Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Crexendo, Inc. (NYSEMKT:EXE)

Q2 2012 Earnings Call

August 9, 2012 4:30 PM ET

Executives

Steve Mihaylo – CEO and Chairman

Jeff Korn – Chief Legal Officer

Ron Vincent – CFO

Doug Gaylor – President and COO

Satish Bhagavatula – Chief Technology Officer and Chief Investment Officer

Analysts

Craig Samuels – Samuels Capital

Robin Lochner – Private Investor

Jeff Bash – Private Investor

Jay Harris – Goldsmith & Harris

Austin Hopper – AWH Capital

Operator

Good day and welcome to the Second Quarter Crexendo Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Steve Mihaylo, CEO and Chairman of the Board. Please go ahead sir.

Steve Mihaylo

Thank you, Maurice. Good afternoon everyone. This is Steve Mihaylo, I am the Chairman and CEO of Crexendo. I want to welcome you to the Crexendo’s second quarter conference call. With me today are Doug Gaylor, our President and COO; Satish Bhagavatula, our CTO and CIO; Ron Vincent, our CFO; David Krietzberg, our Chief Administrative Officer; and Jeff Korn, our Chief Legal Officer.

I am going to ask Jeff to read our Safe Harbor statement, after that I will give a brief overview of the quarter and some operational highlights. Ron will provide some color on the numbers. Doug will provide business and sales update and Satish will give a technical update. Then we will open up the call to questions. Jeff, would you please read the safe harbor statement?

Jeff 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 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 periods ending March 30, 2012 and June 30, 2012.

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?

Steve Mihaylo

Thanks Jeff. Before we get started, I am not sure whether or not our press release is hit the wire yet but it should in the next five or 10 minutes. So I am sure it will be available to all of you when we open this up to questions. For the second quarter of 2012, we had a net loss $117,000 or $0.01 per diluted common share compared to a net loss of $9,345,000 or $0.88 per diluted common share in the prior year quarter.

Loss before income tax provisions for the second quarter of 2012 was $104,000 compared to a loss of $3,183,000 in the prior quarter of the prior year. The income tax for the second quarter of 2012 was $13,000 compared to an income tax provision of $6,162,000 in the prior year quarter. Cash from operations for the second quarter of 2012 was generated from operations in 2012 was $739,000 compared to cash used in operations of $10,769,000 for the prior year quarter. As of June 30, 2012, cash and cash equivalents and restricted cash were $10,408,000, working capital was $9,405,000 and working capital excluding deferred revenue was $17,179,000.

Total current and long-term trade receivables were $9,360,000 as of June 30, 2012. As I have indicated before, we are working diligently on our sales efforts in our products and services. We are fully aware of the downward ramp of receivables and the sales – and when the sales from the Crexendo products must fully carry us. We are watching this closely and I am pleased with our progress, we are closely monitoring our sales progress and lead generation efforts. Doug will comment on this in the next few minutes.

I do want to give a brief update of our University Program. As you may recall the University Program takes the Crexendo software and uses that as the foundation to train students on a choosing classroom settings. In the curriculum, the student does a fully functioning e-commerce website for an actual business. We see two big benefits from this. First, the business will have a website that will be hosted on our platform which we will be able to service up-sell, cross-sell and use as a lead generator for our products.

We envision every website built to be a Crexendo affiliate which will supply the Company with customer leads. Secondly, we are training the next generation of business owners, both business owners that have businesses today and students that may have businesses tomorrow on our platform. We fully expect them to become Crexendo converts and to be a strong voice for our products and services. We are finishing our first test of the Crexendo University Program at one university and the initial results are very promising.

We will increase the rollout gradually over the next six quarters and we expect to have the offering in large numbers with the universities by the end of 2013. While we expect this to be a lead generation opportunity for the Company and its clients, all means not the only thing we are doing. Doug Gaylor will discuss this in more detail later.

We are monitoring our sales process and sales results carefully. I am very pleased with the continuous improvement on the caliber of sales people we acquired and I am impressed with the new and intense sales training we have incorporated. We’re also watching our expenses and cash very carefully and we are cutting any expenses which do not – which we do not believe necessary. We are also continuing to streamline our operations. I have been disappointed and have problems with our office space in Utah and we are looking forward to reduce costs and lease space there.

We have consolidated some additional operations into our Phoenix headquarters which I also believe will reduce some costs. I also know we have world class products and services that can compete with anyone in the marketplace. Our associates know that we need to be better every single day and serve our customers with the best products and services and increased shareholder value. That is what I and the executive team are driven by.

With that I will turn the call over to Ron Vincent, who will then turn the call over to Doug who will then turn the call over to Satish and after that, we will open up the call for questions. Ron, can you give us some granularity on the numbers, please?

Ron Vincent

Thank you, Steve. The trends we have seen in the second quarter are positive and we continue to see growth in Crexendo Web Services and Network Service segments. And we continue to maintain a strong backlog for both our Network Services and Web Services segments. We had StoresOnline revenue of $4 million. Crexendo Web Services revenue of $692,000 and Crexendo Network Services revenue of $168,000 for the second quarter.

Total revenue decreased 6% quarter-over-quarter compared to $5.2 million in the first quarter and decreased 72% year-over-year around $17.5 million in the prior year. As you are aware, the decrease in revenue on a quarter-over-quarter and year-over-year basis is primarily due to the loss of revenue from our suspension of our direct mail seminar channel. Our StoresOnline revenue will continue to decrease over time as we continue to collect our StoresOnline receivables on extended payment terms agreements entered into prior to July 2011.

