approximately $500,000 of revenue was deferred because of the SAS model versus the old model, so is it fair to say that compared to the June quarter, this quarter would have been several hundred thousand dollars better if you had the same proportion of SAS if you did in the June quarter?

Steve Mihaylo

There were several issues there, but I’d like to get Jon to elaborate on the details.

Jon Erickson

Had we not switched to SAS, had it been a license, revenue would have been higher by $500,000 and pretax income would have been higher by $500,000.

Jeff Bash – Private Investor

OK, that’s what I thought. I have a couple questions on the tender offer. During this period, till December 2, are you forbidden from being in the market yourself personally and if there’s any excess shares tendered, does the tender offer comment on your ability to buy them?

Steve Mihaylo

Well, first of all, I think it would be – I’ll let Jeff Korn answer this, but I do want to get some comments. I think personally, it’s a bit of a built in conflict of interest for me to be competing with the company, but Jeff, why don’t you give the more granular answer.

Jeff Korn

Well the answer to your second question Jeff is, yes, Steve is forbidden from purchasing any shares which have not been tendered to the company. It’s not allowed. And in regard to the first, Steve is not forbidden from purchasing during the period he and I have spoken, and it’s my advice that he not purchase as it would at least have an appearance that he was competing with the company for shares, which is not a good appearance for him and the company.

Jeff Bash – Private Investor

Jeff, I didn’t understand your first answer. Let’s say two million shares are tendered at $4.75. You could buy the first million, but Steve couldn’t buy the second million, the balance?

Jeff Korn

That is correct, yes. We checked that with several SEC councils. We were told that could not be done.

Jeff Bash – Private Investor

OK, fine. And my last question Steve, is as I think you know, Oracle just bought a company called Art Technology, which is an e-commerce and software company that serves larger companies – it’s your target market, but is that a fair model for us to look at as a company that might be a goal down the road for the direction you’re taking iMergent with respect to small and medium size businesses or could you identify let’s say a comp that we could follow or look at.

Steve Mihaylo

I think to identify any comp would be probably because we’re offering all sorts of infrastructure capabilities to customers so that they don’t have to expend capital dollars in order to have these services.

At some point in time, we’ll probably even add a few. One that I’m looking at is data storage and retrieval. All of these things can be hosted in our data centers and it’s just a matter of adding more servers, which is a capital requirement, but we can spread that capital requirement for servers and storage devices over a larger population of customers, so it drives our cost down as compared to an individual business.

I don’t know specifically about the model that Cisco is going after, but I will say this. My business experience has always been with the small and mid-size businesses which are the ones that are the most difficult to sell into.

We were extremely successful at Inter-Tel. I see no reason why we can’t be successful here. And the fact that other companies like Cisco are getting into the space, which by the way, is probably one of the largest markets imaginable. It’s in the trillions of dollars I think worldwide, so there’s lots of room.

But this is a wonderful, wonderful validation of the space that we’re in and I welcome them because it will help educate larger companies and the trickledown effect will occur with iMergent and our Crexendo division.

Jeff Bash – Private Investor

OK. Thanks a lot Steve. It’s Oracle, either one are perfectly fine endorsement.

Steve Mihaylo

Absolutely. That’s the good housekeeping seal of approval.

Jeff Bash – Private Investor

Thank you.

Clint Sanderson

This is Clint. Just one more comment on that as well. Just to add color to why we moved to the SAS model in the StoresOnline site, is to answer your question Jeff, what we can now do is this move to the SAS model allows us to follow a similar model to what you just mentioned and go to more channels, where we were limited in the past with, you can’t sell a license to one set of customers and then have a SAS model on the other hand.

The two compete, and that ultimately ends up in a conflict. And so we’ve got our StoresOnline offer in line with what we want to do now in approaching other channels similar to what Oracle’s doing, so we can do that in the small, medium enterprise space.

Jeff Bash – Private Investor

Good. All right. Thank you Jeff.

Operator

We’ll hear next from Samuels Capital, Craig Samuels.

Steve Mihaylo

Good afternoon Craig. How are you?

Craig Samuels – Samuels Capital

Good, how are you Steve?

Steve Mihaylo

I’m doing great.

Craig Samuels – Samuels Capital

Actually, most of my questions have been answered, however revenue per Crexendo rep, what’s a reasonable expectation going forward?

Steve Mihaylo

You know we don’t have enough experience yet. Our benchmark quota is $500,000 per rep. I think that’s attainable. We haven’t had anyone attain it yet, but we’ve got a couple of our sales people that are close to that, and so we know it’s an attainable goal.

