Asure Software Inc (ASUR) 2003 Q4 法說會逐字稿

Welcome to Forgent Network's fiscal 2003 fourth quarter and year ending July 31, 2003 earnings announcement.

Today's call is being recorded.

For opening remarks and introductions, I would like to turn the call over to Mr. Michael Noonan, Director of Investor Relations.

Please go ahead sir.

Thank you, and welcome, everybody, to today's conference call.

Before we start, I'd like to mention that some of the statements made by management during this call might include projections, estimates and other forward-looking information.

This would include any discussion of the Company's business outlook.

These particular forward-looking statements and all other statements that may be made on this call that are not historical facts are subject to a number of risks and uncertainties that could affect their outcome.

You are urged to consider the risk factors relating to the Company's business contained in our latest periodic filing reports on file with the Securities and Exchange Commission.

These risk factors are important and they could cause actual results to differ materially.

This call is being recorded on behalf of Forgent and is copyrighted material; it cannot be re-recorded or rebroadcast without the Company's express permission, and your participation implies consent to the call's recording.

After we have completed our review of the quarter, we will open up the call for questions from the analyst community.

Now, I would like to turn the call over to Richard Snyder, Chairman and Chief Executive Officer of Forgent Networks.

Good morning everyone, and thank you for attending our conference call.

With me today are Jay Peterson, Vice President of Finance and Chief financial Officer;

Ken Kalinoski, Vice President and Chief Technology officer;

Russ Caccamisi, Senior Vice President of Sales; and Nancy Harris, Vice President of Marketing.

Although you'll not be hearing prepared remarks from them, I've asked the Forgent executive team to be on the call so that you can ask them questions directly at the end of our call.

I'm pleased with the results of our fourth quarter.

License revenue from intellectual property was a record 23.3 million, which continues to be an excellent source of funding for the Company's future growth.

While our enterprise software sales were down slightly, like most others in this market, we launched new products that customers are very excited about and it set the stage for software growth for FY 2004.

The fourth quarter concluded FY 2003 with strong momentum, and I'd like to spend a few minutes talking about how we got there and then look forward to what lies ahead.

This past year marked significant progress in our business strategy, but certainly had its challenges as well.

We have succeeded in transforming ourselves into a software company by doubling software revenue on a year to year basis.

We shed unprofitable, non-strategic businesses and the costs that went with them.

We continued to build on an IP program that strengthened and gained momentum during the year.

The result is a financially strong company that has excellent working capital, no debt and sufficient cash to fund our core business, repurchase shares, or to make targeted acquisitions that grow our topline.

We have experienced people at Forgent who are some of the best in their field, and I'm confident in their ability to make this business successful.

On the other hand, rapidly growing a new software enterprise company in this market continues to be difficult.

We're answering this challenge by improving our value proposition with new products, such as ALLIANCE, segmenting our customers for focus, continuing to improve our professional direct sales team and partnering with world-class companies to reach mutual customers.

A year or so ago, we began this journey by leveraging our experience in videoconferencing to develop tools for video management.

Over the past year, we've extended our value from that video-centric beginning to include schedule of media, as well as other critical business functions such as room, resources and people.

We have now taken even further steps with our ALLIANCE software suite, which is a complete integration of powerful enterprise scheduling with rich media automation, and all of this is driven from a common user interface.

We call this space enterprise meeting automation, or the EMA market.

Our analysis shows this to be a $500 million opportunity, growing at about 15 to 20 percent compound annual growth rate.

ALLIANCE will create a new level of meeting performance in the enterprise to speed decision making, improve productivity and significantly reduce cost.

You can think of it in the same way that just-in-time manufacturing, customer relationship management and enterprise resource planning were developed to fix manually intensive and costly business processes.

There are many companies that offer limited point solutions around the meeting environment.

There are applications for scheduling people, there are interfaces for scheduling audio calls and Web conferences, and there are applications for scheduling videoconferences.

ALLIANCE, however, allows us to offer a uniquely unified solution that is vendor neutral and brings all of these capabilities together in a seamless meeting experience, all driven through a familiar user interface, such as Microsoft Outlook or Lotus Notes.

Our strategy is to provide technology to improve the way people meet and do business while we reduce the associated cost.

The value proposition to our customers is to reduce meeting time and cost by 50 percent.

Now let me switch to our intellectual property licensing program.

We continue to find companies that have an interest in purchasing a license for our 672 still image compression patent.

The intellectual property licensing program has produced over 80 million since its inception six quarters ago, and produced almost 50 million during the last fiscal year.

