Asure Software Inc (ASUR) 2004 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2004 earnings conference call.

My name is Andrea and I'll be the 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 today's conference.

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

I would now like to turn presentation over to the host of today's conference call, Mr. Michael Noonan, Director of Investor Relations, please proceed.

Well, thank you, Andrea, and welcome everybody to Forgent'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 other information about the Company's outlook.

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

You are urged to considerate the risk factors relating to the company's business contained in our latest periodic 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 recorded or rebroadcast without the Company's express permission, and your participation implies consent to the call's recording.

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

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

Richard?

Thanks, Michael.

Good morning and thank you for attending Forgent's 2004 fiscal fourth quarter conference call.

With me this morning are a few people that I will introduce: Jay Peterson, Vice President and Chief Financial Officer, Jamie Stevens who is our Chief Adviser on intellectual property, and Nancy Harris, the General Manager of our NetSimplicity software division.

As customary for these calls, I will comment on our results, and have Jay give you some additional details around the numbers, and then we will open it up for questions.

The major theme last quarter was to take specific action to improve overall performance of the Company.

I believe we made some solid progress, and it brought us further clarity to those areas of the business we will continue to drive to do even better.

As you know, we have two business segments and I'd like to comment on both.

First, intellectual property licensing, and second, the NetSimplicity software business.

Okay, on IP.

We see steady progress in this program, and that makes us optimistic about the future.

It's very important at this stage to take the necessary steps to ensure that the lawsuits that we have filed will be successful, so that we can recover in full measure from those who are infringing on our '672 compression patent.

We are also continuing every effort to reach agreements outside of litigation, and we were successful with two defendants and are continuing the dialog with many others, who see the benefit of coming forward early to settle with us and to be dismissed from this lawsuit.

On this evidence, we are optimistic that other defendants and other companies yet to be named in the lawsuit might choose to license the patent.

Those recoveries can obviously provide significant cash to our company.

To keep you informed, we have also added additional links to our website to give visibility to the details of the various court filings that are relevant to this lawsuit.

We remain confident about the process, and we have not seen anything from the defendants that would change our plans.

Our NetSimplicity software division grew over 35% last quarter, and is on track to break even by the end of this year.

This is a healthy and attractively growing business with significant margins.

We believe NetSimplicity will continue to grow as we bring on new products and promotions, as well as expand the distribution, particularly on an international front.

We now have partners in the United Kingdom, Germany, and Australia.

We have a small amount of ALLIANCE activity remaining, that is focused on supporting existing customers through paid maintenance contracts.

We have stopped the investment in ALLIANCE, and we now have two or three employees where there were once 40 or 50.

We are continuing to seek alternatives for partnering and have spoken to several companies who have expressed an interest in purchasing the code.

In the meantime, we have a responsibility to our customers and we will, of course, honor those commitments.

We also continue to seek other ways to return shareholder value.

We have repurchased shares when appropriate, and consider other strategies as well.

If we were able to prevail in our IT litigation, we believe there will be even more options available in the future.

Perhaps as a special dividend or even a tender offer.

But let me caution you: These lawsuits can be lengthy and that puts us some time away from that goal.

On another note, we have been asked by some of our long-term shareholders about the potential of acquisition activity.

This is an option, but let me be very clear.

We would only proceed with a transaction that would produce cash very early, and provide a significant growth engine for the future.

It would also need to be a good fit to our areas of understanding and technology.

We continue to look very carefully for a strategic, public or private business or product line to acquire or partner, that has growth, profitability, and is of an appropriate size.

We have already considered several options, and were not satisfied with the fit to the criteria that we have outlined.

Lastly, I want to discuss other patent activity.

Several months ago, we announced Baker Botts was going to assist us with some other patents we have in our portfolio.

Unfortunately, Baker Botts was not able to continue, due to some unforeseen conflicts.

These patents represent many products in diverse markets, and those conflicts were not readily apparent at the outset.

However, they have been working closely with us to assist us in moving those patents to a new law firm, along with the work they were already able to accomplish.

We are seeking alternatives, including bringing on perhaps, new firms to help us with the IP program, as well as other strategies, such as brokering, or perhaps even selling some of these patents.

We will keep you apprised of the progress of this activity as it goes along.