Our StoresOnline revenue which is expected to decrease year-over-year to – decreased $4.4 million from $16.9 million for the second quarter of 2011. StoresOnline revenue is broken down as follows. Cash collected on our accounts receivables was $2.6 million, a 16% decrease from first quarter which was $3.1 million and a 40% decrease over the second quarter of 2011 which was $4.4 million. The revenue stream will continue to at a descending rate over the next year to 18 months based upon our current collection rates, we expect to collect approximately $9.2 million in revenue from our StoresOnline receivables over the next 12 to 18 months.

Approximately $7.7 million during the next 12 months and the remaining $1.5 million during the following year. Interest income from receivables was $504,000 in the second quarter compared to $764,000 in the first quarter and $1.3 million in the prior year quarter. We will continue to collect interest on receivables at a descending rate as the accounts receivable portfolio from the StoresOnline wind down.

Hosting revenue was $829,000, a 4% decrease from the first quarter which was $860,000 and 37% decrease from $1.3 million in the prior year quarter. Commission from third-parties and other revenues was $596,000 in the second quarter, an increase of 79% from first quarter which was $322,000 and a 70% decrease from prior year quarter of $2 million.

The remaining other revenue is primarily derived from enterprise sales selling to our current customer base. Crexendo Web Services, revenues decreased to $692,000 quarter-over-quarter from $770,000. The majority of our revenue in the Web Services segment is generated from search engine optimization, one-time revenue and link building which is recurring in nature typically six to 12 months contrast.

We continue to maintain a strong backlog of $1 million as of June 30, 2012. Our growth in this segment both 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 reps. As of today, we have 29 direct sales reps which is an increase of five from the prior quarter.

Crexendo Network Services revenue, which primarily relates to hosted telecommunication revenue, increased approximately 124% to (inaudible) in the prior quarter. We had $18,000 in revenue from Crexendo Network Services in the second quarter of the prior year. We continue to experience significant growth in our Network Services backlog which increased to $1.2 million at June 30, 2012 compared to a $155,000 at December 31, 2011.

The majority of our Network Services contracts are 36 months contracts and as such the revenue associated with the backlog this quarter is expected to be recognized over the next 36 months. From an expense perspective, we had $5.5 million in total operating expenses, a quarter-over-quarter decrease of 8% from $5.9 million in the first quarter and a 75% decrease from the prior year quarter of $21.9 million.

Our expenses are broken down as follows. Crexendo Web Services expenses totaled $1.4 million in the second quarter compared to $1.3 million in the first quarter and $1.1 million in the prior year quarter. Our expenses are broken down as follows. Crexendo Web Services expenses totaled $1.4 million in the second quarter compared to $1.3 million. Crexendo Network Services expenses totaled $851,000 in the second quarter compared to $763,000 in the first quarter and $507,000 in the prior year quarter.

StoresOnline expenses totaled $944,000 for the second quarter, a decrease from first quarter of $1.2 million and a decrease from prior quarter which was $18.1 million. Unallocated corporate expenses which related mostly to rents, corporate salaries, stock option expenses, research and development, accounting and professional fees totaled $2.4 million in the second quarter compared to $2.7 million in the first quarter and $2.2 million in the prior year.

In summary, we generated revenue of $4.9 million for the second quarter of 2012 on a consolidated basis, a loss before income tax provision of $104,000 and a net loss of $117,000 after income tax expenses of $13,000. For the six months ended June 30, 2012 we generated revenue of $10.2 million. For the six months period on a consolidated basis, a loss before income tax provision of $60,000, net income of $80,000 after income tax benefit of $140,000.

Through six months ended June 30, 2012 we generated $739,000 in cash from operations compared to $2.7 million used for operations in the prior year. As of June 30, 2012, we had cash and cash equivalence including restricted cash of approximately $10.4 million compared to $10.6 million at December 31, 2011.

With that I will turn it over to Doug Gaylor, our President and COO for some discussion on sales and operations.

Doug Gaylor

Thanks Ron. I want to provide an update on our sales initiatives and progress. The Crexendo sales team is currently at 29 sales representatives and we are continuing to focus our efforts on expanding not only the quality, but the quantity of our sales reps, as we continue to grow our team here. We’ve upgraded our recruiting efforts with the new in-house recruiting specialist who specializes in identifying recruiting sales talent and that will be accretive to our sales efforts.

We undertook quite a few lead generation initiatives in Q2 to help enhance our lead generation efforts for our sales team. First, we hired a business development manager and increased the size of our telemarketing department to six business development representatives, who will be responsible for building a database of lead opportunities to prospecting and lead generation for the sales team.

This addition will build on the success of the initial business development efforts that we started in Q1. By having a dedicated manager and team focused on lead development, we are confident that we will see a dramatic increase in lead for our sales team. We also hired an event coordinator who will be responsible for identifying researching and scheduling targeted trade shows as well as speaking opportunities for Crexendo to project in [ph]. In addition, this role will also generate leads through webinars, industry specific and association gatherings and vertical market alliances.

We had marginal success in these areas previously as it was one of the many responsibilities for our director of sales, but the addition of a dedicated resource to focus on these events will raise our levels of success in these areas. We started a successful campaign as Steve mentioned with our University Program in Q2 with one university rolling out the first web design classes utilizing the Crexendo web builder. We have three more universities related for the fall semester for a total of four universities on our University Program and we are very hopeful that the program will continue to expand rapidly.