Craig Samuels – Samuels Capital

What the average sales price per Crexendo offering?

Steve Mihaylo

It really varies on the services that they need and the size of the business, but it’s substantially above what we’re getting in the StoresOnline. Clint do you want to comment on that at all?

Craig Samuels – Samuels Capital

You could say a range, the low end, the smallest sale you made and maybe at the high end, the largest sale you’ve made to date.

Clint Sanderson

The way you have to look at it, if we address a company for example that needs link building to build Google page rank, they’ll do a 12 month link building campaign that’s $2,000 a month. So you look at the aggregate, that’s a $24,000 sale.

So it really varies. When we do a web build for a company, the average price there is about $12,000 and that includes some basic search engine optimization. So the price range, we’re looking at $5,000 to about $30,000 is the range for a Crexendo customer, depending on their needs.

Craig Samuels – Samuels Capital

Are you competing with Register and Go Daddy and other domain registers that have comparable offerings?

Clint Sanderson

No, we don’t see them as competitors.

Craig Samuels – Samuels Capital

Who do you see as competitor?

Clint Sanderson

The competitors, if you look at the full suite of products we offer, one hand with the internet web promotional services that we offer for search engine optimization, link building, search marketing etc., competitors would basically be ad agencies out there that are offering internet promotional services. So that’s one side of the competitive coin.

The other side of the competitive coin is basically any web development company. We offer web development services on our platform, so we would see and have run into web developers, so we’re competing with web developers as prospects look at our platform versus the other options out there for a website.

Craig Samuels – Samuels Capital

Got it. I have kind of a macro question. Here you are offering various web services, search engine optimization and marketing via the internet, yet you’re recruiting attendees to your workshops through direct mail. Is there a viral strategy going forward for you guys?

Steve Mihaylo

Yes, we had to change from a license to a SAS model before we could start looking at the viral aspects of this. But our university program is a viral type of process and some of the things we’re doing internationally. Would you like to comment further Clint?

Clint Sanderson

Well, you hit it on the head. What we had to do first is we did have to move to the SAS model, and again, what was driving that is, we now have the opportunity to go out and compete in the space. And I’ll just use – there are companies right now where you can see television advertisements for get your website, free trial for 30 days and then it’s $10.00 a month or $20.00 a month, etc.

This move to a SAS model allows us now to enter that channel and in essence, we can board new customers into our platform at little to no cost to the customer as a lead generation tool and then offer our services on the back end.

But that’s something, now that we’ve made the SAS change in the StoresOnline division, that’s something that’s coming in the future to our business. That’s not something that’s going to happen immediately though.

Jon Erickson

Don’t expect that Craig until the end of Q1, Q2 of next year before we’ll be ready to actually virally take this software and use that for our lead gen.

Steve Mihaylo

Exactly. But what it has done Craig, is it’s opened up a vast number of new opportunities for us and we’re pretty excited about that. But before we could do it, we had to transition our teams, and there was a lot of change necessary to do that.

Over time, we’ll even start looking at the demographics of some of the folks that we’re selling to in both of our channels, the Crexendo channel as well as the StoresOnline channel.

Craig Samuels – Samuels Capital

Right. OK. And then my last question is, I truly appreciate your optimism and your prepared remarks. However, historically I’ve learned to just kind of look at the numbers and ...

Steve Mihaylo

Well obviously the numbers are extremely important. I think that last quarter was the last of the old iMergent, and this fourth quarter coming up is the first quarter of the new iMergent.

Craig Samuels – Samuels Capital

OK.

Steve Mihaylo

And we had a lot of issues to deal with over the past few years, and I think we’ve got a handle on most of them.

Craig Samuels – Samuels Capital

Right. So I think if you just look at the numbers, you’ve had what, almost two plus years of revenue decline, nearly sequentially.

Steve Mihaylo

Yes, and that’s from ...

Craig Samuels – Samuels Capital

Can you go out on a limb at this point and comfortably say that Q3 2010 may mark the low point for you?

Steve Mihaylo

Oh absolutely. I’ll go out on a limb and I’ll state that.

Craig Samuels – Samuels Capital

OK. And then going forward, your comfort is derived from what, one the new model which I don’t fully understand but we can talk offline, but two is the products forthcoming that haven’t been announced yet?

Steve Mihaylo

That’s part of it. Our going to the SAS model is part of it. The new products are part of it. The fact that we’re in the SAS model opens up additional channels. That’s part of it. There’s a lot of moving parts here. It’s a dynamic market.

