Fusion Telecommunications International, Inc. Q2 2008 Earnings Call Transcript

Fusion Telecommunications International, Inc. (FSN)

Q2 2008 Earnings Call

August 14, 2008 1:00 pm ET

Executives

Philip D. Turits - Secretary, Treasurer, Director

Matthew D. Rosen - Chief Executive Officer, Director

Gordon Hutchins, Jr. - President, Chief Operating Officer

Barbara Hughes - Chief Financial Officer

Presentation

Operator

Welcome to Fusion’s second quarter 2008 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to Philip Turits, Treasurer.

Philip D. Turits

Welcome to Fusion’s second quarter 2008 earnings conference call. Representing the company today are Matt Rosen, Chief Executive Officer, Don Hutchins, President and Chief Operating Officer, and Barbara Hughes, Chief Financial Officer.

Before I turn the call over to Matt for opening remarks, I remind you that statements made during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995 and are subject to uncertainties and risks.

Fusion’s future results may differ materially from those anticipated and discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences have been described in the press release issued today and in Fusion’s filings with the SEC. I refer you to these sources for additional information. I also point out that remarks made during the conference call are based on information and understandings that are believed to be accurate as of today’s date, August 14, 2008.

This call is the property of Fusion. Any distribution, transmission, broadcast or rebroadcast in any form without the express written consent of the company is prohibited.

With those announcements complete, I will turn the call over to Matt Rosen.

Matthew D. Rosen

I’m pleased to welcome everyone to Fusion’s second quarter 2008 earnings conference call. This afternoon I’ll provide you with an update on our company’s recent accomplishments and our near-term corporate objectives. I will then turn the call over to Don Hutchins, President and Chief Operating Officer, who will review our business operations. Finally, Barbara Hughes our Chief Financial Officer will review our financial results for the quarter.

The second quarter of 2008 was a challenging quarter for Fusion but a quarter in which we nonetheless made important progress toward our overall business objectives. In our carrier business segment revenues were essentially unchanged from the first quarter of 2008. This lack of growth was largely a result of historical quarter-to-quarter peaks and valleys of the carrier business along with other characteristics that Don will discuss in a few minutes. Yet despite the lack of revenue growth in our largest business segment, it’s important to note that we still improved adjusted EBITDA by 2% compared to the second quarter of 2007. I’d also like to note that the sales results for the first half of the third quarter show very encouraging signs of growth in the carrier segment.

As we previously discussed, it’s our strategy to focus primarily on growing our higher margin corporate and consumer business segments which we believe will ultimately maximize the overall value of our business. To that end I’m pleased that we have made major progress in our corporate segment during the first quarter as we expanded our marketing efforts adding new sales agents and increased revenues by 33% from the prior quarter. Although a number of delays have lengthened the revenue ramp-up period for our consumer segment, we still made significant progress as we expanded international distribution and launched several important marketing initiatives both here and abroad.

As we work through the remaining two quarters of this year, we continue to focus our collective corporate effort on driving improved operating results. We intend to build on our strong technical and operational infrastructure, feature rich products and service, and establish distribution channels and to translate these significant investments into material growth in both revenue and margin.

In regards to financing activities, we raised approximately $1.3 million through a combination of debt and equity during the second quarter. These funds were instrumental in providing much of the working capital needed by our business during the quarter. However, we nonetheless recognize that our continued growth will require additional capital. In our last conference call I mentioned that we were investigating financing alternatives that would provide the necessary working capital, enable us to expand the scope of our business, and allow us to accelerate sales and marketing activities within our corporate and consumer segments.

I’m now pleased to report that we have made meaningful progress in this area, and although there can be no assurances we believe that we are well positioned to secure the required funding. We are excited about concluding such a meaningful financing as it will give us the ability to execute on a variety of opportunities we were previously unable to address.

I’ll now ask Don Hutchins to review our operations in each of our three business segments.

Gordon Hutchins, Jr.

As we review Fusion’s business operations, let’s start with the carrier services segment. Although we continue to emphasize the growth of our corporate and consumer segments, carrier services is still the largest segment of our business. During the second quarter of 2008 carrier revenues were essentially flat when compared to the first quarter of 2008, a fact that Matt has already mentioned. This lack of growth was attributable to several factors including the general volatility of the carrier business and its historical quarter-to-quarter variations, our conscious decision to limit certain categories of traffic and revenue in order to improve cash flow and reduce our requirements for working capital, and the fact that our working capital limitations precluded our ability to invest in certain growth opportunities.

However, during the second quarter of 2008 we were still able to add 30 new carrier customers and vendors, increase transmission capacity to several of our largest customers and vendors, and optimize the geographic and time of day utilization of our network, all key steps to position the carrier segment for what we anticipate will be meaningful improvement in financial results during the remaining quarters of this year. In fact as Matt already mentioned, the carrier sales results for the first six weeks of the current quarter have been very good and have given us encouragement that the final results for the third quarter will reflect significant improvement when compared to the results for the second quarter.

I am also pleased to note that several of our day to day relationships with our carrier customers and vendors have led to opportunities to develop significant business for our corporate and consumer segments. The results of such cross-marketing are just one more benefit the carrier business brings to the rest of the company.

Although our strategic plans still anticipate that revenues from the carrier segment will constitute a lower percentage of total company revenues in the future, we will continue to add carriers both customers and vendors to our global network and to grow this important business segment, thus enhancing our overall network coverage, improving network quality, and reducing network costs for all three segments of our business.

Second, let’s look at our corporate services segment. During previous conference calls we have spoken about our new service offerings for corporate customers: Business telecommunication services that drive efficiency and cost savings for small, medium and large business customers; provide those customers with new and innovative features; and deliver significant cost savings to the customer. We’ve also spoken about our development of both a direct sales force and an agent distribution channel for these services. During the second quarter of 2008 we continued to expand our agent distribution channel and as of today we have 35 agents in 17 states representing us in the market place. We also continue to grow our focus on direct sales in order to maintain a healthy balance between our two distribution channels.

As a result of these efforts, second quarter revenue from our corporate segment increased 33% over the prior quarter and we increased the average monthly recurring charge per customer by 20% compared to the first quarter. We were also able to increase the average monthly charge per customer in our outstanding proposals by over 50%. As of today our customer base includes over 60 corporations in 16 states and six foreign countries and the total value of our customer contracts is over $700,000 an increase of 75% compared to the same figure just three months ago. We have also seen a 20% increase in the pipeline or backlog of proposals outstanding which now has a contract value of over $1.8 million and we are seeing growing interest in our corporate services in Latin America as a result of our in-country marketing activities.

Finally within our corporate segment we have begun to focus more of our executive time on sales to very large enterprise customers. While this is a relatively new focus for Fusion, the opportunities appear very promising. The sales cycles are often long with such large enterprises. We are hopeful that we will soon see the benefits of the time we’ve invested in this important sales effort.

Finally let’s talk about our consumer services segment. Despite significant progress in this segment the second quarter of 2008 was a very challenging quarter for our consumer business. Several major revenue opportunities were unavoidably delayed and we were unable to recognize the revenue anticipated from them during the quarter. We also saw growing competition in certain segments of the consumer market. As a result we are now focusing on marketing our services in those areas with less direct competition, marketing to specific customer segments where we have unique product capabilities or unique distribution arrangements, and other similar steps designed to maximize our opportunity to achieve our aggressive growth targets for this key segment of our business.

During our last conference call I reported on the launch of our new website and web portal and the ways in which they’d enhanced functionality, facilitated the development of new service applications for our customers, and provided our network of distributors with the necessary support infrastructure to cost-effectively deliver our services to the market place. The second quarter was one in which we began to build on those strengths and execute on certain strategic initiatives designed to significantly expand our global market presence.

The first such initiative is our continuing effort to market our consumer services through unique social networking sites and web-based communities. We have previously described our development of a Chinese language soft phone and related services for Jinti a major social networking site in China that attracts over 20 million unique visitors per month. I am pleased to announce that in conjunction with the recent opening of the Olympics we have released our Chinese language Efonica soft phone and launched our initial service offerings for the Chinese market. We are pleased with the fact that we added over 2,000 new subscribers in the first week following the launch and we are very enthused about the potential of the rapidly-growing Chinese market.

A second initiative is the expansion of our business presence in Latin America. During the second quarter we widened the distribution of our Efonica consumer services in that region and introduced our existing suite of corporate services to Latin America. We also launched Mobilinea the Latin American version of our Mobilink service which will allow our customers in El Salvador, Guatemala, and other Latin American countries to place voice over Internet calls from their mobile telephones and communicate cost effectively with friends and family in the United States and throughout the world.

In a third initiative our plans for strategic expansions in a new market took a big step forward during the second quarter as we opened our sales office in the Philippines and launched the sale of our Efonica consumer services in that country. Today just 60 days after that launch we have a very active sales force in place and a growing base of distributors and customers to whom we are providing services. The size of the market in the Philippines as well as the related market for sales to the millions of Philippinos living throughout the world represent an outstanding opportunity for Fusion.

We strongly believe that initiatives such as these will play a key role in the future success of the consumer market segment.

This covers the highlights of our activities in the carrier, corporate and consumer business segments during the second quarter of 2008. I appreciate the opportunity to review our operations and performance with you today and I look forward to continuing to report on Fusion’s business accomplishments in the future.

Matthew D. Rosen

As we continue to progress through the two remaining quarters of 2008, I’m optimistic that the significant opportunities before us combined with the continued execution of our business plan will maximize the opportunity for Fusion’s true value to ultimately be reflected in its margin capitalization.

At this time I will turn the call over to Barbara Hughes for a review of our financial results.

Barbara Hughes

I’d like to spend a few minutes this afternoon reviewing our financial results. Our consolidated revenues for the quarter ended June 30, 2008 totaled $11.4 million a decrease of 17% compared to revenues of $13.7 million for the quarter ended June 30, 2007. Revenues for the second quarter of 2008 were relatively flat however when compared to the first quarter of 2008.

The change over the prior year was primarily attributable to a decrease in the company’s carrier services revenues as compared to the second quarter of 2007 reflecting the volatility and other factors of the segments that we have previously discussed. As already noted we are seeing increased carrier revenues during the first half of the third quarter.

Revenues from the consumers, corporations and other segments totaled $0.35 million in the second quarter of 2008 compared to $0.4 million in the second quarter of 2007. As previously mentioned revenues in this segment were adversely affected during the second quarter by delays in recovering consumer customers’ loss as a result of technical difficulties experienced during the prior quarter and delays in the ramp-up period of certain consumer revenue opportunities. However as mentioned, our corporate sales are continuing to grow and we anticipate improved results in that segment in the coming quarters.

Consolidated gross margins decreased slightly to 6.6% in the second quarter of 2008 compared to 7.2% in the second quarter of 2007. Selling, general and administrative expenses decreased from the second quarter of 2007 to $3.0 million. This represents an improvement of 6.7% compared to the second quarter of 2007. The decrease was primarily attributable to the company’s continuing focus on cost containment and maximizing infrastructure efficiencies.

Adjusted EBITDA improved $0.05 million or 2.2% to a -$2.03 million for the quarter ended June 30, 2008 compared to -$2.07 million in the second quarter of 2007. We believe that adjusted EBITDA provides a more comparative assessment of our operating performance by excluding the effects of non-cash and certain one-time expenses or adjustments that may vary from period to period.

Although the company had an increase in net loss of $1.1 million compared to the second quarter of the prior year, there were certain one-time items that affected both periods. For the second quarter of 2008 the net loss was -$2.9 million or -$0.08 per share compared to a net loss of -$1.8 million or -$0.07 per share for the second quarter of 2007. However the second quarter of the prior year had a gain on the sale of our equity investments in our subsidiary in India of approximately $0.9 million and the second quarter of 2008 had a loss on disposal of fixed assets of approximately $0.06 million. Excluding these two factors the increase year-over-year was approximately $0.1 million.

Turning to our balance sheet, as of June 30, 2008 total current assets were $4.7 million compared to $6.3 million at December 31, 2007. This decrease was due to a decrease in accounts receivable of $1.8 million offset by an increase in cash and cash equivalents of $1.1 million. The decrease in accounts receivable was due to the adjustment of some of our customer payment cycles negotiated it improve our working capital position as well as the decrease in billed revenues in the first and second quarters of 2008 compared to the fourth quarter of 2007.

We are continuing to work on several opportunities to improve our cash flow position. Property and equipment also decreased $0.7 million due to additional depreciation on existing assets and the $0.06 million loss on disposal of certain fixed assets mentioned before which was offset by an increase of $0.02 million from new assets purchased.

Total current liabilities were $11.2 million at June 30, 2008 compared to $10.5 million as of December 31, 2007 due primarily to an increase in notes payable. As noted last quarter the company raised $1.8 million in the first quarter in equity financing and a total of $1.3 million was raised in the second quarter in a combination of debt and equity financing.

We are continuing to explore other financing opportunities that we expect will contribute to a stronger working capital position as we continue to work on building the revenue base and bridging the company to the point of adjusted EBITDA positive. Total liabilities in stockholders’ equity at June 30, 2008 were $15.8 million compared to $18.1 million as of December 31, 2007.

In conclusion, while the results of the second quarter of 2008 did not meet our own expectations we are pleased with the growth of our corporate sales segment, the quality and quantity of the opportunities available with our consumer segment, the recent opening of our sales office in the Philippines, and the launch of our marketing effort with Jinti. We understand the work and challenges that we have ahead of us. We continue to be very focused on driving improved financial results and we look forward to reporting our progress during the remainder of the year.

This concludes my prepared remarks. At this time we will open the call to your questions.

Question-and-Answer Session

Operator

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

Matthew D. Rosen

I just wanted to thank everyone for joining the call today and we look forward to updating you further on our next call. Thanks so much.

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