We’re launching a lead generation follow-up campaign using email drip campaigns and direct marketing for our web and telecom services. These campaigns will also allow us to target ideal verticals with the right demographics and contacts. We continue to have great success with association and trade group relationships accounting for almost $500,000 in sales year-to-date for association and membership organizations and we also continue our targeted cross selling campaigns with our inside sales department to our existing Crexendo customer base for cross selling our telecom customers with our web services and cross selling our web customers with our telecom services.

And finally we began our initial stages of the developing a dealer and agent program for our telecom services and have our first dealer representative launching our program this month. We will continue to build on these programs throughout the rest of the year. I am very pleased with our progress that we have made in the last quarter on these lead generation initiatives and I am very confident we will report nice successes from these efforts in Q3 as we continue to build on our sales processes.

So with that I will turn it over to Satish to give an update on the technical side.

Satish Bhagavatula

Thank you, Doug, greetings everybody. I am Satish Bhagavatula, CTO and CIO for Crexendo. I am very excited about the opportunity that lay ahead of Crexendo and look forward to transforming our products and services and infrastructure to suite our needs to be the best cloud services Company and make customers and businesses more productive.

We plan on doing that by adopting more SaaS principles and adopting technologies of the day that are best suited for our products and services such as HTML 5, Web 3.0 and many of the cloud technologies. We continue to rebuild our technology teams, infrastructure and data center in Arizona along with other offices using the state of the art equipment which I believe will help us offer best quality and service and products to the customers.

With that I turn it over to Steve Mihaylo for his comments.

Steve Mihaylo

Thank you, Satish. Before I open this up to questions, I just wanted to comment on the fact that we’ve accelerated consolidation here in Arizona because some of the issues in Orem with noise and maintenance problems but we fully move that up may be a quarter or two and we’ve now got our accounting department fully in Arizona which is as you might expect created some disruptions in our business but that particular piece of the business is now running smoothly and we’re very optimistic about the rest of the consolidation that will occur over the next quarter or two.

With that I’ll open it up to questions. Maurice.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll pause for a moment to assemble the roster. Our first question comes from Craig Samuels with Samuels Capital.

Craig Samuels – Samuels Capital

Hi guys, good afternoon.

Steve Mihaylo

Good afternoon, Craig.

Craig Samuels – Samuels Capital

Quick question maybe for Satish. If you could outline the technology R&D roadmap over the next 18 months and provide some insight into the Company’s roadmap that’d be quite helpful I think?

Satish Bhagavatula

Yes. So thank you, Craig. As we reshape our business for more suited [ph] for B2B and we are constantly evaluating a competition and products and features. So right now as we are seeing more and more traction in small and medium size businesses, we have an enormous need for features that seem to be mimic what used to be the features in traditional PBX world. Although we are a cloud communication and we believe we are the first of the kind to be offering these services, many features such as ACD’s huntgroups, IVRs and many of the telecom features we actually deliver although we have it, we do have some shortcomings in some of the future sets which we plan on expanding in building to best suite our customers.

I believe in offering the right set of features that are useful rather than having a huge feature kit. So that’s on the telecom aspect. On the web, we are also continuing to evolve our web platform which is the core for our marketing efforts to generate leads to our university program and the way that we find to do it is as we penetrate into more and more universities, it is very important for us to make it more user friendly and very easy to on board customers so there is an enormous amount of effort being channeled towards that to be able to assess what exactly is this that makes a customer come on board very quickly and build a site.

We have a very feature rich builder which was suited and is suited for certain clientele but we also want to expand those, we want to harvest on those features that we have, improve those features and continue to grow into what we believe is where the opportunity lies in the B2B.

In addition to that, we are also expanding our technology and the infrastructure to be able to offer Voice-over-IP and web services without huge latencies. This kind of thing requires a very, very well-tuned network that can offer quality of services. So as we do that throughout the next 18 months, we build on relationships and partnerships that will enable us to deliver these features through our datacenter infrastructures.

Craig Samuels – Samuels Capital

Got it. Thank you. And Steve, if you could maybe talk a little bit to sales force product – if you can talk a little bit to sales force productivity, I mean just simple math, 25 and added four this quarter and six hundred and...

Steve Mihaylo

Yes.

Craig Samuels – Samuels Capital

It comes about I think it’s about less than 30,000 per man 10 grand a month which is not a very good metric.

Steve Mihaylo

Before I do that Craig, let me expand on what Satish had to say. One of the things he forgot to mention on our web builder is we’re adding more templates which even makes it easier and as you already know ours is the only web builder out there that’s offered free and a free build with e-commerce and templates and verticals that we address and that’s very important. It’s the core of our marketing effort.

I really think it’s better for Doug Gaylor to speak about the sales situation if there is anything I think that he missed, I’ll be happy to add it. But as you can also appreciate when you add new people, they don’t have productivity in the first couple of weeks or even the first month or so because we have training and other things that we want to give these people so that it ensures their success and liability.

In addition, we’re always weeding out people that don’t make the grades. So even though we added four or five people in the quarter, we probably have the 10 or 15 that we have to weed out which means that we really added 15 or 20 people and terminated 10 or 15 and we saw the same thing in our previous business with getting a sales force that was clicking on all eight cylinders and with that I am going to turn it over to Doug to give you a little more color and if there is any more questions you might have, we’ll be happy to answer them.