So in summary, Number 1, we remain very optimistic about the intellectual property program, and the litigation process to date.

NetSimplicity continues to grow rapidly and provide a solid margin base, and from a corporate perspective, we will continue to drive down expenses and overhead, preserve or grow cash and look for ways of returning shareholder value through a variety of means.

Now I'm going to turn it over to Jay for some specific financial results.

Thank you, Dick.

First let me talk about the revenue performance for the quarter.

Total revenue increased significantly during the quarter, due to improved intellectual property revenues and software revenues.

Let me now discuss those two segments for you in greater detail.

As I mentioned last quarter, we noticed that our negotiations with potential licensees were not productive, resulting in declining intellectual property revenues.

In April, and then again in August, we initiated litigation against 42 companies regarding the '672 patent.

During this last quarter, we realized an increase in revenue and settled with one of the defendants in the case.

Subsequent to the end of the fourth fiscal quarter, we settled with another defendant, and we are currently in discussions with other defendants and nondefendants regarding licensing agreements.

Regarding litigation, we believe that the process is on track, and we have not learned of any new information that would negatively impact our position.

Total software revenues for the quarter grew by 20%, led by a 35% increase in NetSimplicity revenues.

Note that both NetSimplicity units and ASPs, average selling prices, grew this past quarter.

We are also seeing positive trends in certain verticals, including legal, education, healthcare, financial, and pharmaceuticals.

ALLIANCE revenues were essentially flat with the prior quarter.

Note that these ALLIANCE revenues are maintenance contracts related to support of existing customers, and are not from new software license sales.

Let me briefly discuss gross margins.

Margins for intellectual property business this last quarter were 50%, with one half of the proceeds going to our law firm, Jenkens and Gilchrist, as part of the existing success fee arrangement with that firm.

Our software business generated margins of 69%, an increase of 18 percentage points over the previous quarter.

Let me now discuss operating expenses.

Consistent with previous guidance, our total operating expenses decreased significantly.

This last quarter, we reduced SG&A expenses, R&D expenses, and Other infrastructure costs by a total of 29%.

Also, we have moved the majority of our development efforts to our NetSimplicity office in Vancouver, where we realize lower operating costs.

Note that we are planning additional overall spending reductions for this quarter while maintaining our investment in our software business, and also increasing spending in our IP segment.

Our headcount as of today is 32 full-time employees, down from 44 at the end of April, and 103 at the end of January.

In terms of the income statement, we significantly narrowed the loss for the quarter to $200,000, or approximately 1 cent per share loss, nearly getting to breakeven.

As you can calculate, we need only approximately $5.5 million to $6 million in intellectual property license revenue per quarter to be profitable.

And that is without growing software from its current revenue base, or by further reducing expenses.

In terms of our balance sheet, our balance sheet remains strong.

At the end of July, we were able to grow cash by $400,000, approximately $.02 a share, to $21.5 million dollars, including the cash impact of a modest security repurchase.

Working capital was over $18.6 million, an improvement over the prior quarter by approximately a half a million dollars.

Also, our current ratio improved to 6:1, a slight improvement over the prior quarter's 5.7.

Let me switch to guidance, please.

First off, we will achieve IP license revenue this current quarter, and again, while predicting the exact timing of IP revenues remains difficult, we are forecasting intellectual property revenue throughout the next fiscal year.

We anticipate that we will reduce our operating expenses again, and this quarter we anticipate that reduction to be in the range of 10% to approximately 3.2 million.

We believe that the NetSimplicity business will continue to grow, and will generate cash in the second or third fiscal quarter of this current year.

We are forecasting this business to be profitable later this year, and we believe that we will have to invest an additional one half million dollars in cash over that period, for NetSimplicity to achieve profitability.

Last point, we are forecasting our cash balances to remain healthy and to maintain strong working capital.

I would now like to turn the call over to Michael Noonan.

Well, thanks, gentlemen.

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

And I'll ask Andrea to coordinate the session.

Ladies and gentlemen, this is the question-and-answer session.

If you'd like to ask a question or make a comment, please key star followed by 1 on your touch-tone phone.

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

Again, star 1 for questions.

Our first question comes from Carter Mansbach from Concord Equity Group, please proceed.

Good morning, fellows.

Good morning, Carter.

