Asure Software Inc (ASUR) 2004 Q1 法說會逐字稿

Welcome to your Q1 2004 Forgent earnings conference call. (OPERATOR INSTRUCTIONS).

Now I would like to turn the call over to your host, Michael Noonan, director of investor relations.

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

Before we start the call today, I would 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 filings 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 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.

I'd like to now turn the call over to Richard Snyder, Chairman and Chief Executive Officer of Forgent Networks.

Thank you, Michael.

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 of Development and Chief Technology Officer;

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

Although you will not be hearing prepared remarks from them, I have asked the Forgent management team to be on call so that you can ask them questions directly at the end of the call.

We believe that we've delivered a solid quarter in the software business.

We met our software revenue targets, we continued to reduce expenses, and we closed on a strategic acquisition with our purchase of Network Simplicity.

We believe the software business is on target to meet our goals and we're pleased with the performance to date.

As we have cautioned over the past several quarters, the timing of signing licenses for patents in our intellectual property program is challenging to forecast, and therefore, will inevitably lead to peaks and valleys in the program.

We ran well ahead of our expectations and hit a significant high last quarter, and now we have dropped back a bit this quarter.

We have not, however, seen any significant changes relative to the integrity or application of the patent.

We continue to be confident that the IT program can continue to provide positive financial contributions to Forgent, regardless of the uncertain flow.

Our cash position is strong and we do not expect these short-term cycles to affect operations, the funding of the software business, or to continue to make strategic acquisitions that can strengthen our market position.

I'd like to spend a moment to describe the market dynamics we're seeing.

As per our general -- other general industry commentaries, we're seeing mixed demands in the market.

While small and medium-size businesses have increased spending, large enterprises are still reluctant to invest in software applications beyond maintaining their current systems.

We are, however, beginning to see some changes where enterprise productivity improvements are critical, and managers are investing in ways that will help people get their jobs done more efficiently and with less hassle.

So it's early, it's cautious, but it is encouraging.

We have responded to these circumstances in several ways.

We acquired Network Simplicity, which addresses the small and medium-sized business sector through efficient distribution and a range of easy to use products.

We believe this will be an accretive acquisition in the medium-term that allows us to broaden our market and to add new customers.

ALLIANCE, on the other hand, offers our large enterprise customers extensive capability to manage their meeting environment through familiar Microsoft Outlook or Lotus Notes interface.

That is not a trivial issue, because it's very important for enterprise IT organizations, which means no additional training or switching costs are required.

(indiscernible) also are continuing to improve our value proposition with new ALLIANCE enhancements, such as Web conferencing applications, or new products, such as Meeting Room Manager 2004.

We're optimistic about our software business and we believe we can achieve a 10 to 20 percent growth in software over first quarter '04, and we believe that a 6 to $7 million target for the full 2004 is achievable.

On our intellectual property licensing program, as I have said, we continue to find companies that have an interest in purchasing a license for our 672 still image compression patent, and we are vigorously pursuing those opportunities.

The intellectual property licensing program has produced over 82 million since its inception 7 quarters ago.

While the past quarter was down, the intellectual property licensing program continues to show more evidence that we can continue to gain licenses in the future.

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

However, I think this quarter reminded us all that predicting the timing of these licenses will remain difficult.

Let me summarize some key results from the first fiscal quarter of 2004.

We acquired Network Simplicity to strengthen our market position.

We realized intellectual property revenue for the seventh consecutive quarter.

We continued to reduce operating expenses -- cash reserves to approximately $26 million, which includes the cost of purchasing Network Simplicity.

And, we maintained a strong balance sheet and healthy working capital position.

Now I would like to turn the call over to Jay to give you some specifics on our financial execution.

Thank you Dick.

Good morning.

I would like to discuss three different areas this morning -- first off, I'd like to start with an overview of the financial performance for this last fiscal quarter; secondly I would like to talk about some specifics relating to the strength of our balance sheet; and third, I would like to discuss guidance for the future.

Let me turn to the financial results from the income statement.

Overall software revenue, in a very difficult economic environment for enterprise software companies, grew slightly this past quarter to approximately $1 million.

Our intellectual property revenue declined to $2.9 million this past quarter.