Doug Gaylor

All right, hi Craig. So yes, if you look at our sales deck today of 29 sales reps, about 60% of those have been with us less than four months. So as Steve said quite a ramp up time for new sales reps to come on board, get trained start prospecting and filling up that pipeline. We don’t have the luxury of having a base of customers so we have to go out and build that base individually with every single sales rep. So when they come on board actually they are trained, their process is to go out and build that pipeline.

So if you look at our sales – average sales per rep for the month, last month just to kind of give you some tracking we’re averaging about $20,000 in sales per rep per month right now building on that as we continue to get more and more tenure with our sales reps and so that number will continue to increase with more focus and more lead generation. The reason I spend so much time talking about our lead generation efforts is that mission critical to getting these folks success and helping them build their pipeline. When I bring a sales rep in and have them relying on totally their efforts to build that pipeline as opposed to us enhancing with our lead generation efforts, obviously it’s about that good sales people and can provide them with a healthy list of lead opportunities that’s just going to enhance our sales efforts.

So as we continue to build all of these sales initiatives to generate leads, that sales number per average per rep should go up considerable over the next couple of quarters with the lead generation efforts that we’ve got in place.

Craig Samuels – Samuels Capital

So what’s going on as far as when your – you’ve given guidance what, a month or two to demonstrate their capability and then if they are not hitting your targeted minimums you are asking them to leave and bring on someone else. I am wondering how is the caliber or so in the brokerage business right, you have a $1 million producers and other firms offer those guys a lot of money to consistently jump around? Is it obviously different in your business?

Steve Mihaylo

It’s a little different than that Craig. We give them a little bit more than a couple of months. We usually give them about 90 to 120 days. We also want to hire people with experience but we’re not in a position where we can offer them big sign-on bonuses and things like that. And then in a lot of cases when you hire these higher producers, you’re also hiring a person [ph] with a lot of problems that goes with it. But you have to appreciate what we’ve done here in order to lower our costs except for the management team and the management team is mostly from Inter-Tel.

We’ve all been together now for 10, 20 years with the exception of Ron Vincent who came from Ernst & Young and has 12 years of accounting experience and he also has industry experience and that’s pretty important. So there is well over a 100 years of experience on the management side and most of them have been former Inter-Tel employees and we have all been together for a long time.

With respect to the rest of the employees except in our engineering department where we also brought a lot of engineering talent in our big switch division from Inter-Tel, the average tenure of employees in this building is and I am speaking from Phoenix, Arizona, the average tenure is only three or four months. So we’ve got a relatively new team. However most of them have experience. We’re just in the process of putting our inside sales and our business development departments together. We’ve hired a very, very experienced business development guy.

All of this is going to take another couple of months to click in. We’re working our plan. We still got to tune our network and get everything located here in Arizona and that’s going to take another month or two. But once that settles down, you’re going to see us putting the pedal to the metal. Everybody in this office is excited. They’re engaged, they understand the sense of urgency. Job number one is leads and sales period. And job number two is to treat our customers with respect and to take better care of them than they’ve ever experienced anywhere else. And job number three is to have the best network and the best products and the best services around. All of which takes time.

We had some issues in Utah with noise and maintenance problems with the building up there which is accelerating our move and consolidation here in Arizona, but we’re also going to keep a very well trained cadre of people and a smaller location in Utah. So we’re excited about the future. We’re very excited. I’ve never been so excited. In fact I am going to pledge right now that every nickel I receive in the way of dividends I am going to plough it back into this Company. So it’s only dividends to our shareholders outside of myself that will be keeping the money and the rest of the money is going to come right back into the Company because I will be buying stock as soon as it’s available and options exercise and on the open market if I can get any there. It’s been difficult on the open market.

But we are committed and we are dedicated and we are going to make this Company a success. We have no other option and besides we would do it anyway if there were other options. I hope that answers all of your questions…

Craig Samuels – Samuels Capital

Can you comment on anything on the M&A front that could accelerate, i.e., acquiring customer base or things on that nature to give you some critical mass?

Steve Mihaylo

We haven’t started that just yet but one of the things that Dave Krietzberg is going to be transitioning into as soon as we get all the dust settled in the consolidation and the things that need to be done and that’s probably going to be sometime in the fourth or the first quarter is to be on the lookout for acquisition opportunities.

We think that we’re going to have a process oriented Company that’s totally automated so it will be very easy to acquire a customer bases without the need to acquire a lot of different cultures and business models and so on. And that’s going to be one of his primary focuses in 2013. Yes, that’s a real big opportunity for this Company along with all of the other things we’re doing.

Craig Samuels – Samuels Capital

Great, thank you.

Steve Mihaylo

Thank you, Craig.

Operator

Our next question comes from Robin Lochner [ph] with Private Investor [ph].

Robin Lochner – Private Investor. Hi good afternoon.

Steve Mihaylo

Good afternoon, Robin.

Robin Lochner – Private Investor

On your last conference call you talked about a few goals and I just want to check in on those. One was a goal of having 50 sales people by year-end. And another was to begin selling in the Northeast corridor. Can you give us kind of an update on getting to 50 by the year-end and what the timeframe might be for starting sales in the Northeast corridor?

Steve Mihaylo

Well we are in the Northeast corridor already. We have three sales people in New York and Connecticut, but getting back to the 50. We think that we can probably add about four or five per quarter net which will get us very close to the 50, probably 45 and may be possibly 50 but we’re really concentrating on quality, not quantity. We’re finding that people that are well trained, experienced are much more able to sell than ones that we have to bring along.

So we may miss it by a little bit, but it’s not going to be a whole lot and we really want to have productivity as part of our top priority here.