A year ago, we were under pressure from organizations that attempted to discredit this patent.

The integrity of this patent, however, has prevailed.

The intellectual property licensing program continues to show more evidence that we can continue to gain license revenue in the future.

We also continue to broaden our geographic coverage and to put more companies on notice.

Let me summarize some key results from fiscal 2003.

We succeeded in doubling our software revenues year to year; attained a 37 cent earnings per share for the fiscal year; achieved profitability for the sixth consecutive quarter; we grew cash reserves by over 25 percent to approximately 25 million; and we finalized the sale of our videoconferencing hardware services business.

Now I'll turn the call over to Jay to give you some specifics of our financial execution.

Thank you.

Good morning.

I would like to discuss three areas this morning -- first off, highlights of the financial performance for our company over the last fiscal year; second, a discussion on operational results from the fourth fiscal quarter; and third, provide guidance for the future.

First off, let me start with fiscal year 2003 results.

Overall revenue exceeded $53 million this past year, a growth rate of 61 percent.

Revenue from our IP program totaled approximately $49 million, and program to date, IP has generated in excess of $80 million.

And in our second year of selling software, we doubled software revenue from $2.2 million to $4.4 million.

Gross margins for the year were 47 percent.

This is a 3 percentage point improvement over the prior year's performance of 44 percent.

Total operating expenses for the year were approximately $16 million, a $3.7 million reduction from the prior year.

And over the past year we have reduced infrastructure expenses -- defined as unproductive assets, underutilized office space, depreciation expense and equipment leases -- by approximately $500,000 a quarter, and this performance will save us in excess of $2 million over the next fiscal year.

Earnings per share this last year amounted to 30 cents per share -- that's from operations -- and it is the best financial performance since this company went public in the early '90s.

Our balance sheet is stronger today than it was a year ago, as measured by cash, working capital, and our current ratio; specifically, we grew cash this past year by $5 million; we more than tripled working capital, from $9 million to $29 million; and our current ratio improved to a 5.7.

And the specifics are of that, for every $1 of short-term liabilities we have on our balance sheet, we have approximately $6 in cash and receivables.

I would also like to note that in the last year, we increased current assets by $8 million.

So current assets went up $8 million in the last year with a corresponding decrease in current liabilities by $11 million.

Also note that our NOL loss carryforwards amount to approximately $135 million and our overall effective tax rate is currently 2 percent.

That is for last year and that is also for the next several years.

Let me now switch to the fourth quarter.

In the fourth quarter, revenues grew by 82 percent, lead by our best intellectual property revenue quarter to date.

Software revenue amounted to approximately $1 million this past quarter, a decrease of 13 percent from the prior quarter.

Gross margins were 48 percent for the quarter, and in absolute dollars, nearly doubled over the prior quarter's performance.

Operating expenses were approximately $4.5 million, and that is down slightly from the prior quarter.

This past quarter's financial performance marked our sixth consecutive quarter of profitability.

EPS for the quarter amounted to 28 cents a share from operations and 16 cents a share bottom line.

This quarterly operating income performance is the highest in the Company's history.

DSO ended at 35 days, an improvement over the prior quarter by 5 days; and one thing I would like to call out is that we took an approximately $425,000 noncash charge for impairment of excess office space, and this charge is not anticipated to occur in the future.

The last topic I would like to discuss is guidance going forward, and there are five areas I would like to provide guidance on.

First off, software revenue is expected to be flat with prior quarter; however, based on early optimism from large enterprise customers and assuming just a little help from the economy, we are outlooking software revenues for the year of between 6 and $7 million.

And over a longer period of time, in the next three to four years, we believe we will build our software business to be between 40 and $50 million a year in annual revenues.

Second guidance point -- based on performance quarter to date, we will achieve IP licensing revenues in this quarter, marking our seventh consecutive quarter of licensing revenues.

In addition, we expect IP revenue in Q2, and throughout fiscal year 2004 and throughout fiscal year 2005.

Let me now offer a brief perspective on the breadth of the program.

We are currently in licensing discussions with companies in Japan, South Korea, the United States, Taiwan, and several companies in Europe; and with fields of use covering printing devices, scanners, personal computers, digital cameras, certain video cameras, certain cellphones, rendering software and other technologies.

The third guidance point is that overall spending levels are being planned to be approximately flat with Q4 levels.

Note that we will continue to reduce infrastructure costs while redirecting that spending to customer facing and product development areas.

