Crexendo's CEO Discusses Q3 2011 Results - Earnings Call Transcript

Nov. 8.11 | About: CREXENDO INC (CXDO)

Crexendo, Inc. (EXE) Q3 2011 Earnings Call November 7, 2011 4:30 PM ET

Executives

Steven G. Mihaylo – Chairman and Chief Executive Officer

Clint Sanderson – President and Chief Operating Officer

David Krietzberg – Chief Administrative Officer

Jonathan R. Erickson – Chief Financial Officer

Jeffrey Korn – Chief Legal Officer

Analysts

Robin Lochner – Deutsche Bank

James J. Dowling – Jefferies Capital Partners LLC

Neal Goldman – Goldman Capital Management

Operator

Good day, everyone. Welcome to the Crexendo, Incorporated Third Quarter 2011 Earnings Call. Today’s call is being recorded. At this time, I would like to turn things over to Mr. Steve Mihaylo, Chief Executive Officer. Please go ahead, sir.

Steven G. Mihaylo

Thank you, and good afternoon everyone. This is the Crexendo third quarter 2011 conference call and earnings report. With me today, I’ve got Clint Sanderson, our Chief Operating Officer; Dave Krietzberg, our Chief Administrative Officer; Jon Erickson, our Chief Financial Officer; and Jeff Korn, our Senior Vice President of Legal and General Counsel.

Before I get started with a few remarks, I’d like Jeff to go ahead and read our Safe Harbor statement. And that, after he reads that, I’m going to have a few remarks, and then I’ll turn it over to Jon Erickson for more granularity.

Can you go ahead, Jeff?

Jeffrey Korn

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 facts are forward-looking statements.

Forward-looking statements include, but are not limited to words like, belief, expect, anticipate, estimate, will, and other similar statements of expectations identifying forward-looking statements. Investors should be aware that any forward-looking statements are based on assumptions, and are subject to risks and uncertainties that could cause actual results to differ materially from those discussed here today.

The 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, 2010 and the Form 10-Qs for the periods ending March 31, 2011, June 30 2011 and September 30, 2011. Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

I’d now like to turn the call back to Steve. Steve?

Steven G. Mihaylo

Thank you, Jeff. I’m just going to have a few remarks and I’ll turn this over to Jon Erickson. Net income for the third quarter of 2011 was $4,507,000 or $0.42 per diluted common share, compared to a net loss of $79,000 or $0.01 per diluted common share in the prior year quarter.

Income before income tax provisions for the third quarter of 2011 was $4,546,000, which included $209,000 in restructuring related charges related to office space impairments and other one-time charges associated with the announced restructuring of our StoresOnline division, compared to a loss of $455,000 in the prior year quarter.

Cash used in operating activities for the third quarter of 2011 was $320,000, compared to $601,000 for the prior year quarter. As of September 30, 2011, cash and cash equivalents was $10,096,000, which included $1,088,000 of restricted cash, working capital was $8,376,000, and working capital excluding deferred revenue was $19,809,000. Total current and long-term receivables were $19,348,000 as of September 30, 2011 and this is net of reserves.

At this time, I’m going to turn this over to John Erickson to give me the granularity and then we will open it up for questions. Jon?

Jonathan R. Erickson

Thank you, Steve. So I wanted to keep with theme of last earnings call and provide clarity on what you can expect from our revenue and operations in future quarters based upon this quarter.

This quarter was the first transition quarter without seminar sales with the exception of two days of sales in July. The quarter for the most part went as we expected. From a revenue perspective, we had approximately $10.25 million in revenue for Q3, which is broken down as follows. Crexendo Web Services revenue was $648,000, which grew at a quarter-over-quarter rate of 18% from $550,000 and a year-over-year rate of 105% from $315,000 last year. Our future rate of growth in this segment will be dependent upon our ability to hire sufficient qualified sales reps and increase the productivity of our current sales reps.

Today, we have 28 sales reps and we continue to hire an additional three to four reps per month. Crexendo Network Services revenue was $52,000, which grew at a quarter-over-quarter rate of 188% from $18,000 in the second quarter of this year. We have no revenue from Crexendo Web Services in the prior year.