Robin Lochner – Private Investor

Okay. And I guess with your sales efforts focused mainly in Utah and Arizona and a little bit in Northeast corridor, you’re probably selling primarily against or probably getting customers primarily from question and horizon. In general is that a fair assumption that you’re generally taking customers from the legacy telephone companies or is it also cable companies and other Voice-over-IP providers?

Steve Mihaylo

We’re not seeing much in the way of cable companies and Voice-over-IP providers. In fact I think we’ve only run into one deal that we were in with another Voice-over-IP provider. And let me just clarify, we’ve got sales people all over the country. We have them in the Northwest, we have them in the Midwest, we have them in the Northeast, we have them in Utah and Arizona. And geographically our sales force is not confined and we have them in Southern California and Nevada, but geographically our sales force is not confined to just those locations.

We can sell anywhere in the United States and we have sold just about everywhere in the United States. So that’s not an issue, but yes we are looking for qualifying people and we are looking for productivity. And most of our deals are coming from traditional carriers, from traditional CPE which is Customer Premises Equipment. The idea of providing service that’s as good as the current service they have. With an engineering team I might add that it used to take six months to two years to develop a new program, we’re bringing up applications and services on a monthly basis for customers.

And that’s because of the robust nature of the platform that we’ve developed here. Satish and his team are actually able to go out to our customer, get critical information and develop applications in as little as three or four weeks, five weeks at the most. And that’s something we weren’t able to do at Inter-Tel. And we are able to do now because of the way we designed the platform. So those are some of the things but the deals are coming.

Robin Lochner – Private Investor

Okay.

Steve Mihaylo

Everywhere. And what they’re going to lead either web services or anything else, we always look at the other services that we’re going to sell through them. And one of the things that we’re selling is internet service, basic internet service, we are reseller of those services, the rest are all in-house services. At Inter-Tel we were selling approximately 20% of our customers that bought our products, were also buying telecom services.

Here at Crexendo we think the percentage is just going to be much higher and we’ve already achieved 20%. And quite frankly, we think it’s possible to achieve over the next year or two as high as 70% or 80% of the customers because one of the issues involved with the quality of services to make sure that their network and their routers and everything else were setup properly and prioritized properly and that provides another revenue stream for us not only the broadband services but actually the service of setting up the network for them. So we’re really excited about the future.

Robin Lochner – Private Investor

Okay. Thank you for your answers. I’ll go ahead and turn it over to someone else.

Steve Mihaylo

Okay, thanks Robin.

Operator

Our next comes from Jeff Bash, a Private Investor.

Jeff Bash – Private Investor

Hi Steve.

Steve Mihaylo

Hi Jeff.

Jeff Bash – Private Investor

First I want to compliment you the engagement…

Steve Mihaylo

How are you?

Jeff Bash – Private Investor

Very good, thank you. I did lose my connection I have to dial in again.

Steve Mihaylo

Thank you.

Jeff Bash – Private Investor

I want to complement you on the KS [ph] management that’s continuing to be excellent and that’s very important during this development stage.

Steve Mihaylo

Well it’s going to get better as we get more consolidation here.

Jeff Bash – Private Investor

That’s great. I want to ask you about the University Program. You said by the end of 2013 you expected to have large numbers of universities in the program. In your mind, how many is roughly as large?

Steve Mihaylo

I would say you have to understand, you got basically three or four teaching sessions that are called semesters or quarters. The first teaching session was this summer and we’ve built approximately 10 websites. This next semester coming up, we’ve got four schools on board. We will build somewhere between 40 and 60 websites. By the end of next year, we hope to have somewhere in the neighborhood of 10 or 15 schools on board.

Once we have 15 schools or so, it’s going to become more or less cookie cutter and I would expect by the end of next year to have 30 or 40 school – not next year but the end of ‘14 to have 30 or 40 schools on board and multiple classes instead of just one or two classes. And of course they’ll be teaching in the summer season, the winter and the spring session. So you can see how quickly this will build. We’re also looking at online teaching sessions. And as each of these young people learns on our platform, and they graduate they will start college businesses we think, and of course the new companies will have affiliate legs on every single one of their websites which will allow us to get more and more leads.

So we’re very optimistic about this, but a short answer to your question is 10 to 15 by the end of ‘13 and probably 30 to 40 by the end of ‘14.

Jeff Bash – Private Investor

Okay. So that becomes really a very large source of lower acquisition cost business, correct?

Steve Mihaylo

Absolutely.

Jeff Bash – Private Investor

Next in terms of the follow-up on Robin’s question about the 50 sales reps. Do you think you’ll have to get to a point where it’s not going to be like 10 to 15 – higher 15 to 20 and like 10 to 15 situation where you only had net of five, in other words, where you don’t necessarily…

Steve Mihaylo

I do believe that will get there but as we found out in Inter-Tel, it’s probably going to always be somewhere in the neighborhood of 50% or higher 20 to keep 10. But don’t forget that we’ve also got business development that’s starting to get a little traction. We’ve got inside sales. The feet on the street are going to be primarily for the larger deals. There is three ways that we get deals. One is directly off of our website. Two is inside sales in business development and the third way is a more complex sales with network services and a lot of other things, fine tuning the network and that’s feet on the street, which takes sales engineers and lot of people supporting them.

