Asure Software Inc (ASUR) 2004 Q2 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Q2 2004 Forgent earnings conference call.

My name is Jean.

I'll be your conference coordinator for today.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards the end of the conference.

If at any time during the call you require assistance, please key star followed by zero; and a coordinator will be happy to assist you.

At this time I would like to turn the call over to your host Mr. Michael Noonan, Director of Investor Relations.

Sir over to you.

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

Before we start this call 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 with the Securities and Exchange Commission.

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

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

Richard?

Thank you, Michael.

Good morning.

Thank you for joining us for the quarter two 2004 earnings call.

This morning, I have Jay Peterson, who is Vice President and Chief Financial Officer, with me.

We will make some brief comments regarding the performance for the quarter and our plans, and then we will answer your questions.

First, let me comment on our intellectual property licensing program.

The program has produced over $88 million since its inception eight quarters ago, but the timing of the signing of licenses for patents continues to be challenging to forecast; which drives the inevitable peaks and valleys.

We've continued to expand the list of companies globally that we've approached to obtain licenses for our 672 data compression patent.

This program continues to be the source of the vast majority of our revenues, and we believe that that will be the case in the future as well.

If that is the case, many of you ask why we don't just become a business that is focused around licensing patents.

Unfortunately, it is not that simple.

While it is an excellent source of earning cash at the moment, it lacks the control and predictability that is a fundamental part of a growth strategy that our investors would like to see.

We will, however, continue to work to improve this process.

We will also continue to expand the program to include additional patents from our portfolio, and to apply for new patents through our development process.

In other words, the IP program is vital and strategic, but Forgent must have an alternative profitable growth business that will bring long-term sustainable value to our shareholders.

We believe that our software business, although very small today, can be that growth engine in the future.

Let me turn to the software.

We brought ALLIANCE to market last July with a vision to bring new levels of productivity to the enterprise through better management of the thousands of meetings that take place every day.

Customers told us their frustrations, and we developed solutions based upon our experience in scheduling and network management.

The interest level in the ALLIANCE solution was high, but the actual results as measured in sales is clearly disappointing.

After seven months, we were talking to many of the same prospects who remained unable to make a decision to deploy the software, enterprise-wide on a global basis.

Such a decision requires capital expenditures and complexity of IT involvement that drives the sales cycle far longer than the six to nine months that we had anticipated.

Software purchases at this level seem to be reserved for a very short list that is mission critical or to maintain existing infrastructure.

We decided that immediate and significant adjustments were required to improve results and to reduce our expenses.

Our acquisition of Network Simplicity has demonstrated that there is a very healthy demand for lighter-weight scheduling products in small, medium business; as well as divisions of large enterprises.

The price points are more compelling, and the sales and delivery model over the web and the phone is more cost effective.

Therefore, we have repriced and repositioned the ALLIANCE products to fit in this space as well.

You can visit our web site today and see a family of products that range from simply scheduling a few rooms to handling conference centers, to managing complex video conferencing calls; and it is all at a very attractive price point.

As mentioned, we are pleased with the sales growth we have already experienced in our Net Sim product line.

It has also been -- actually, it has only been a few weeks since we have made the changes to ALLIANCE, so it is too early to give you much data; but we've already experienced interest from new prospects through the web, who would like to evaluate the software, and we have also been able to move some of our former ALLIANCE prospects who declined to purchase to our Net Sim product line.

Now, let me summarize some of the positive results from the second quarter, as we see them.

We've realized intellectual property licensing for the 8th consecutive quarter, the Network Simplicity business model is gaining strength, and we continue to work on lowering our costs and being more efficient.

At this point, let me turn the call over to Jay, and then I will summarize at a later point.

Thank you, Dick.

Good morning.

I would like to discuss three areas with you this morning.

First off, an overview of the financial performance for our last fiscal quarter, including an analysis of the asset impairment charge.

Second, a discussion on the reduction in our software business operating expenses.

And third, the strength of our working capital and balance sheet.

Let me first start with Q2 results.

Total revenue for the quarter increased by 71% to $6.6 million.

This increase was led by a 104% increase in intellectual property revenue, to $5.8 million.

We continue to believe that the IP program can deliver both income and financing in the future.

Our overall software revenue declined this last quarter by 21% to approximately $800,000.

Total gross margins were a negative $1.9 million, impacted by the write-off of capitalized software development and prepaid royalties.

Total operating expenses for the quarter were $11.5 million.

Excluding the asset impairment charge, and adding in the effect of having the Net Simplicity business for the entire quarter, operating expenses would have been essentially flat with the prior quarter.

The details of the asset impairment charge are as follows: First off, there was a $4.8 million write-off of previously capitalized software development and, to a lesser extent, prepaid royalties.

Second, there was a goodwill asset write-off of $5 million, related primarily to the acquisition of global scheduling solutions that we acquired in 2002.

There was an excess facilities impairment charge of approximately $1.6 million.

And lastly, there were fixed assets relating to our software business that were written off to the tune of $400,000.

The total of these charges amounted to $11.8 million.

Of which approximately 90% of that charge was a noncash charge.

Bottom line earnings for the quarter amounted to a loss of 55 cents a share.

Excluding the impairment charge, earnings were a loss of 7 cents per share, which in fact was a reduction in the loss of 10 cents a share in the prior quarter.

Let me now turn to the software business operating expense reductions that took place the second week in February.

As a result of these resource and expense reductions, we have reduced our software cost of goods sold by $700,000 per quarter.

In addition, we -- there was a reduction in software operating expenses of approximately $600,000 a quarter.

And the total of these two expense reductions are $1.3 million a quarter.

And these actions will save us, well in excess of, $4 million a year in cash on a go-forward basis.

Let me now turn to the continued strength of our balance sheet.

Our balance sheet remains strong as measured by four different metrics: Cash, working capital, the current ratio, and our day sales outstanding.

Specifically, at the end of January, we had $24.9 million in cash and securities, versus $26.5 million at the end of the prior quarter.

Our working capital balance amounted to $22.5 million, a decline of $500,000 from the prior quarter.

And this decline was due primarily to a reduction in payables and an increase in deferred revenue that we have on the balance sheet.

The third metric is our current ratio, and our current ratio increased to 5.9 versus 5.3 in the prior quarter.

In other words, for every dollar of short-term liabilities we have on the books, we have nearly six dollars in current assets to cover those liabilities.

Our days sales outstanding, I believe the leading indicator of the efficiency of one's back office operation, was 23 days; and the lowest DSO in the 15-year history of the company.

Also note that our NOL loss carry-forwards amount to approximately $140 million.

And our overall effective tax rate is forecasted to be in the 2% range in the future.

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

Thanks, Jay.

Let me finish and summarize by just outlining our corporate business strategy.

There are four main points: Number one, we will continue to aggressively pursue our intellectual property licensing program, we will broaden the program by adding additional patents from our portfolio, and we will continue to apply for new patents through software development efforts.

Number two, we will continue to build a separate business based upon scheduling software to provide growth and profitability; however, the model will be very lean, and we will need to be self-sustaining as quickly as possible.

Number three, we will continue to look for selective acquisitions that are accretive and can add significant value in revenue, customers, and partners.

This will allow us to scale faster and bring profitable self-sustaining growth to the company.

Number four, we will continue to drive down costs and overhead that are our legacy from previous days, and just being a public company.

We took out over $2.5 million last year and we will continue that process.

I know that the path we've traveled has been difficult for all of us.

And I want to thank many of you who have chosen to stay with us and to offer your support.

We know that we must earn that support and trust every day and we're determined to do everything possible to make this business successful.

Thank you very much and I will turn it back over to Michael for questions and answers.

Well, thank you gentlemen, with that I'd like to open up the meeting for q & a from the analysts; and we'll ask Jean to coordinate the session.

Jean?

Thank you, sir.

At this time ladies and gentlemen if you would like to ask a question please key star one on your touch-tone phone.

If you would like to withdraw your question, please press star two.

Questions will be taken in the order they are received by.

Please hold for your first question.

And your first question today comes from David Corbin of Corbin & Company.

Hi, guys, how are you today?

Good morning, Dave.

Good.

I guess in -- I was interested to hear how you're going to grow the business.

I guess the question is is what are you going to do for shareholders?

Because when we had originally bought GSS, I believe that the quote from the CFO was, is that, you know, the returns in this business were going to be unbelievable.

Well, they have been unbelievable, they were a complete zero it sounds like.

You know, we have consistently shown we cannot run businesses, but we've done a great job of suing people.

With that said, -- or threatening to sue people.

With that said, my question is, is how are you going to return cash to shareholders; and something that you basically said was a venture capital type investment, with the sale of the legacy business, and the sale of the service business, and you know, which clearly has failed to meet any of the objectives that management has set forth.

Well, Dave, I guess the answer to the question is the past is the past and the future is -- lies before us.

As I outlined, I think we believe that the best course of action here is to grow the business.

We will continue to aggressively --

You guys have shown no ability --

Excuse me?

You have shown no ability whatsoever to grow any business in 15 years of this being a company.

I mean you know, you didn't show ability to grow video conferencing, you didn't show an ability to grow the service business, you haven't shown an ability to grow software, why do you think you're going to be successful now?

Because we believe the plans that we have set forth are sound.

So in other words the plans that you had in the past do you --

Clearly you're not interested in my response, Dave so I think we just better move on.

Well, I mean no, I'm clearly interested in making money as a shareholder of this company.

And you're not -- you guys don't seem to have an interest in doing that.

Well, would he have a great interest in doing that.

And if you would like to stay with us, we will be glad to continue to work those things out.

You know, Dick, I've been in this for seven years.

At a certain point in time, you know, I mean, you know, you can only hear the same thing so many times.

Dave, you've had your say.

We're going to move on to the next question.

Okay.

And your next question comes from Carter Mansfesh.

Hey, guys, how are you?

Fine, Carter.

I've been with this thing for seven years myself, and my question at this point; obviously we know about the misstarts and the problems, but at this moment, do you have intentions of doing something for shareholders?

In the sense of a buyback, a possible dividend, or considering the company's considerably smaller, the management taking a pay cut?

Obviously, management -- obviously shareholders are uptight, shareholders are frustrated, I would like to know what the company intends to do, and are their intentions of increasing shareholder value in any way shape, or form?

Well, Carter as I said, I think the main intent for us is to grow the business.

We will consider all the things that you've outlined there, and continue to have approval from the board to buy back shares when it is appropriate.

We have looked at various programs such as dividends, and the use of cash.

We will continue to have the board look at that.

We believe that making the company more efficient, skinning that down, finding a higher growth business model that we can sustain, and continuing to realize revenues from our intellectual property program are the right focus for the company at this point.

Well, let me say this, I mean from my point of view, it's what you think versus what we know; and what we know is that the patent has been consistent, more consistent than the software.

And I have faith that you guys have the -- you can grow a business.

I have faith in you as a manager.

However, this is shareholder money and this is shareholder people who have been invested in this company for many year, trusting you, and your management team for many years; and I think something should be done.

Whether it be a more aggressive buyback, or you know, the company -- I believe management growing a company at this level, this revenue base, $800,000 a quarter, should take a pay cut; and take one for the shareholders, considering we've trusted you.

I thank you for your time and good luck.

Thank you.

And your next question is from Mark Harmon of A.G. Edwards.

Hi, guys.

A couple of quick questions.

Could you give us some guidance on a going forward basis regarding the IP and software?

Yeah, the guidance for IP has not changed, Mike, and that is, there will be -- there will be peaks and valleys.

As I said before, we believe that the program will continue to offer cash, income, and financing for years to come; however, making the guidance any more granular than that is quite difficult.

Okay.

Could you elaborate why it is so difficult to get a U.S. patent and explain the process involved?

We have not broken out patents by the geographies, and that's not something we plan on doing at this point, Michael.

Okay.

Well, another question.

You mentioned earlier that you're going to pursue other patents in the portfolio for the licensing program.

Can you tell us a little bit more about that?

We have a number of patents in various areas of technology, and what we have done so far is really focus around the 672, and it has really required the energy and efforts to be able to do that.

We now believe that there is some bandwidth that we can apply to looking at a couple of the patents that we have gone through and taken a very close look at.

And we're just in the process now of launching that, and looking at where the best applications of those patents would be.

Okay.

I just have one last question.

It is regarding more of the software.

Dick, I've read your resume and you're an outstanding resume with what you did with Dell.

My question is, why did we not, in the first place, pursue a more Internet sales-driven model with the ALLIANCE product or VNP?

That's a great question, Mike.

And I guess my -- my assessment was that the enterprise software play really looked to be very attractive, in other words, when we did the initial research, it looked as if the ASP would be very high, there was a robust opportunity to develop that from the video business that we had already established, and it was a good on-ramp from that.

And it appeared to be something that customers would buy inside the sales cycle that we had anticipated.

It just didn't work that way, and I think this is the best response, is to look for a lighter weight method to approach this marketplace.

How long of a transition period do you foresee in migrating the sales model to the Internet?

I think we really have already done much of that, Mike, because we had Net Simplicity on board in October.

We began shifting our telemarketing resources to that immediately.

They are already scaled up on Net Simplicity, and providing that kind of response to demand generation through the web.

And now, the question is what will be the cycle to get ALLIANCE plugged into the same model?

And it has only been a couple of weeks, but I think we should be able to do it very rapidly within the quarter.

Great.

Okay.

Thank you very much.

You're welcome.

Again, ladies and gentlemen, it is star one for questions .

And you have a question from Randy Levy of A.G. Edwards.

I have a couple of questions.

I wanted to know what Ken and Russ's, they're not on this call, what is their capacity going forward?

Are they still with the company?

Second question is, we're paying -- it seems like the only positive thing we have here is the IP, and I know we're paying 50% to our lawyers for collecting this IP.

On the new patents, do we have that same deal with them?

Or did we renegotiate this?

And then at what point, my third question is, at what point do we file suit versus just trying to make friendly settlements with these companies?

Can you give us some guidance there for people in violation of 672?

Yeah, Randy, let me answer your questions, both Russ and Ken are with us.

We are changing some of the rules, based on the needs that we have.

Ken is spending quite a bit of his time on looking at technology and the acquisition component and also assisting with our intellectual licensing program.

Russ is continuing to assist in building the Internet sales model for us.

To answer your question on the agreements on patents going forward, no, we have the ability to renegotiate those; and we have done so.

We also, on the litigation aspect, believe that, you know, that strategy is primarily a function of our ability to continue to negotiate with prospective prospects.

We have no desire to particularly, to litigate obviously but we will enforce the patents when the time comes that that's necessary to do so.

So I can't really predict that, But I can tell that you it remains a viable part of the strategy.

Okay .

This does conclude the question portion of the conference call.

I would like to turn it back over to the hosts for closing remarks.

Thanks, Jean and thanks everybody for joining us on this call.

And if you have any follow-up questions, please give me a call directly.

Most of you have my number already.

Thanks very much.

We will talk to you next quarter.

Bye now.

Ladies and gentlemen, thank you for joining us on the call.

You may now disconnect.