Steve Mihaylo – Chairman, President and CEO
Jeff Korn – Chief Legal Officer
Jon Erickson – CFO
Doug Gaylor – VP, Sales
Crexendo, Inc. (EXE) Q1 2012 Earnings Call May 8, 2012 4:30 PM ET
Good day ladies and gentlemen welcome to the Crexendo Incorporated 2012 First Quarter Earnings Conference Call. (Operator Instructions). At this time I would like to hand things over to Mr. Steve Mihaylo, Chief Executive Officer. Please go ahead sir.
Good afternoon everyone. I am pleased to be here today and to go over first quarter results with you, I have with me on this call on our conference room, Doug Gaylor, our Vice President of Sale, Jon Erickson our Chief Financial Officer, David Krietzberg, our Chief Administrative Officer and Jeff Korn, our Legal Officer. I am also pleased to introduce you to Ron Wilson, our new VP of Finance, Satish Bhagavatula, our Lead Engineer in Phoenix and Dave Hudson, our controller.
I am going to ask Jeff to read our safe harbor information and after that I will give a brief overview of the quarter. Jon will provide some additional granularity to the numbers. If you have any questions we will open it up for calls afterwards or questions afterwards. Jeff, would you please provide the safe harbor statement.
I want to take this opportunity to remind listeners that this call be contain forward-looking statement 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 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.
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, 2011 and the Form 10-Q for the period ending March 30, 2012.
Crexendo does not undertake any obligation to publicly update or revise any forward-looking statements, whether it’s a result of new information, future events or otherwise.
I’d now like to turn the call back to Steve. Steve?
Thank you Jeff, I am going to go over the numbers at a very high level and then we will turn it over Jon for some more granularity. Net income for the first quarter of 2012 were 199,000 or $0.02 per diluted common share compared to a net loss of 1.851 million or $0.17 per diluted common share in the prior year quarter.
Income before income tax provisions for the first quarter of 2012 was 45,000 compared to a loss of 2.973 million in the prior year quarter. Cash from operations from the first quarter of 2012 was 652,000 compared to cash used in the first quarter of last year of 3.307 million. As of March 31, 2012 cash and cash equivalents and restricted cash were 10.688 million working capital was 899,000 and working capital excluding deferred revenue was 17 million I am sorry I misstated the number above, it was 8.999 million working capital and working capital excluding deferred revenue was 17.882 million.
Current and long term receivables were 12.351 million as of March 31, 2012. I am very pleased with our progress particularly on the sales side. We have dramatically improved our hiring process and we are now getting the caliber of sales people that we need. I believe this will continue to improve as our productivity and results continue here.
We also continue to improve our offerings and services and we are beginning to offer a full range of cloud services including telecom, web services, web design and services and broadband. I am very impressed with our quality and commitment to our customers I believe we are well on the way of creating a world class business and a significant recurring revenue stream.
I believe in this company and we will continue to put my money where my mouth is, I will now turn the call back over for review to Jon Erickson, Jon?
Thank you Steve. We had a good quarter from a cash flow perspective as well as a bookings perspective specifically on the telecom side. From a revenue perspective we had approximately 5.3 million in revenue for Q1 which is broken down as follows. Crexendo web services revenue was 770,000, the 21% increase quarter-over-quarter to a 638,000 in Q4 and 61% increase year-over-year from 479,000.
The increase in revenue on a quarter-over-quarter basis is primarily due to improvements in our fulfillment process allowing for additional one time revenue as well as improvements over the last quarter in our customer churn and our recurring products.
As mentioned last quarter the majority of our revenue in the web services division is recurring in nature such as link building. As such our future rate of growth in this segment on both a year-over-year and quarter-over-quarter basis is largely dependent on our ability to hire sufficient number of qualified sales reps and increase the productivity of our current sales reps. As of today we have 24 direct sales reps which is flat from the prior quarter but we do have several more sales reps in the pipeline.
Crexendo network services revenue was 75,000 and 88% increase quarter-over-quarter from $40,000. We had no revenue from Crexendo Network Services in the prior year. As we discussed in the last earnings call our telecom approval in February of this year in the State of Arizona had a positive impact on our telecom sales pipeline and was a key driver in our telecom bookings which came in over 800,000 this quarter taking our telecom backlog from a 155,000 at December 31, 2011 to 965,000 at March 31, 2012.
Majority of our network service contracts are 36 month contracts as such the revenue associated with the booking this quarter expect to be recognized over the next 36 months. Stores online revenue was 4.410 million which as expected decreased at a quarter-over-quarter rate of 13% and 5.40 million and a year-over-year rate 69% from 14.89 million at a prior year.
Stores online revenue is broken down as follows, cash collected on our accounts receivable balance was $3.120 million, a 9% decrease over Q4 which was 3.412 million and 19% decrease over Q1, last year which was 4.204 million. This revenue stream will continue at a descending phase over the next 18 months to 2 years. Based upon our current collection rates we expect to collect approximately $12 million in revenue from our receivables over the next 18 to 24 months, as approximately 9 million coming over the next 12 months but the remaining 3 million coming the following year.