As of Crexendo Web Services, this segment is primarily a direct sales segment, and the future growth will be depended upon our ability to hire sufficient number of qualified sales reps and get them up to quota as quickly as possible. We anticipate that while our direct reps will have the ability to sell both web services and network services, the sales reps will have a focus on other network services or web services.

We started hiring our first telecom specific reps in October, and expect to grow from there. StoresOnline revenue was $9,542,000, which as expected decreased to the quarter-over-quarter rate of 44% from $16,928,000 in the second quarter of this year, and a year-over-year rate of 32% from $13,969,000 in the prior year quarter. StoresOnline revenue is broken down as follows, seminar event related revenue was $3,626,000, the majority of this revenue related to the roll-off of deferred revenue with the remainder related to the few events we held in July.

This revenue will not continue in the future, however, we still have approximately $530,000 in deferred revenue, which we recognized over the next 12 months, a majority of which will be recognized next quarter, in the fourth quarter of this year.

Cash collected on our accounts receivable balance was $4,190,000, a 4% decrease over Q2, which was $4,383,000, it is also a 4% decrease from last year, which was $4,346,000. This revenue stream will continue and at a descending pace over the next two to three years. Based upon our current collection rates, we expect to collect approximately $19.3 million in revenue from our receivables over the next two to three years. With approximately $11.5 million expected to come in the next 12 months, the remaining $7.8 million is expected to be collected in years two and three at a decreasing rate.

Hosting revenue was $940,000, a decrease of 6% from the second quarter, which was $1,005,000. As we mentioned in the last earnings call, we increased our customer service average programs, which we believe has been beneficial as we saw reduce in our churn rates during this quarter and a reduction from what we expected as well.

Commissions from third-parties was $786,000 in Q3, a 60% decrease from Q2, which was $1,978,000 and a decrease of 65% from the prior year, which was $2,228,000. Commissions from third-parties, which has historically been one of the largest contributors to our profitability in this segment, our channel will not be significant in the future. We expect that we will receive a little bit of money in Q2 and Q1 of next year, but not a significant amount.

Interest on receivables was $1,241,000 in Q3 compared to $1,452,000 in the prior year. We will continue to collect interest on receivables at a decreasing rate as our accounts receivable portfolio from StoresOnline winds down.

Expenses; from an expense perspective, we had $6,946,000 in total operating expenses, a quarter-over-quarter decrease of 68% from $21,955,000 in Q2 of this year, and a 57% decrease from the prior year at $16,191,000. Our expenses are broken down as follows. Crexendo Web Services expenses totaled $1,185,000 in Q3 compared to $1,145,000 in Q2 this year and $750,000 in the prior year quarter.

Crexendo Network Services expenses totaled $573,000 in Q3, compared to $507,000 in Q2 and $435,000 in the prior year quarter. These expenses for both Crexendo Web Services and Crexendo Network Services are expected to increase in the future as we have sales reps and increased our fulfillment efforts with increased sales.

StoresOnline expenses totaled $2,850,000 in Q3, compared to $18,103,000 in Q2 and $12,764,000 in the prior year quarter. We expect this expense level to decrease over the next several quarters, but it will remain in the $2 million to $2.5 million range as we continue to support our customer base with StoresOnline, and expect four additional sales channel through StoresOnline.

Unallocated corporate expenses, which relate mostly to R&D, corporate salaries, depreciation, stock, option expense, accounting and professional fees totaled $2,338,000 in Q3, compared to $2,196,000 in Q2 and $2,242,000 in the prior year quarter. The increase from the previous quarter is primarily to rate impairment in our Utah office.

In summary, on a consolidated basis we had income before income tax provision of $4,546,000 of a $10,242,000 revenue.

Now for discussion on our cash flow and balance sheet; as Steve mentioned, during the third quarter we used $320,000 in cash from operations compared to use of cash of $600,000 in the prior year quarter. The use of cash of $320,000 in the current year is primarily due to the pay down of our accounts payable balance and accrued liabilities balance during the quarter, which decreased by $2,571,000.