But all of these things are pointing – all the indicators are pointing up. What I can’t tell you is how far up they’re pointing, but I feel confident that we’ll be able to exceed the sales of the third quarter in the fourth quarter.

And since we’re right at break even, and we’re absorbing, Jon can tell you better, but we’re absorbing at least $1 million of expense per quarter to launch all these new initiatives. What’s the actual number Jon?

Jon Erickson

It’s about $450,000 per division in Q3, so ...

Steve Mihaylo

OK. So it’s $900,000. That was a little high, but $900,000 we’re absorbing, while we’re making all of these transitional things and bringing on new products and revenues streams.

Craig Samuels – Samuels Capital

I understand, but if you – I appreciate and trust that Q4 is up. The bigger question is do you then start to dip again into Q1, Q2 next year or is there a bigger trend going on which is ...

Steve Mihaylo

Well we do have some seasonality in our quarters. You know the first quarter is not as good as the fourth quarter generally. The summer quarter is usually kind of soft. The fourth quarter is our strongest quarter, so we do have a little bit of seasonality, but that will start to smooth out as we start to get more Crexendo sales and we get more recurring revenue.

Jon Erickson

Craig, this is Jon. I think a lot of the optimism comes because of what we saw towards the end of Q3, specifically September, realizing that really the thing that we had the problem with in Q3 was not sales related. It was response to our marketing related, and we believe that has been fixed. We’ve seen it fixed in October.

Steve Mihaylo

Just one more comment about old fashioned marketing being direct mail. We happen to agree with that, but once we start getting a more viral characteristic to the way our products enter the market, that will start driving our marketing costs down and then we can spend marketing dollars on more high tech or web based marketing, but that’s still probably more in the Crexendo division than in it is in the StoresOnline division.

Craig Samuels – Samuels Capital

Got it. Thanks a lot. I look forward to watching your progress.

Steve Mihaylo

Thank you.

Operator

We’ll take a follow up from Mike Shonstrum [ph].

Steve Mihaylo

Yes, Mike.

Mike Shonstrum [ph] – GDC Capital

Just a quick one. On the school program, the colleges, is that a profit, or is that a revenue driven business that you’ve created there?

Steve Mihaylo

Well eventually I think it can be. The three schools that we’re in are Brigham Young University, University of Utah and California State University at Fullerton. We have in the hundreds the number of students that are participating this semester.

It depends on websites we wind up hosting as a result of this. I would look at it at this point most a marketing effort to get our software more of a viral nature. You want to comment on that Clint?

Clint Sanderson

The objective on – we call it the Crexendo Up program, and you can look at it up.crexendo.com. We have the two universities right now, Cal State Fullerton and the University of Utah that are participating and the short term goal is two objectives. One is actually public relations and building credibility in the Crexendo brand and two is to use it as a recruiting tool in the Crexendo business.

Our very best sales people, well I won’t say our very best, but as a recruiting tool, it is the best in recruiting great sales people fresh out of college, and it’s a perfect litmus test to our platform.

Long term, we see it as Steve said, growing our platform, software platform virally through university students. We feel they are the brightest minds in the perfect demographic for using our platform and for entrepreneurship. And so that’s the long term goal. Short term, not a revenue generator, long term we see it being a revenue generator for us.

Mike Shonstrum [ph] – GDC Capital

OK, great. Thanks.

Steve Mihaylo

Thank you Mike.

Operator

And that does conclude today’s questions. I’ll turn the conference back to you for closing remarks.

Steve Mihaylo

OK. Thank you operator and thank you all of you for being on this conference call with us today. As you can tell from all of the folks that made comments, Jon Erickson, Clint Sanderson and Dave Kreitzburg and myself, we’re all very optimistic about the future, but I would like to temper that with the fact that it is a dynamic marketplace and there’s always unforeseen things that are out there.

But right now, most of the indicators are up. Our optimism is definitely up and we do expect to exceed revenue and profitability in the fourth quarter over the third quarter. By how much, I really can’t comment at this time, but we’re optimistic that it will definitely be higher, both revenue and profitability in the fourth quarter.

We look forward to sharing the fourth quarter numbers with you sometime in February. In the meantime, I’d like to wish all of you happy holidays with Thanksgiving right around the corner, Christmas and Hanukkah, and of course the New Year. Thank you very much. Good day.

Operator

That concludes today’s iMergent conference. Thank you for joining us.

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