The fourth guidance point is that we are forecasting to be profitable for fiscal year 2004.

Note, however, that due to the peaks and valleys of our IP licensing business, there could be a quarter where the profit contribution from IP will not cover the investment we are making in our software business; and in that event, we would not achieve profitability for that given particular quarter.

The fifth guidance point is that we are going to maintain healthy cash balances and a strong working capital position.

And one final point regarding our share repurchase program -- last quarter, we repurchased approximately 200,000 shares at an average price of $2.61.

Program to date, we have purchased 1.7 million shares -- just under 2 million -- at an average price of $2.72 a share.

And also, additional repurchases in the future will be assessed on a periodic basis.

I would now like to turn the call back over to our Chief Executive Officer, Richard Snyder.

Thanks Jay.

I'd like you to come away from today's call with the following main points.

Forgent is a growing software company focused on an emerging space called enterprise meeting automation.

This EMA market is a large market opportunity focused on fixing a broken business process.

We're getting sales traction to date, and we believe that ALLIANCE momentum is increasing.

We have pilots in place that represent hundreds of rooms and thousands of users.

We believe that these pilots will lead to thousands of rooms and tens of thousands of users when deployed globally.

We have a successful IP program that continues to provide cash for stability and growth.

We have an experienced management team and the financial resources to be successful.

Our goal is to be the market leader in this segment.

We believe we have the right people, the right products and the necessary resources to make this year one of our best.

We would certainly benefit from any improvement in the enterprise software market, but we will focus our efforts on things we can control, continue to strive for excellent execution, listen carefully to our customers needs and to satisfy those needs with creative products and solutions.

Thank you for listening.

I would now like to turn the call back over to Michael for questions and answers.

Thank you gentlemen.

And with that, I would like to open the meeting for questions and answers from the analysts.

We will ask (indiscernible) to coordinate the session.

(OPERATOR INSTRUCTIONS).

Gentlemen, your first question comes from Adrian Dowes (ph) of Jim Hartwell.

If I heard you correctly in terms of IP licensing, there may be a quarter (technical difficulty)

Gentlemen, I apologize; it appears that we've lost Adrian's connection.

Sir, if you could please key *1 again we can get you back into the queue and you can complete your question.

Thank you.

Please go ahead.

Sorry about that.

No problem.

Please repeat the question.

IP revenue through the -- you indicated in '04, will be volatile, given the particular closing of deals.

If I understood you correctly, there could be a quarter you said where IP revenue would be less than 4 million, because that's the current expense rate.

Is that correct?

Yes.

Let me restate that.

First off, we're trying to give some guidance here that, based on the past six quarters of our performance, you would call it conservative guidance.

We do not have a particular quarter in the horizon where we do not foresee IP recoveries, but we're just trying to be very cautious in the approach that we provide to our investors.

Can you talk a little bit about the software, the launch of ALLIANCE, the number of new customers that you've signed up?

Just to give us a sense of the amount of trial and demoing that's going on with the product.

I would be happy to address that.

ALLIANCE is going very well, thank you.

It was released a few hours over 48 days ago, and at the present time, we have better -- we've got about 20 instances of ALLIANCE that are installed in one form or another in the marketplace.

That's made up of a combination of existing customers of GSS and VNP that have upgraded, of prospects, as well as several net new ALLIANCE customers.

And I think the greatest encouragement to me is twofold -- first of all, what we hear are large enterprise customers that have begun to implement ALLIANCE saying about what its impact could be on their business; and secondly, the impact that ALLIANCE has had in our pipeline.

We've talked about the size and the depth of the pipeline in the past, but I would be less than candid with you if I didn't tell you that the pipeline was certainly resplendent with some names that many of us had never heard of before.

That is no longer the case.

You heard (indiscernible) talk a little bit about our focus and segmentation.

We are clearly focused, if not exclusively focused, on large enterprises in certain industry segments, the predominant of which are financial services, pharmaceuticals and consumer products, as well as the U.S. federal government.

And all of those show, I would say, substantial interest and promise.

So we are cautiously optimistic.

The additional patents that you have -- what plans are there underway to extend and start litigating or going after patent violators of some of the other patents that you have?

We have spent the last three or four months doing some fairly in-depth investigation into those patents, and looking at how to stream those into the current process.

And we believe in the coming quarter that we'll be able to start that process and take more definitive action.

It may take awhile for us to get to the point where we are (indiscernible) noticing customers, but we clearly have an opportunity to follow on with some activity there.

Would you look to have another law firm involved with different economics than the initial deal?