On the lead generation side, we’ve got already a half of dozen ways that we provide leads. The University Program is just one of those ways, but we have everything that Doug talked about earlier on top of the University Program. It’s my hope and desire that eventually the University Program will be the number one lead generator, but that’s not going to happen for at least another year or so. In the mean time we’ve got a lot of other things that we’re doing to provide leads.

Doug Gaylor

Yes, and Jeff just to add to that, with more leads becomes more sticky sales reps. And so if I’ve got more leads coming in sales reps – every sales rep that I interview and I hire, they all portrait until as hunters and here there is a lot of farmers out there. So when we talk about the difference between a hunter and a farmer from a sales rep perspective I need people that can go out and find the business. Some sales business portrait themselves as hunters and they’re really farmers, I need hunters. And so if I’ve got leads to give those sales reps they are going to stay. If I’ve got sales reps that can’t build a pipeline obviously over time, we can’t afford that expense if they can’t build the pipeline.

So I do anticipate to that attrition rule will lighten as we get more of our lead generation efforts kicking in the year.

Jeff Bash – Private Investor

Okay. And my last question has to do with the flexible products you have. I seem to recall you once told me that I think, it was 8x8 I think you said has a license platform of some sort which would appear to give Crexendo a competitive advantage in dealing with larger customers to require custom applications. Is that true?

Steve Mihaylo

I am not sure what kind of a platform 8x8 has but it’s certainly true of our platform. Satish was with Inter-Tel for what, 12 or 13 years, Satish?

Satish Bhagavatula

12 years.

Steve Mihaylo

And he has his Master’s degree in Networking and Computer Science. So the long and the short of it is the people we have now are more geared towards larger and more robust platforms and we definitely have that capability over any of our competitors. And the really important thing here I think is the fact that we can handle larger accounts. We’re more agile. We can bring out specific applications. And I am going to let Satish may be comment on that as well.

Satish Bhagavatula

Thank you, Steve. Thanks Jeff for the question. Yes, I mean we take pride in doing the R&D and building the right set of things, tuning our systems to best suite our customers and then as we are drawing and as we picking up more and more customers, we are trying to define those kind of niches for our technology.

Jeff Bash – Private Investor

Okay, thank you Steve.

Steve Mihaylo

All right. You’re welcome. Thanks, Jeff.

Operator

Our next question comes from Jay Harris with Goldsmith & Harris.

Jay Harris – Goldsmith & Harris

Steve, earlier this year on a conference call…

Steve Mihaylo

Good afternoon, Jay.

Jay Harris – Goldsmith & Harris

How are you? Hello.

Steve Mihaylo

I am very good, and how are you?

Jay Harris – Goldsmith & Harris

Good. Earlier this year on a conference call, I asked a question of what your objectives were for sales representatives and I’ve forgotten what the answer is. I’d like to go over that answer and I’d like to know how many of your sales representatives are meeting these goals at this time?

Steve Mihaylo

Well that’s probably something that as far as the meeting the goals I can tell you what my personal goals are. We’d like at least a $1 million in productivity for sales rep. Now that you have to realize, it’s over a 24 or 36 month period. So on a monthly basis, $1 million in sales probably equates to about $3,000 or $4,000 a month in recurring revenue. That would be my goal. I don’t think we’re quite there yet. We’ve got one or two salesman that are there.

One of them is a very experienced person that’s been with Inter-Tel before and the other one is young man that’s really hitting the ball out of the ballpark, that we recruited from BYU. He has a Master’s Degree and he is a great young man and both of them have been with us for a couple of years. Now the newer sales reps I am going let Doug to handle that one.

Doug Gaylor

Yes, so when we look at our sales team today, typically sales rep is going to come on board with $50,000 a month quota as we’ve talked a little bit ago, $20,000 is what we’re averaging right now that number continues to grow. Though, as we look at our sales that’s coming on board with the fact that over 50% of them have been with us less than four months, that’s obviously a ramp up cycle. So obviously when we get that tenure within our sales team and we get everybody ramped up, we’ll be closing in on the numbers that our associate have recorded [ph].

So right now it’s still a building process but each month we see the right movement and the right progress there.

Steve Mihaylo

And just one more comment, Jay. I am sorry, I tried to talk over you. Say again.

Jay Harris – Goldsmith & Harris

I was just wondering if any of your salesmen are meeting these goals at this point in time?

Steve Mihaylo

Yes. Two of our salesmen are meeting these goals. But you have to remember that the average is going to be…

Jay Harris – Goldsmith & Harris

Hello.

Steve Mihaylo

Well they’ve been with us – yes, I am still here. They’ve been with us approximately one, about a year and a half, and the other one – well both of them are about a year and a half.

Jay Harris – Goldsmith & Harris

One of the guys who’ve been with you for – how many guys have been with you now for a year?

Steve Mihaylo

Just the two of them.

Jay Harris – Goldsmith & Harris

And so everybody else is what, you have 20 in online you said, I thought 12 or 13 had been with you for a year based on the response from earlier questions.

Steve Mihaylo

No, we only started selling our telecom platform in March. It took us that long to get the regulatory approvals. Yes.

Jay Harris – Goldsmith & Harris

All right.

Steve Mihaylo

And that’s when we started to ramping our sales force. We have some sales people that were selling web services but on the telecom side, we’ve only been at it for a few months.

Jay Harris – Goldsmith & Harris

Are you in a position…

Steve Mihaylo

And if I shouldn’t have the government to deal with and all of the – position to what...

Jay Harris – Goldsmith & Harris

Are you in a position…

Steve Mihaylo

You evidently got a bad connection.

Jay Harris – Goldsmith & Harris

Well I am using a landline telephone company.