We believe that our accounts payable balance will remain in its current level for the coming quarters. As of September 30, 2011, we have cash, cash equivalents, and restricted cash of $10,096,000. Our accounts receivable balance was $19,348,000 which as discussed earlier is expected to result in future revenue over the next two to three years.

During the quarter, we also repurchased 143,000 shares of common stock for $593,000. With that I’ll turn the time back over to Steve.

Steven G. Mihaylo

All right thank you John. At this time, we will open it up to general questions. Kelly, do you have any folks that are waiting to ask questions.

Operator

(Operator Instructions)

We will go first to Robin Lochner.

Steven G. Mihaylo

Good afternoon, Robin.

Operator

Robin, your line is open, if you still have a question, or you may have the sound mute. Hearing no response, we will move next to Jeff Basch.

Steven G. Mihaylo

Good afternoon, Jeff.

Unidentified Analyst

Hi, do you hear me?

Steven G. Mihaylo

Yes, I can hear you fine.

Unidentified Analyst

Okay. How would you characterize the realization of your discount receivables versus your expectations; are you doing better, about the same or what?

Steven G. Mihaylo

We are slightly ahead of where the number we got there. Not so much that we’re going to revise the reserve or anything like that, but we feel, we will collect everything that we’ve got on the books and probably just a little bit more.

Unidentified Analyst

Good. I was rather pleased with the goings from I think was 15 sales reps last quarter to 28 now. Do you still feel comfortable with what I recall you previously said has been about $400,000 revenue per year generated by let’s say amateur sales person after those have their training and so forth?

Steven G. Mihaylo

Yes. But it takes anywhere from 60 to 120 days to get them there.

Unidentified Analyst

Okay. I understand.

Steven G. Mihaylo

But most of the reps that we have onboard right now are not producing, they’ve all been hired in the last three or four weeks.

Unidentified Analyst

How far would you say you are from having a product offering in the telecom space that meets the needs of most potential customers?

Steven G. Mihaylo

We have a telecom offering right now that meets the needs of most small businesses that would be 100 desktops or less, so we are actually starting to ramp the sales in that area.

Unidentified Analyst

Okay. Good. Where do you stand and any regulatory approvals that you might need?

Steven G. Mihaylo

I believe we are – and Jeff Korn, you can correct me, if I’m wrong. I believe we are approved in 46 jurisdictions, that’s 45 states and the District of Columbia.

Jeffrey Korn

That is correct, Steve.

Steven G. Mihaylo

We have one state that we chose not to put an application in yet. We had another state where there was couple of issues that needed to be corrected on the application, so we pulled it back which leaves three states. One is, Arizona and the other two, Jeff Korn are?

Jeffrey Korn

I don’t have that in front of me. I think, no, I don’t recall. But it’s…

Steven G. Mihaylo

No, it’s not important.

Jeffrey Korn

Arizona is the only big state that we’re waiting on.

Steven G. Mihaylo

Right

Jeffrey Korn

I know we don’t have proof, we don’t have application spending in South Carolina or Main and there are two other states we’re waiting on.

Steven G. Mihaylo

Yeah, but the bottom line is, we’ve got enough of a footprint that we’re going to start going national with the program now.

Unidentified Analyst

Excellent. Jon had said something about the reason that you showed $320,000 of cash used is basically significant pay down of accounts payable and similar during the quarter. Jon, will there be a fair presumption that in future quarters than you might actually have considerable cash generated while we still have the receivables coming in.

Jonathan R. Erickson

I don’t know if I want to defy considerable at this point of time, Jeff. We expect to have cash from operations in Q4.

Unidentified Analyst

Okay. That’s fine. Steve, I just had one general question. Many of us has thought that given your success with Inter-Tel success here in sort of a related telecom business with respect to that in this year, would largely just be a matter of time since its sort of like repeating something more or less than before. Is there anything you see generally wrong or incomplete with that thinking?

Steven G. Mihaylo

Well, the entire telecom industry is in transition. For the next year or two I think we‘ve got a huge advantage in there by offering telecom services on the cloud, we can offer a much larger savings for the customers. But as time goes on, the savings will be by improving the productivity of companies, which I think will give us an even better opportunity for operator services, secretarial services and other things that we can do for the customer; that’s the good news.

The bad news is, it's not really bad news, but it takes probably six months before you're paying for a salesperson, because we're looking on a SaaS model here, which is monthly recurring revenue. So if somebody sells $1,000 in services their first month, it will take them five or six months to get to the point where they are covering the cost of their salary, but beyond that it becomes extremely profitable.

But an answer to your basic question Jeff, I don't see anything that's going to prevent us from being successful. We still got a few more states that we have to be approved in, and we're going to have to build up data centers and that sort of thing, but most of it is mechanical, and I'm pretty optimistic about the direction we're going at.

Unidentified Analyst

Excellent. I know that Steve, you said you’ve purchased 143,000 shares for $593,000, which is by 415 per share. So I presume then you didn't have a 10b5-1 plan going for the acquired period, and I think that's actually correct. Can you indicate anything as to what the company’s interest in stocks with these price levels going forward or yours personally?

Steven G. Mihaylo

Yeah, going forward company probably will not be buying stocks. We want to make sure that our cash is conserved and make sure that we don't get certain threshold on the cash. We’ll even be looking at the dividend next quarter with the idea of possibly reducing or eliminating it completely.

We’re also looking at additional savings in the way of expenses. I would like to be in a position where our cash does not get below $4 million or $5 million, and in order to do that, we certainly have a look at everything and especially repurchases of stock.

Personally, I will still be looking for opportunities to require stock, if and when large blocks are presented to me.

Unidentified Analyst

Great. That's it from me.

Steven G. Mihaylo

Okay. Thank you, Jeff.

Operator

We’ll go back to Robin Lochner.

Robin Lochner – Deutsche Bank

Yes. I’m sorry.

Steven G. Mihaylo

Good afternoon, Robin.

Robin Lochner - Deutsche Bank

Good afternoon, I'm sorry, I was on mute before, and I didn't realize it.

Steven G. Mihaylo

No, problem.

Robin Lochner - Deutsche Bank

Okay. On the last conference call, you indicated that the company would be fortunate if they were at 30 to 35 salespeople in the first part of 2012, is that still your goal, and if you achieve that goal, is that a place for you would level off or where would this number of sales people continue to grow beyond 35?

Steven G. Mihaylo

Well, we're going to keep growing the number of salespeople, but you have to remember this is sort of like building a ball team, football, basketball, baseball whatever. You're constantly changing players, and only about probably 25% of our new recruits are going to make it. If we’re fortunate, it could be 30% or 40%. So we’ll constantly be hiring and reshuffling the deck here in order to get producing sales people. I would be very pleased if we’re up around 15 or 20 producing sales people by the first quarter. And that would indicate probably 35 to 40 sales people in the company at that point in time.

Robin Lochner - Deutsche Bank

Okay. And then also last quarter, you indicated that you had approximated 400 business customers in Crexendo excluding the StoresOnline related customers. What’s that figure for this quarter?

Steven G. Mihaylo

I don’t know, do you have that information, Jon.

Jonathan R. Erickson

The vast quantity of customers?

Steven G. Mihaylo

Yeah.

Jonathan R. Erickson

That’s not something that we necessarily want to disclose on a go for basis in the future. We did have probably $130,000 in bookings for the third quarter of this year. Our sales price is typically about $9,000, so –

Steven G. Mihaylo

Yeah, I think it’s probably easier for us to just do the segment accounting, which would disclose the sales, but not the actual customers.

Robin Lochner - Deutsche Bank

Okay, fair enough. And then last question, as you continue to buy stock, I mean – Steve Mihaylo, your ownership percentage gets closer to 50%, if your ownership percentage ever exceeded 50%, would that result in any changes in the way that the company would run or would it have any significant implications for smaller stockholders?