Hosting revenue was $860,000, 10% decrease from the fourth quarter which was 960,000. Commissions from third parties and other revenues was 322,000 in Q1 a 15% decrease from Q4, which was 379,000 and a 83% decrease from the prior year 1.908 million.
Commissions from third parties which has historically been one of the largest contributors to our profitability in the seminar channel will not be significant in the future. The remaining other revenue is primarily derived from inside sales selling to our current customer base.
Interest on receivables was 764,000 in Q1 compared to 1.14 million in Q4 and 1.158 million in the prior year. We will continue to collect interest on receivables at a decreasing rate for their accounts receivable portfolio from stores online winds down. From expense perspective we had 5.981 million in total operating expenses, a quarter-over-quarter decrease of 5% from 6.315 million in Q4 and a 68% decrease from the prior year at 18.699 million.
Our expenses are broken down as follows; Crexendo web services expenses totaled 1.333 million in Q1 compared to 1.380 million in Q4 and 1.149 million in prior year quarter. Crexendo network service expenses totaled 763,000 in Q1 compared to 1.380 million in Q4 and 1.149 million in prior year quarter.
Stores online expenses totaled 1.224 million in Q1, a decrease from Q4 which was 2.282 million and a decrease from the prior year which was 14.784 million. Unallocated corporate expenses which related mostly to R&D corporate salaries, appreciation, stock option expense, counting and professional fees, totaled 2.661 million in Q1 compared to 2.44 million in Q4 and 2.190 million in the prior year.
In summary, on a consolidated basis we had income before income tax provision of 44,000 off of 5.3 million in revenue. Now for discussion on our cash flow and balance sheet, during the first quarter we generated 652,000 in cash from operation and use of cash in 3.307 million in prior year. As of March 31, we have cash and cash equivalents almost $10.7 million and receivables of $12.3 million which we expect to collect over the next 18 months. With that I will turn the time over to Doug for some discussion on sales.
Thanks Jon. Jon had mentioned the Crexendo sales team is currently at 24 reps, we have a team of new reps starting in May for our May 20 class. Our refined hiring process of focusing on sales representatives that have an successful track record in either web or telecom has resulted in from immediate success with initial sales from our most recent new higher class totaling over a $100,000 in their first four weeks. So that was a nice change that we have had there.
Our new Director of Sales, Dale Miller (ph) has launched our new training program with great initial results and we are excited to have additional training classes with strong new hiring scheduled for mid-May, for mid-June, continued daily inspection of our expected activity levels has helping ensure that our activity levels entails opportunities are increasing. The daily inspection of activity by the management team allows us to quickly identify any weakness in short comings. But put the proper measures in place to increase our sales contributions of each round.
I know business development program that we started back in December continues generating quality leads that already resulted in numerous sales. We're increasing the size of this group and our efforts and are currently interviewing for business development manager to help take that group to a new level of success.
In addition we had three new association partners that generated tremendous success in Q1 with high quality lead generation efforts as well as significant sales contributions in both telecom and web marketing sales. With the approval of our telecom petition in Arizona, along with our initial telecom sales and many of our other markets we were able to recognize significant sales of approximately 800,000 for the quarter including the conversion of some of our beta sites that were traveling our telecom offerings.
We also added our network services division offerings in Q1 that allows us to offer broadband services in conjunction with our cloud communications. This offering in a relatively short period of time has already resulted in sales and we've been able to offer these services to all of our existing clients out there and seeing a nice (inaudible). I continue to be extremely optimistic on the initiatives that we put in place and I am extremely excited about the progress we're making in building the materials division.
So with that, I'll turn it back over to Steve.
All right. Thank you Doug. At this time, I think we've covered everything from the standpoint of the granularity and the numbers, the progress we're making. I'd like to turn it over to the operator for any questions that may be out there.
Thank you sir. (Operator Instructions).
Well, I have one shareholder that emailed me with a couple of questions and maybe I'll go over that.
One of the questions was assuming the June quarter sales were new initiatives, will a look a lot better than the March quarter. Can you comment on that?
Well, I think Doug has already commented on it. We have more producing sales people than we've had in the past. I would expect at least a 40 or 50% increase quarter over quarter. So that's just on the telecom sales. So we have 75,000 in recurring revenue. And the telecom sales I would expect may be 100 to 110, little bit less than that 45 or 50% about 30 to 40%. If we do better than that, that would just be frosting on the cake.
Doug has also commented on the sale process. We hired the sales manager that used to be with us at Interco. Dave Miller. We now have 24 sales reps with four in the pipeline that are starting any day now; they will now be in our May training class. Our goal is to have 50 by the end of the year. We're also pioneering a business development person that will work on increasing the leads and that sort of thing.