Yes, we're exploring that at the moment.

Final question.

How many shares have you bought back so far in this quarter?

Just under 200,000 shares this quarter.

This current fiscal quarter?

Since August 1st.

David Ushbach (ph) of Sanders Morris Harris.

A little follow up on your outlook on the software revenues, 6 to 7 million.

Is that primarily coming from, like you have indicated earlier, various users, the 20 various installations of the various forms that you already have?

Or is that anticipating maybe -- as you also mentioned, you've got some new names (inaudible) recognized in the pipeline that are going to get you the 6 and 7.

What kind of combination would you be expecting off of existing type of variations versus new kind of customers, so to speak?

The majority of that will be from net new enterprise customers.

So at this point in time, you've got to be very optimistic then that the sale cycle is very encouraging for you then?

The sales cycle is about what we expected.

And the number of salespeople supporting that initiative right now right is basically what you had outlined in the third quarter -- nothing has changed from that?

Nothing has changed, that's correct.

What kind of timeline would you anticipate -- what kind of expectations (indiscernible) would you need to begin the ramp up (indiscernible)?

To ramp the headcount?

Yes.

We have enough headcount on board to accomplish our plans for this fiscal year.

But what I am saying is, what do you need -- what could you do to get -- that 6 to 7 million right now is basically what your sales force is in place right now.

So you are saying you'll need more salespeople to get above that number at some point in time, if you were to begin to exceed that 6 to 7?

At some point in time, that's correct.

Any idea about what kind of timelines you may need to -- what kind of expectations, based off this sales cycle (indiscernible) anticipate (inaudible)?

We've got some thoughts internally, but I'm not prepared to share that.

Sheldon Simon of Adage Capital.

I'm wondering if you guys have a sense whether your customers (indiscernible) whether it be on the corporate side or the IT side, as it relates to ALLIANCE, is beginning to loosen up a little bit, so that we should feel encouraged that at -- at least at their willingness to buy products like this, where there might not have been so much of a desire a year or 15 months ago?

I think that's a great question.

I spent personally better than 50 percent of my time with large IT customers over the last 50 or 60 days, both in the US and in Europe.

And basically what I see is first of all, people are still spending money for the most part out of a calendar year 2003 budget that was set about this time last year, and we all know how bad the environment sucked this time last year.

We are seeing some encouraging discussion about increases in IT spending that people are putting into their budget for calendar year 2004, and thus, the reason for my cautious optimism.

Presuming no unforeseen cataclysm, I think most of the pundits are saying some single digit increase in IT spending that enterprise software will get its proportionate share of.

I know for a fact that we have customers that are in pilot now that are putting larger deployments into their budget for calendar year 2004, and we'll see how those budgets play out.

So yes, I see some cause for optimism.

Jeff Dabbs of Kercheville & Co. (ph)

Number one -- Jay, of the total authorization, how much have you purchased?

Could you repeat that again?

Yes.

Recall about 18 months ago, the Board extended the authorization from 2 million shares to 3 million shares.

And of that 3 million share authorization, we have repurchased approximately 1.7 million shares, leaving 1.3 in the balance.

Any word on maybe extending the authorization -- or increasing the authorization?

The Board continues to look at increasing that 3 million share authorization, but no new news or definitive news at this point in time.

Have you guys look at what the return would be on buying shares versus doing acquisitions at this point?

Could you give us any kind of insight on what you guys are thinking at this point?

We certainly have discussed that at the Board level, and I think that the priority continues to look at how we can grow this business as quickly as possible.

And I think that the emphasis would certainly be on looking at what in the marketplace might be an acquisition that could add to our topline quickly, and then certainly to continue to look for the return that we could get as the share price increases.

And the deals that you would be looking at would be immediately accretive?

We certainly hope so, but in today's environment, as you know, it is very difficult to do that with the accounting the way it is.

We would consider the topline to be the primary focus to get things moving and get the momentum, and to make it accretive as quickly as possible.

On ALLIANCE, Russ, one of the things that we kind of talked about was that this, whether we wanted to title it, was a product transition.

And it looks like the first quarter is going to continue that, as you have got some pilots going out and testing going on.

I'm kind of impressed by the guidance if you take into consideration the flat.

You would expect them in the second, third and fourth quarter of this year to kind of see a little bit of a hockey stick.

What's the potential to really see the significant hockey stick, assuming the economy is a little bit better than anticipated and that enterprise software sales uptick like a lot of people are predicting?

MY crystal ball is not that good, to be honest with you.