Steven G. Mihaylo

No, I quite frankly Robin, if I own 90% of this stock, we would run just like all public companies with full disclosure, a full Board of Directors that are independent. I have always run all of our businesses, all of my businesses as if it was 100% owned by the public

Robin Lochner - Deutsche Bank

Okay, thank you very much.

Steven G. Mihaylo

You bet.

Operator

(Operator Instructions) We’ll go next to Jim Dowling with Jefferies Capital.

Steven G. Mihaylo

Good afternoon, Jim.

James J. Dowling – Jefferies Capital Partners LLC

How are you doing, Steve?

Steven G. Mihaylo

Very well, thank you. How are you?

James J. Dowling – Jefferies Capital Partners LLC

Good. If we can go and say take a 20,000 – of all of this, if we’re sitting on this call a year from now, and more hirings will have occurred, so more maturity of the sales force, some actual revenues coming in, what do you think that you would be able to say to us a year from now, as to what the annualized level of business would be in the major segments?

Steven G. Mihaylo

I will tell you. That’s a crystal ball sort of a question. I’d be disappointed, if by the end of next year, we are not doing at least $2 million of a month in revenue.

James J. Dowling – Jefferies Capital Partners LLC

Any quote as to how that might breakout?

Steven G. Mihaylo

Probably about 60% or 65% Telecom, and 35% to 40% Web Services.

James J. Dowling – Jefferies Capital Partners LLC

Okay. And if you are at that level, annualize the year from now, what kind of a future growth rate would you think infuse?

Steven G. Mihaylo

We should, we should be able to attain for a couple of year after that a rate of at least 50% per year.

James J. Dowling – Jefferies Capital Partners LLC

Okay. Very good. Thank you.

Steven G. Mihaylo

You bet.

Operator

We will move now to Neal Goldman with Goldman Capital Management.

Neal Goldman – Goldman Capital Management

Hi, Steve.

Steven G. Mihaylo

Hi, Neal.

Neal Goldman – Goldman Capital Management

First of all on just that segment, Telecom and the Web Services, what would you need on a cash flow breakeven per quarter, but to get the cash flow breakeven?

Steven G. Mihaylo

Well, that’s going to depend on a lot of things, Neal, but it's probably somewhere in the range of – and it also depends on how good we are at getting our expenses down, and I think there is room for considerable improvement in expenses. Our current projection is sometime in ‘13, but I think we can beat that by at least two or three quarters, but I would suggest maybe $7 million a quarter.

Jonathan R. Erickson

Okay. I can actually get some clarity if you’d like, and Neal, this is all dependent upon several factors, how many salespeople we hire, etcetera. But you're speaking specifically the Telecom segment, correct?

Neal Goldman – Goldman Capital Management

Yeah.

Steven G. Mihaylo

I misunderstood, Neal, I thought you meant the whole company.

Neal Goldman – Goldman Capital Management

No, no, I'm excluding the StoresOnline receivables and Hosting and that, I missed on that the new offerings, the Telecom and the corporate…

Jonathan R. Erickson

So, from the Telecom segment itself, given the ramp in salespeople that we have forecasted, and you are going to need between $2 million and $2.5 million a month from a cash flow perspective to pay for all other revenue ramp, to pay for the increase in sales and cost of sales etcetera.

Neal Goldman – Goldman Capital Management

Okay. And above that, what percentage close to the bottom line, Steve?

Steven G. Mihaylo

Well, here again it depends on what your expense level is, we’re working on about a 60% or 65% gross margin.

Neal Goldman – Goldman Capital Management

Okay.

Steven G. Mihaylo

And as we get bigger, our cost of bandwidth and other things will decrease. So hopefully, we’ll exceed the 60% or even 65% margin.

Neal Goldman – Goldman Capital Management

Okay. But what kind of capital spending will you need in terms of facilities, you’ve talked about that, that’s why the cash is?

Steven G. Mihaylo

Somewhere between $1 million and $2 million to get us to the point where we’ve got two fully redundant data centers.

Neal Goldman – Goldman Capital Management

And that would give you what kind of capacity?

Steven G. Mihaylo

Capacity for at least 100,000 customers.