Let's see where this, had four questions. I answered two of them. I answered that too. He also wanted us to comment on large well-known companies that we sold. The largest is realty executives with a currently about 400 desktops. We're working on an account which is still in the trial stages so I can't mention the name but they have several thousand desktops and we've installed two of their outlying offices for about 5 or 10 phones each and we'll probably put in about five or 10 more locations before we have something that we can announce.
As far as the market size, that was the fourth question that our shareholder asked. The market size is so big for hosted telecom web services and broadband worldwide that I am afraid, they'll throw a number out there. But it's at least a 100 times bigger than the market that we served. The market niche that we served at (inaudible).
Now if there is any more questions, maybe these questions have generated, I'll be happy to answer them. Operator?
And at this time there is no one in the queue. (Operator Instructions). And Mr. Mihaylo there appear to be no phone questions.
We're very happy with the results that we had, we're happy with the progress that we're making and we look forward to talking to you next quarter.
Sir we actually do have a couple of people that have signaled now.
Our first question will come from Bruce Sr.
I was just curious, on the stores online effort, that is slowly diminishing, I presume to zero. Is there any chance of selling that operation separately?
No. we have no plans for selling the operation and it won't reduce to zero. We have over 13,000 customers that host with us websites. So we don't expect it to reduce to zero. This is core and it's very important to our progress. A lot of these customers are becoming affiliates of ours to sell our telecom and web services not directly sell them, they'll be selling whatever products and services they sell but they'll have a link on their website that will go to our cobranded landing page which will be people that notice a chance to reduce their telephone cost and to increase their sales. And those will be handled through us and inside sales force but we have no plans to sell that division. We've stepped up our customer service in that area to support these customers and we are working diligently to help them and support them.
Will the seminar sales effort continue?
No, we discontinued that almost a year ago.
Is there an active sales organization pushing the stores online?
And we do have another question that comes from J. Harris.
I wondered if you could give us some insight into what you expect from your sales organization in terms of revenues generated or range of revenues generated per sales as they hit stride.
Doug can handle that question a lot better than that. Doug can you go over the quarters that we're establishing and, you know it's all over the board right now but I think the quarters are more important and the kind of sales activity we saw in our previous business. Doug managed our sales force at Interntel (ph) and we had approximately 300 sales people.
Yes, great. So as we look at where we are today. Typical quarter for our average sales rep out there is $50,000 in bookings per month and we've got as you know as we mentioned a lot of new hires in our sales team so that 24 sales reps that we currently have, over half of those are fairly new within six months of hire and so obviously the ramp on them is a little bit longer than the ramp for our experience reps. When we look at our average productivity per rep today, for the Q1 period, it was right around $20,000 average productivity and sales per rep per month.
Fine, and are they selling both telecom as well as internet hosting?
Correct. All of our reps there what we call hybrid reps, they've been trained in and are selling all of our offerings. So that includes the web and the telecom as well as the network services which we just launched in Q1. So now we've got network services to add into that equation. So obviously from a training perspective, training is critical for them so that they can cross sell and make sure they upsell all of the opportunities to make sure that we're covering, web, telecom and network with all of our potential client out there.
Have any of your sales been hit objective strides yet?
Sure if you look at our core numbers out there, last year we had three representatives that qualified for our presidency club which was exceeding 100% of their quota for the annual quota targets they had then this year. I think we've got the same three on track and some others knocking on the door to hit presidency club for the year.
And how will you make decisions in terms of building that sales tab?
So we're actually hiring right now in our core markets of Phoenix and Salt Lake, we're actually hiring in the outlying areas as well. So we're targeting through thicker markets, so we just promoted one of our employees through a sales manager position and we're going to be hiring and recruiting heavily up in the north east corridors, so the New Jersey, New York, Boston, Washington DC marketplace and so as we look at where our growth is going to be, we've got nine reps now in the Phoenix marketplace and so we'll continue hiring here in Phoenix. Phoenix obviously a large market but we've realized that as we look at our growth and expansion, the north east corridor and the west coast are going to be primary targets. So we've already made that first step by putting a sales manager up in the north east corridor and we're hiring heavily there. And then the next step will be the LA Orange County area in California.
And how many salesmen do you think you'll have a year from now?
Steve mentioned our target is to get to 50 by the end of this year. So I'd like to get to that target number first and then we'll continue growing from there. So obviously as we make our strides that number will continue to increase but targeting 50 by the end of this year.
And Mr. Mihaylo there are no further questions.
Okay, well I think we've covered everything and for the gentlemen that asked questions about stores online, obviously you're new to our company but we announced everything that I have mentioned on the call here today approximately a year ago. So I am surprised that we had questions on that. Having said that, I would like to thank all of you for being here today and we look forward to seeing you next quarter. Good bye.
Ladies and gentlemen that does conclude today's conference. We would like to thank you all for your participation.