I would like to state, however, that we continue to be confident about the program; however, due to the inherent nature of the licensing program, fluctuations of this sort are inevitable.

Let me now turn to gross margins.

Total gross margins were 41 percent, a 7 percent decline from prior quarters' performance of 48 percent.

However, our software margins did in fact increase from 7 percent to 15 percent.

Total operating expenses for the quarter were $4.1 million, a 400,000 reduction, approximately 10 percent from prior quarter.

Over the past 15 months we have reduced infrastructure expenses -- and I define that as unproductive assets, underutilized office space, depreciation, excess equipment leases -- in excess of $500,000 a quarter, and this performance will save us approximately $2 million-plus over the next fiscal year.

In addition, we are forecasting reduced infrastructure expense activities planned this quarter in the range of 100 to $200,000 in savings.

Bottom-line earnings per share for the quarter amounted to a loss of 10 cents, and this was due solely to the lower IP revenues for the quarter.

I would now like to turn to the balance sheet.

First off, our balance sheet continues to remain strong as measured by cash, working capital, our current ratio, and the days sales outstanding metric.

Specifically, we were able to grow cash this past quarter by $1.5 million.

This is the third consecutive quarter that we grew cash.

Keep in mind, however, that we were able to grow cash in the same quarter that we self-funded the $2 million cash acquisition of Network Simplicity.

Our working capital balance was at $23 million.

Our current ratio remained relatively constant at 5.3, meaning for every dollar of short-term liabilities we have on our balance sheet, we have approximately $5 in cash and receivables.

Our day sales outstanding, the primary indicator of the health of one's back-office operations, was 29 days -- an improvement of three days over the last quarter and our lowest DSO, I believe, in Company history.

Note, our NOL loss carryforwards currently amount to approximately $140 million, and our overall effective tax rate is forecasted to be 2 percent.

Let me now turn to guidance.

I would like to provide guidance in five different areas.

First off, as Dick mentioned, software revenue is expected to grow this quarter in the range of 10 to 20 percent over our first quarter's financial performance.

In addition, we are reaffirming our previous guidance of 6 to $7 million in software revenue for this current fiscal year, and between 40 to $50 million in annual software revenues in the next three to four years.

We are forecasting intellectual property licensing revenues this quarter, marking our eighth consecutive quarter of licensing revenues.

In addition, we expect intellectual property revenues in Q3 and Q4 of this year and throughout fiscal year 2004 and fiscal year 2005.

Let me just comment on the breadth of the program.

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

Guidance for operating expense -- we are planning spending levels to be approximately flat with Q1 levels.

Note that we continue to reduce infrastructure costs while redirecting those savings to marketing and other customer-focused areas.

In addition, we believe that we can manage expenses to be flat, while also expending approximately $300,000 on Sarbanes Oxley related requirements over the next several quarters.

We are forecasting to be profitable for fiscal year 2004.

Again, it is important to note that due to the peaks and valleys of our IP licensing program, there could be a quarter where the profit contribution from the intellectual property program would not cover the investment we are making in our software business.

And in that event, we might not achieve profitability for that particular quarter.

One other note on profitability -- we are forecasting that our software business will achieve profitability on a stand-alone basis in the next fiscal year, that is, fiscal year 2005.

And the last guidance point is that we will maintain healthy cash balances and strong working capital positions as we execute our business plan.

One final point regarding our share repurchase program.

Last quarter, we repurchased 137,000 shares at an average price of $3.31 a share.

Program to date, we have repurchased 1.7 million shares at an average price of $2.72.

And note, we have approximately 1.3 million shares yet to purchase out of a 3 million share authorization.

I would now like to turn the call back over to Richard Snyder.

Thanks Jay.

I think it's important that you would come away from today's call with the following points -- Forgent is a growing software company, focused on an emerging growth space that we call meeting automation;

Forgent's focus in this space is both in the enterprise as well as in the small (technical difficulty) business sector; we are getting sales traction today, and believe that momentum is increasing; 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; and finally, our goal is to be the market leader in this segment.

Thank you for listening.

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

Thank you gentlemen.

With that, I'd like to open the meeting for Q&A from the analysts.

We will ask Jeanne (ph) to coordinate the session.

(OPERATOR INSTRUCTIONS).

Neil Goldman (ph), Goldman Capital Management.

First, you said you expect to achieve profitability on the software next year.

What kind of sales volume do you need for that?

Let me give you an approximate number.

It's somewhere in the range of $3 million per quarter.

So a round number is 12 million, gets you to break even or profitability.

Correct.

At a 40 or $50 million run rate, what kind of margin should we achieve just on the software side?

We believe that what we call our timeless business model is an 18 percent net income performance.

And we will be able to achieve that as we hit the 40 to $50 million revenue range.

And 18 percent -- you're talking about pre-tax or post-tax?

Post-tax in our situation, in that our NOLs will preclude us from paying any --

I understand; there would be essentially a pre-tax margin type of thing?

Yes.

One technical question.

On the share count -- in the release it says outstanding 22 896. (indiscernible) like a million 7 from the last quarter.

Hello?

Yeah, just checking that number.

(indiscernible) you show average share is 24 6.

The correct number is 24 6.

So that's the outstanding shares at this moment, right?

That is correct.

And that's after the buyback. (indiscernible) let's say it's 24 5 -- okay?

Yes.

In terms of the licensing, have we managed to have any success on the domestic side as of yet?

We have not really broken out by geography.

The lion's share of the recoveries thus far have been overseas.

We look that there is a significant opportunity yet remaining domestically.

Okay.

On the software side, are you seeing any new competition coming into this space that you will view ultimately as a competitor?

No.

Was that no?

Yes, it was no.

Andrew May, San Jacinto Securities.

I'm trying I'm trying to understand what's leading you to believe that you can achieve the growth and 67 million in revenues of software this year.

So Russ, I'd like to ask you a few questions.

And I'll ask all the questions at once, and you can just answer.

First of all, what do you believe the size and quality of the pipeline to be?

Secondly, what's the ESP on the software?

To help me understand Network Simplicity versus ALLIANCE, could you maybe discuss the sales cycle?

Yes, I'd be happy to.

I'm just finishing writing down my notes.

Let's talk about the size of the pipeline and quality first.

Actually, the size of the pipeline has gone up -- I would call it modestly -- $1 million or so.

But the quality has gone up dramatically.

And let me tell you what I mean about quality.

A couple of quarters ago, if you looked at my pipeline, you would not have recognized somewhere between 30 and 50 percent of the names that were on the list.

Wonderful little companies and so forth, but they were not household names.

And we got very focused, thanks to some help from our marketing organization and some outside consultants, on getting very focused on just a few large market segments.

And now if you looked at my pipeline, it looks very similar to the global 1000.

There's not 1000 in it, not yet anyway, but all of the names for the most part are represented from there, as well as from large governmental organizations as well, which is one of our key segments.

So I think relative to the quality of the pipeline, it's gone up substantially.

Now, that ties to the ASP question, which was your second, which is what do these deals look like?

We were doing deals, again, with many of those companies that neither of us may have heard of before they became a prospect six to nine months ago, in the 40-$50,000 range.

And because of the wide impact of ALLIANCE, that required a relatively lengthy sales cycle even in a small organization, because so many people had to weigh in.

Coming off this last quarter, our ASP has almost doubled.

Number of deals were down slightly, but the ASP has almost doubled.

And virtually all were organizations that we've all heard from.

I can give you a few names;

I can't give you all of them because I'm precluded by confidentiality from some.

But names like UBS, names like the General Electric Company, and names like Lockheed Martin became customers of ours this past quarter.

And interestingly enough, they all became customers of a pilot; and of those three, 2 have already upgraded or have indicated that they plan to upgrade, and several of the others have already planned to add additional rooms or additional clients and so forth.

We also, last quarter, had a significant piece of business that impacted the ASP upward, and that was actually a significant upgrade from J.P.

Morgan Chase via IBM Global Services, which was the third deal we've done with IBM Global Services.

This was adding a significant number of locations within J.P.

Morgan Chase.

It has been implemented, and we are in fact looking at additional opportunities within J.P.

Morgan Chase.

So you add those names to existing customers like McGraw-Hill and US Trust and Aetna and Bristol-Myers Squibb -- which by the way, just a few days ago, went live after a six or seven month very careful pilot, with several thousand live users, very successfully.

So what you're saying is you're beginning to get traction.

We're beginning to get traction with the big guys, and that's what we're trying to get done.

Not only the big customers, but also with the big partners.

I mentioned IBM Global Services.

I'm not a big believer in luck or jinxes so I don't mind saying this -- we anticipate our first significant deal with a customer of EDS within this quarter.

I can't reveal the customer, but we expect our first significant deal with a customer of EDS within this quarter.

So we all are beginning to get pretty excited about the traction, and that's what leads us to be optimistic about the growth.

You asked one last question which I will answer briefly, which is from a sales cycle standpoint -- I will be honest with you, the sales cycle for ALLIANCE is anywhere between six months and a year.

That's just the facts.

It is a very technically wide-reaching products.

Just a slight anecdote -- one of our very large, very interesting customers whose name I'm precluded from mentioning by agreement, told us that they had five systems in their enterprise that are considered -- they call it AAA.

Or they're buried down deep in bunkers, redundant between a data center in the Midwest and a data center in the East.

Two of them are customer facing; one of them is their trading system; one of them is their e-mail system; and one of them is their audioconferencing system.

We touch two of those five.

So to say that their implementation will be slow and methodical is to put it mildly.

So that leads to an exacerbated sales system in the large accounts, thus the reason -- one of the many reasons that (indiscernible) in that Simplicity deal is that we now have the opportunity to reallocate part of our cost model toward a small to medium business and departmental marketplace, that has a sales cycle somewhere between 6 minutes and 60 days.

So that's (indiscernible) that answer your question?

Patrick Lynn (ph), Primus Capital.

I have 2 quick questions here.

One, we talked about when you were here in San Francisco for some of the meetings, about some of the potential IP opportunities in the printing area.

And I was wondering if you could expand on that a little bit?

And secondly, you mentioned the stock buyback last quarter.

When could you guys start to buy back after you guys have the earnings?

The window will open for Company purchases on Monday, December 8.

That's the earliest we could repurchase.

So basically 48 hours after, roughly?

Correct.

In terms of the IP, you're pretty excited about, obviously, the opportunities both in US as well as globally.

Of all the things that you mentioned, you mentioned the printer part first.

I was wondering if you could give any updates on what your thoughts on why you think that is such a big opportunity?

I think it's obviously one of many -- several that we look at.

Digital cameras are, obviously, a very broad category, as are cellular phones, particularly with the new emphasis towards picture -- production of pictures and transmission of digital images.

Printers, of course, are ubiquitous.

And as you know, the manufacturers and producers are worldwide as well.

So it gives us not only a broad field of use, but it gives us geographic coverage to look at as well.

With regard to the specifics of progress, I can tell you that we have noticed many large companies within those sectors, and the process continues.

Michael James (ph), Keukenhof (ph) Capital Management.

Gentlemen, you paid $2 million for Network Simplicity Solutions and $4.7 million for Global Scheduling Solutions.

We're looking at maybe 6 to $7 million in revenue of '04.

We were told a year ago that we were supposed to be breakeven; now we're not going to be breaking even until '05.

What type of return are we looking on for the capital?

And the second thing is, at what point in time does the Board shut down the software and turn this thing into the royalty trust that it should be?

Let me handle the first question.

We believe in the strength of our business model.

We believe that the guidance we're providing that we will be profitable in fiscal year '05 is prudent.

What we did not anticipate 18 months ago was the rate and pace and the slowness of the spending in the IT area.

We just didn't anticipate that the economy would be exactly where it has been over the last year and a half.

With respect to the ongoing direction of the Company and how the Board feels about that, we look at the fact that we have a multiple business model very positively.

In other words, the intellectual property provides a very attractive flow of capital into the Company.

But I would point out to you, as the results of this quarter, it's a very -- a business with a lot of cycles in it.

It has a great deal of uncertainty attached to the intellectual property arena, and we feel that the real direction and growth of the Company can come by funding a high-growth segment of the industry.

And we believe that we've identified that with our software business, and we believe that the investments we're making there will provide an attractive return for our shareholders, as Jay pointed out.

I think the term has been a little longer than any of us would like to see, driven by the global economy.

But if we're seeing some of the early signs of encouragement, I think we can start to look for, first the growth, the profitability coming after that.

And then long-term, of course, we're expecting to see a very attractive sized business and growth as we continue to grow.

Rick Raney (ph), A.G. Edwards.

Hello?

It's Randy Levy (ph) from A.G. Edwards.

I want to be clear on some things.

You project 6 or $7 million this year from the software business.

We did a million in this first quarter and you're projecting 10 to 20 percent growth for the second quarter.

Let's give it the high end of 20 percent; that would be 2.2 million for the first two quarters.

In order to get to the low end of your projection of 6 million, you would need 60 percent growth in the third and fourth quarters.

My question is, is that from the current software we have now, or is this projection coming from maybe a company that you're looking to buy that would bring in more revenue?

It's primarily looking at two things -- it's looking at the investment we made in Network Simplicity.

We think the contribution will scale fairly quickly there; and it's also looking at Russ' earlier comments that we're picking up speed in the ALLIANCE category, which is a much higher ASP and dollar volume opportunity.

Randy Levy, A.G.

Edwards Okay.

So from current business, 6 to 7 million?

Yes, that's correct.

So that's some aggressive 60 percent for the third and fourth quarters.

Good luck.

Secondly, assuming that -- how much in IP licensing revenue do we need in order to meet your projections of being profitable this fiscal year?

We lost 2.5 million, and by my projections, without the 2.9 million we collected in IP this quarter -- I guess we're losing about 4 million a quarter from software.

That's not correct.

The software business, from an operating expense, is running about $3 million a quarter.

And that is a P&L.

From cash, it's less than that.

We have significant depreciation and amortization that rolls into that.

We're spending somewhere around $800,000, plus or minus, on the intellectual property business for travel and some consultants we have -- we have on board.

On a go forward basis we need, per quarter to break even, approximately $7.5 million in intellectual property per quarter, to break even.

We've got a little delta to make up from Q1.

So we're talking $30 million in IT revenue for the year in order to break even, roughly?

And that's assuming, that's assuming software revenue were to remain flat.

So you came out with a projection that we will be profitable in this fiscal year, and we have a -- we already in hand a licensing agreement for this quarter, this second quarter.

We are forecasting licensing revenue for this quarter, that is --

I just want to get clear on the visibility of how this works.

How do I not know as a shareholder the same thing that you know?

What is it that -- you're projecting a lot of IT revenue -- although it will be sporadic, I know that -- but can you update me on how this works?

How confident are you that we're going to have this $30 million worth of IP licensing revenue this year?

I would answer that by taking a look at the fourth quarter.

Our collections there were 23 million.

And I would tell you that that exceeded our expectations.

In other words, we have a group of companies that we look at within the quarter that appear to be moving towards signing a license.

There are others in the pipeline.

It's much like a sales process; some move up and some move back.

But let me point out that the magnitude of each one of those licenses changes dramatically.

We may have a license for less than a million or we may have a license for 20 million.

It really depends upon the field of use and the nature of the license itself.

So I understand some of your frustration in being able to forecast this, and believe me, we face the same things.

I think the thing to focus on is it's a very healthy pool, it is a source that we will continue to pursue, and we believe that it is forecastable within the (indiscernible) of the year that we've spoken of.

Lastly, you talked about the buyback.

We have about a 1.3 million left authorized to buyback, and we bought 137,000 shares at $3.31 this past quarter.

With the stock trading where it is, and a lot lower than the 3.31 level that you averaged, are you going to aggressively buy back the stock, or can you look for another 1.3 million?

Or is it -- do you look for -- I'm sorry -- another 137,000 next quarter?

Are you going to get more aggressive, or is it a dollar amount that you spend each quarter?

How do you decide on that?

The board really looks at keeping that on the table, along with the other strategic investments that we want to make.

Sometimes within the quarter, if we're contemplating an acquisition or contemplating other capital expenditures, the share repurchase certainly goes on that list as well.

But we continue to believe that it is something that we need to have on the table.

I would not say that it's more or less aggressive than it has been in the past.

Patrick Lynn, Primus capital.

I already had the question answered, thank you.

Are there other questions?

Not at this time, sir.

I'd like to turn it back over to you for closing remarks.

Thank you.

We appreciate everybody participating in our conference call today, and we will talk to you all next quarter.

Bye now.

Ladies and gentlemen, thank you for joining us on today's conference.

You may now disconnect your lines.