Neal Goldman – Goldman Capital Management

Okay. You’ve talked about, you needed two sales forces initially, although people ultimately could hand, could sell both, what is the rationale for two different sales force for telecom and web hosting.

Steven G. Mihaylo

Well, the rationale is to keep your people focused, but it looks like and I'm going to let Clint Sanderson talk about this, it looks like overtime we’ll be able to deal with one sales force, Clint do you want to add some color to this?

Clint Sanderson

Yeah Neal, what we're doing is, initially because the telecom offering is relatively new, although relatively it is new, and we already have a sales force in place well trained to sell Web Services. So immediately we will have a team that's focused only on selling Telecom and a sales team focused only on Web Services.

Now, what we’ll be able to do is, the teams that are selling Telecom only once that customer relationship is established with the rep, that rep can go back with the Web Services offer and vice versa.

There is too much of a risk in diluting our sales efforts right now by immediately having a sales force that’s selling Web Services, getting them trained to sell Telecom as well. So instead of diluting sales force we're going right now with independent sales forces, now in the future we foresee that becoming one sales force, once we get traction in both channels.

Neal Goldman – Goldman Capital Management

Okay. Steve, you talked initially about the benefit would be on pricing, but ultimately on productivity. So, why don’t you go through what you’re offerings are going to include that’s different than it’s out on the market today?

Steven G. Mihaylo

Well, there is things like call center suite, which is a very robust capability for call centers, gives you all sorts of statistics and things like that. The ones that we’ll introduce first will probably be secretarial and operator services and a lot of those services can actually run more than the monthly for the telecom itself.

But imagine this, a small company with 10 or 15 desktops paying somewhere between $200 and $400 a month for secretarial services that’s still so much less money than what they would have to pay for or I should say operator services, that’s so much less money they’d have to pay for a whole loan operator that requires healthcare and all the various taxes and so on. It’s probably only 10% or 15% of what they would pay.

So, just those three services, operator, secretarial and call center services, and I’m talking about the call center software and what have you would ease be two or three times what their monthly (inaudible) will would be, but their savings would be tremendous. For those three services, even a small company with 10 or 15 employees could save easily as much as $80 or $100,000 a year.

Neal Goldman – Goldman Capital Management

Okay. Does anyone else have those offerings?

Steven G. Mihaylo

Not that we’re aware of. It’s not to say that they won’t, it’s just to say they don’t have them yet.

Neal Goldman – Goldman Capital Management

I mean the ROI has got to be enormous then for any company, what would be – other than reaching the buyer, what would be the, issues that would keep you from getting that customer?

Steven G. Mihaylo

I’m very optimistic about this, Neal.

Neal Goldman – Goldman Capital Management

Okay.

Steven G. Mihaylo

I think that there shouldn’t be a lot of issues, one of the big issues is going to be, how long period they have remaining on a contract with a current supplier. But we can also offer other things. As we get bigger and we have the ability to buy better on our bandwidth we can resell bandwidth, it will also drive our costs down, which will drive out margins up. And then of course, other services that we identify in the market place.

Neal Goldman – Goldman Capital Management

Okay. Thank you.

Steven G. Mihaylo

You bet.

Operator

And we appear to have no further questions at this time. Mr. Mihaylo I will turn things back to you for closing remarks.

Steven G. Mihaylo

Okay. Thank you, Kelly. As you are all aware, this has been a transition that we’re in. We are still supporting our consumer customers, in fact we’ve increased our customer service to our existing customers, and that’s one of the reasons why we’re seeing better than anticipated receivables collection.

We are starting to see existing customers actually buying more services from us, which is encouraging. I’m not going to say it’s a floodgate of services, but they are increasing marginally at this point in time, which is good. We are seeing the ramp in our Telecom and our Web Services, we are getting our sales force ramped up and we are optimistic about the future. And we look forward to having all on a conference call probably sometime in February or March when we announce our year-end and K1 results. I wish you Happy Holidays, both the December and the November holidays, and we look forward to talking to you in the New Year. Thank you everyone.

Operator

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

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