I have two questions, one regarding the Dwork and Maxwell case, where these two attorneys who originally were on the case are suing Jenkens regarding Forgent's lawsuits.

There were statements in there quite intriguing, one being the fact that the JPEG patent could bring hundreds of millions of dollars to the bottom line for Jenkens, which I guess in turn would be the same for you.

My question is, do you agree with that statement?

And what are your feelings on it?

Secondly, in the way of Adobe, and the 5.5 million that was settled, could we expect the 42 companies that are currently being sued, the 5.5 million is an average, is it a low number, is it a high number?

Where does that fit into the whole realm of it?

I want to know if Adobe, 5.5 million is the average that we should look for, in the companies that the company is going after.

Let me comment on the first part, the Dwork and Maxwell case.

Obviously this is an issue between two former employees at Jenkens, and it is not something relative to Forgent, per se.

We find that the information that is in that case is also interesting.

We think that, you know, their estimates are certainly valid within the context of what we know about the IP business, and I think, you know, I think they obviously have a right to their opinion as well.

So I think that's really all I can comment with regard to that part of the case.

Jay, would you like to comment on the second part of that question?

Sure, Dick.

Thanks for the easy question, Carter.

Let me tell you what we know in terms of what's actually happened over the program.

We have had some very significant licenses from companies that we call tier one companies, and we've had some smaller license from what we call tier 2, tier 3 and tier 4.

If I take the average of the 30-odd licensees thus far, it's around 3.25 million dollars per license.

We've got about 40 people we're in litigation with, and as you recall, there are many people, other than the current litigants that we have either noticed or are currently in discussions with.

In terms of looking forward, I think we will see some very large companies that we will possibly license tier 1, and we will see, again, tier 2, tier 3 and tier 4.

How the average changes over time and in the future, it's very difficult to predict, Carter.

Can I just ask you, would tier 1 be considered a Sony, 20 million plus?

And are there many, like, can you give me a number of how many tier 1 companies there are?

Sony would definitely have been a tier 1.

There are more than a handful of tier 1 going forward.

Okay.

Thank you.

Our next question is from Michael James from Keukenhof Capital Management.

Please proceed.

For the past few years the company burned through in excess of $25 million with the ALLIANCE software.

During such time management has received bonuses and stock option grants.

In the past I've raised questions about management's high compensation and inability to enhance shareholder value.

What is being done about your compensation?

Why do you think NetSimplicity will be profitable when you never achieved the forecast for ALLIANCE?

And why do you think that you can be successful with an acquisition when your history shows that you have not been able to?

Thank you.

Is that one question or --

It's actually three big questions.

Okay, fine, I'll be happy to start with that.

With regard to compensation, we use the standard methods within the industry to find competitiveness with our pay ranges.

We have not paid any incentive compensation through the last year, due to the financial condition of the company, nor have pay raises been implemented.

So there has been no movement in compensation, which I think is appropriate as the company reforms and goes through this process.

Number 2, the reason that NetSimplicity is successful, is being successful, and is not the same as ALLIANCE, it's a totally different business model.

ALLIANCE was a enterprise software play, which required a high degree of direct sales content.

It was also a very high ASP of around 200,000 to 300,000 at minimum, and NetSimplicity is a very small, simple business package that's focused at small and medium-sized businesses in more the $2,000 to $3,000 range.

And is really scoped at an entirely different audience.

Third, with regard to an acquisition, as I stated, we are being very cautious as we look forward to what might be appropriate in terms of growth and profitability.

And acquisitions in the past have been more speculatively done.

We will make sure that that is to a minimum.

But if we are going to find a growth engine to replace our intellectual property as that declines over time, I think it's important for us to find a business that will be complimentary and to add to the business mix.

I believe that that's consistent with what our shareholders would want to do.

And thank you for the question.

Ladies and gentlemen, this concludes your question-and-answer portion for today's call.

I would now like to turn the presentation back to Michael Noonan for closing remarks.

Well, thanks very much.

And we appreciate everybody's participation.

Just as a reminder, Forgent is going to be at the Merriman Curhan Ford Investor Summit in San Francisco next Monday and Tuesday, if you're attending the conference or in the Bay area, we hope to see you there.

Thank you again for listening, we look forward to speaking with you soon.

Good-bye for now.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.