Steve Mihaylo

Okay.

Jay Harris – Goldsmith & Harris

I do have a bad connection. Are you in a position to give us some goals as to where your quarterly revenues on the continuing operations are likely to be?

Steve Mihaylo

Yes. We’re working on that as we speak. I’ll probably be in more of a position to start giving, not forward guidance, I’ve never done that, but at least enough color that you can model it yourself and I’ll let you know if you’re a little higher or little low.

We’ll be in a position after this coming quarter, the September quarter to start doing that. You’re going to see the sales from StoresOnline which is really the collection of our receivables dwindle down and be more or less gone by the end of next year. And you’re going to see the ramp up in our other services and products, the web services, the web hosting, the telecom and the network services ramp in a very fast rate. And I think we can sustain that for a while.

I’ll have a better read on it. Every quarter we’re going to get a little tighter and a little bit more so that we can predict, but you have to remember this is all recurring revenue and by enlarge where you’ve got a 100% retention, we’ve lost a couple of accounts but let’s say its 98% retention. At StoresOnline we had a retention level of about 1%. So we’re about 97% better here. And that’s a very predictable revenue model and then we just look at our expenses which were consolidating into the facility we own here in Arizona versus one that we’re leasing and we’ve had a lot of problems with in Utah.

So little by little, we’re getting better and better and you’re not going to see me any less enthusiastic or putting my money somewhere else that my (inaudible). When it comes to this Company, I am committed totally a 100%, in fact 200%.

Jay Harris – Goldsmith & Harris

When you’re in a ramp stage, an accelerated ramp stage, it would be more helpful for me to see when you report your numbers, to report the continuing operations on a consecutive quarterly basis.

Steve Mihaylo

And we’ve done that, we’ve split it into three things that allocation of expenses is not correct yet because of the fact that we’re consolidating revenues and we’re consolidating operations, but by the end of this year we’ll have two divisions. We’ll have our Web Marketing Services divisions which does hosting and link building and SEO and that sort of thing and the University Program and what have you, and we’ll have our Network Services division which is telecom and broadband at which time we’ll allocate everything out so you’ll be able to see the profitability of the two different divisions or even may be show some granularity in the revenue streams off of the two different divisions because there is three or four products in each division.

And you’ll be able to see all of that, but give us enough time. What we’ve done here is we’ve shut down our seminar business and we’ve taken our web services business and taken it from a B2C to a B2B, and we’ve totally brought up the telecom part and there is an awful lot of moving parts. Before we can really ramp sales and we’re very close as the fulfillment and the automation of all of our accounting and fulfillment has to be able to keep up with sales and we’re in the process of doing that.

What we have done here is we’ve changed our business model. We’ve changed our go-to-market strategy. We’ve changed our customer base and we’ve done all of this while we’re running a business. So we’ve got a startup inside of an existing business that over time will eventually become Crexendo, all of our customers are going to be Crexendo by the end of this year. We’re working diligently with our StoresOnline customers which are going to be our SOHO, small business division to make sure that every one of those is an affiliate. All of our university customers are going to be affiliates, which is all lead generation.

It all leads to the eventual acceleration in sales and fulfillment. And we’re very close. What we’ve done is like threading a needle on a rolling ship in an hurricane and we’ve accomplished it. And I am so proud of these people that I can’t even begin to tell you how proud I am. And if they can accomplish that, the rest of this is going to be relatively easy in comparison. But for the last year or so, it’s been controlled chaos around here and it’s starting to really resemble a world class business.

And as we get more leads and more sales, you’re going to see it, everyone else is going to see it. And I don’t know what else I can tell you.

Jay Harris – Goldsmith & Harris

Steve, just in response to my question, I’ve seen numbers on a consecutive quarterly basis, I didn’t have much of a chance to read your press release but there were no tabulations showing quarter-over-quarter growth for your telecom or your web services business and that’s what I am addressing?

Steve Mihaylo

That’s in…

Jay Harris – Goldsmith & Harris

And that’s what I would like to see and I would like to see on future quarters.

Steve Mihaylo

Okay. We’ll do that but, it’s in our 10-Q. If you get to 10-Q and you read it, it’s all in there.

Jay Harris – Goldsmith & Harris

The press release was out a half hour after you started the conference call. I can’t read the 10-Q until it’s filed. I need information if I am going to be following this Company, if I am interested in this Company I need information at the time of the conference call.

Steve Mihaylo

And you know what? In the future, we’ll delay it by a day to make sure you’ve got all of that information.

Jay Harris – Goldsmith & Harris

All right.

Steve Mihaylo

And work diligently to do it on a Monday or a Tuesday so you’ve got it to read over the weekend.

Jay Harris – Goldsmith & Harris

Fair enough. Thank you for announcing [ph].

Steve Mihaylo

Is that acceptable?

Jay Harris – Goldsmith & Harris

Absolutely.

Steve Mihaylo

Okay, thank you. Okay, thank you buddy.

Operator

(Operator Instructions) Our next question comes from Austin Hopper with AWH Capital.

Austin Hopper – AWH Capital

Hi guys, thanks for taking my questions.

Steve Mihaylo

Good afternoon, Austin.

Austin Hopper – AWH Capital

I want to talk about obviously the sales force and ramping it up. Just to understand what is kind of the gating factor to ramping it up, I mean is it, you want to be careful with your cash or if you had a bunch of extra cash or could you just go out and hire a bunch of people or like help me understand why kind of the five you add a quarter can’t be 20 or 30 if you had – is it resources or what’s holding you back?