Clearly, we will see a beginning of an inflection point later in this fiscal year.

We've indicated that by the combination of the two points of guidance that Jay gave you on software revenue.

What we need to be doing is getting these large enterprise deals sold, getting the pilots successfully installed, and then the inflection will come when we begin to get the large global deployments.

Just to give everybody a sense on what I mean by a pilot, let me give you just one representative data point of a financial institution that we closed about a week ago.

The order that they gave us for their pilot was $131,280.

You can add one order of magnitude to that number when we get ready to do global deployment with that customer over the next year or so.

So these are not $2.75 pilots that we are talking about, nor do they take $2.75 worth of time.

Are you -- I guess there was some discussion on partnering.

Is there anything that you can point to or any partners that you could discuss on the call at this point?

I think that we have a number of partners that we've had for some time.

We are particularly pleased with the performance and the optimism that we see from IBM Global Services.

In fact, we talked last time -- we did our first deal with them and we have several more, shall we say, in queue.

Last question.

On IP, Jay, when you're looking at the portfolio now versus where you were looking 18 months ago, there were some numbers that kind of were discussed in the marketplace.

Do you think that at this point now, that 18 months in, is the potential for IP greater, equal or less than you originally anticipated?

That's a hard question, Jeff.

Let me give you one perspective on it.

A year ago October, there were several organizations who were trying to negate the patent.

Those activities have been dormant now for 9 or 10 months, and we believe, based on the momentum and the traction we have with this program, that it is greater than we anticipated it to be a year ago.

However, I'd like to caution you that there will be peaks and valleys going forward, but we are optimistic about the future performance of the portfolio.

Andrew May of San Jacinto Securities.

All my questions have been answered, but I just want to say congratulations on a great quarter.

Thank you, Andrew.

David Ushbach of Sanders Morris Harris.

Just a quick follow-up.

You guys have never -- and correct if I'm wrong -- never gave a forecast for VNP sales -- had you -- and guidance?

I don't believe so, David.

We moved fairly quickly after the acquisition of the SCHEDULING solution to kind of a combined software number, and I don't think there was any outlook that we gave early on.

So expressing some optimism for a 6 to $7 million year for 2004 for ALLIANCE speaks to some confidence in what you are seeing internally, then, I suppose.

Is that correct, then?

I hope that's what you take away from it.

We believe we've made the investment; we've gone through some tough times here, but we really are encouraged by the response we're getting from customers with ALLIANCE.

And we believe that that's consistent with the growth numbers we've given you.

The 6 to 7 million is actual ALLIANCE sales and not other software sales?

Correct.

So software sales in total could be higher than that?

Software -- when we think of software sales today we think of ALLIANCE.

So (indiscernible) any other software is negligible in the 6 to 7 million?

The only other revenue that goes to count in there is our professional services, maintenance and so forth.

Gentlemen, your final question comes from Adrian Dowes of Jim Hartwell.

Just a follow-up question.

With the cash position on the balance sheet of over $1 a share, the excess cash flow that you're generating, why wouldn't -- and the prospects three to four years out of revenue growth and the software business being of the magnitude you've alluded to -- why aren't you doing a tender offer to use some of that cash and buy back stock?

Because given that outlook and given the near tern momentum of IP, it seems as though the best investment you could use for your cash is to buy significant amounts of stock back.

Can you talk a little bit about your thoughts there, whether that's been discussed at board level, and perhaps if not, why not?

Let me give you a couple of comments, and then perhaps Jay can also give you some thoughts.

I think we addressed it a little earlier when we talked about -- the Board really sees the opportunity to try to grow this software business as quickly as we can.

We want to scale this.

We have given you kind of the outline of the 40 or $50 million figure over the next several years.

In order to do that, we believe that we're going to need to do some acquisition, to kind of strengthen the parts of the product offering we have.

So that's really a focus that the Board intends to look at.

And of course, having a cash reserve to do that is important.

Number two is the volatility of the IP business.

Even though those cash reserves are there, we want to make sure that we are prudent in being able to keep enough on hand so that we keep the Company stable, and it can operate through any periods where we might go through some valleys that we have described here.

And then on the other hand, as I've mentioned, there is an interest in continuing to look at repurchasing shares, but it's more on an opportunistic basis.

Jay, do you have any other comments there?

No.

I think that sums it up quite well.

Gentleman, there are no additional questions from analysts at this time.

Thank you.

Thank you very much, and we will talk to everybody next quarter.

Ladies and gentlemen, this concludes your conference for today.