Steve Mihaylo

No, it’s not resources it’s training, it’s fulfillment. Most of the people we’re hiring are coming from other companies. They’ve got two week or four week notices. There is a lot of issues involved and I am going to let Doug speak to the specifics but those are some of the issues. If we have all of the money in the world, we might be able to add a few more sales people, but you’d still have training and termination issues with current employers and so on.

We’re not looking for people that are out of work. That usually indicates that they work very good at their previous job. Doug, would you like to comment?

Doug Gaylor

Yes, so we had talked about at the beginning of Q1 changes in our trending programs, changes in our tracking processes so that we could make sure that the reps that we were hiring were coming on board and following a pretty strict training regime and then getting into very monitored metrics as far as activity goes, so that we could limit that turnover and Jeff Bash asked on an earlier question, slow that transition of losing reps and bringing on new reps.

So as you look at our hiring process right now, obviously concentrating on hiring more quality as opposed to quantity, so we can get reps on board and get them productive and accretive as quick as possible. My philosophy is not to go out and hire 15 and lose 10 of them. I want to curve that as much as possible because losing a sales rep costs me time, effort and money so I want to obviously go out there, hire these reps, get them trained, get them accretive as soon as possible. So we’re spending more time in the interview process, more time in the hiring process to get good quality candidates that have a much better stick factor after hiring.

Austin Hopper – AWH Capital

Okay. And just given the – sorry, go ahead.

Steve Mihaylo

Robin, I mean Austin.

Austin Hopper – AWH Capital

Yes, I would just say…

Steve Mihaylo

I’m resistant to say, Austin if you’ve got a follow-up question.

Austin Hopper – AWH Capital

Yes. Can you hear me? Hello.

Steve Mihaylo

Go ahead.

Austin Hopper – AWH Capital

Yes, we must have a bad connection.

Steve Mihaylo

Yes, we’re here.

Austin Hopper – AWH Capital

Okay. But I mean given considerable opportunity that you’ve got on the top line on growth opportunity that you have, is it that you need to invest more in your own infrastructure, I mean if you maybe as you invest, presumably there are plenty of candidates out there and you need to weed through them and that’s not an easy process. So should you just have more employees internally so that you just – the number become bigger in terms of the system of interviewing and evaluating and hiring, I mean is to invest more in a Company?

Doug Gaylor

That’s correct, Austin. In my comment, I talked about I hired an in-house recruiter that can do that initial process of screening and going through those resumes. Prior to having that, I had a Director of Sales that was not only responsible for training but also recruiting, interviewing and helping the sales team and obviously as you can relate that’s a lot of task under one person’s responsibility.

So now with a full-time recruiter in-house, that will ramp up dramatically because I’ve got somebody to do the initial resume screening, the initial interviews and getting that process fine tune for my Director of Sales so he can concentrate on the existing reps and helping the existing reps get successful after that training. So again I can’t put all of the emphasis on one person so we’ve hired the right resources out there to help that Director of Sales and interview processes being covered, having lead generation efforts being covered so that can have him concentrating on making these sales reps successful once they come on board.

So with that new recruiter in place I would anticipate that we’ll be able to increase the size of our sales training classes because we’ll be able to fine tune our interview process.

Austin Hopper – AWH Capital

Okay, your Crexendo business solutions revenues, I think they were, I think in the press release $692,000, so I guess down sequentially from $770,000 in Q1. Why is that not just going up all the time? Why is that down?

Steve Mihaylo

It’s because Austin we were also transitioning our fulfillment team and consolidating them here in Arizona from Utah along with our accounting team. You’re going to see that start to sequentially move up, but we’ve got a bigger backlog as a result of this than we did in Q1.

Austin Hopper – AWH Capital

Okay. And then you talked about your consumable AR balance and as that draws down probably the next, what, year and a half or so. And sort of hypothetically if that was sort of that occurred just drawn down and that was gone and so you had some legacy stuff related to your old business and then the new businesses in their current state, what kind of operating expenses are you looking at and just to try to understand kind of like what the cash burn would be in that type of scenario?

Steve Mihaylo

Well we expect to be profitable in the next 18 months. And I think that when we get to 18 months out, you’re going to see a business that has roughly about 65% to 70% gross margins on everything except the internet resell business and that will be closer to 30%. So our blended rate will probably be in the 60% rate.

And I would think once we get to breakeven, you’re going to see about a half of that fall through the bottom line or maybe even a little bit more. So that’s the kind of the think you can start to model against. But I would give us at least one more quarter preferably to before you start honing your business model and getting our comments on it, because until we get consolidated here and we reduce the expenses in Utah, it’s still going to be a little bit of a moving target.

Austin Hopper – AWH Capital

Okay, great. And then more constructive way I just sort of the echo the previous guys comments, I don’t need the press release out on a Thursday and the call on a Monday, but I just kind of way to get the press release out before the call just so we can read it, that definitely would be helpful to me. Thank you.

Steve Mihaylo

Thank you. Maurice, we’re going to take one more question. We’ve been going for about an hour now, in fact more than an hour. So one more question and then we’re going to have to wrap it up.

Operator

(Operator Instructions) It appears there are no further questions at this time.

Steve Mihaylo

You know what? It looks like. Okay, great. Thank you everyone. We look forward to talking with you after the September quarter and we really appreciate your support and your involvement in our Company. Good afternoon.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Crexendo's CEO Discusses Q2 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts