Asure Software Inc (ASUR) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2005 Forgent earnings conference call.

My name is Anthony and I will be your 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 this conference.

If at any time during the call you require assistance, please press star followed by 0 and a conference coordinator will be happy to assist you.

I would now like to turn the presentation over to your host for today's call, Mr. Michael Noonan, Director of Investor Relations for Forgent.

Please proceed, sir.

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

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 reports on file for 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.

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

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

Richard?

Thanks, Michael, and good morning.

Thanks for attending the Forgent 2005 first fiscal quarter conference call.

With me this morning is Jay Peterson, who is the Vice President and Chief Financial Officer.

And as customary on these calls, I will make some comments on our results and then have Jay give you some details around the numbers and then we will open that up to questions from you.

Our focus in the first quarter was to continue to improve the overall performance of the Company.

We measure our progress by the success of licensing and protecting our intellectual property, by contributing and continuing to build a software business and by driving down costs and building cash.

This morning I am going to focus most of my remarks to reviewing the progress in the intellectual property program.

Let's just an overview of some of the results from the quarter.

We licensed almost 6 million in intellectual property for the quarter, which is a positive statement that the program continues to build momentum despite the ongoing litigation.

During the quarter, we achieved a milestone: $100 million in total revenues for the program.

A remarkable success that supports the validity we believe of the '672 Patent.

We began this program 11 quarters ago, 10 of those quarters have been profitable for the IP business.

To date, we have licensed 35 companies from a wide variety of businesses.

In an attempt to give you some scope and size of what we have accomplished thus far, we have loosely segmented these businesses into categories, such as, computer and diversified technology, digital cameras, printers and copier manufacturers, software companies and a group called "miscellaneous."

In the diversified category, we have licensed 6 companies to date including Sony, NEC, Konica and Casio.

We are currently litigating against a further 9.

In digital cameras, we have licensed 13 companies to date including Olympus, Pentax, Sanyo, Hitachi and Nokia.

We are currently litigating against a further 16.

Printers, we have licensed 8 companies to date including Sharp, Brother, Oki Electric and we are currently litigating against a further 10.

Software, we have licensed 4 software companies including Adobe, ArcSoft and Macromedia.

We are currently litigating against a further 4.

In the miscellaneous category, we have licensed 3 companies including Kayons [ph], Fundi [ph] Electric and a further litigation of another 6.

In addition, we have sent notices to another 125 companies to date and there are more to come.

As you can see the licensing opportunity is very large and we believe we have only scratched the surface.

Let me move on to the current events of last quarter and to date.

As you can tell from my previous comments, this program is extensive and it is complex.

We have also entered into a new phase with an emphasis on enforcement through litigation.

We chose to strengthen our capability by bringing on 2 new law firms.

A general counsel that is distinctly separate from our IP and is responsible for overseeing our corporate interests, and a separate firm with successful IP litigation experience, including the Eastern District of Texas where our case is being scheduled for trial.

We believe both new firms are topnotch and we believe they will employ fresh strategies that are cost-effective and can improve our shareholder return.

Our new general counsel is Winstead Sechrest & Minick with over 300 attorneys.

They are one of the largest business firms in the southwest.

The new IP attorneys are Godwin Gruber with over 150 lawyers focused on litigation.

In August 2004, they won a large patent infringement case in the Eastern District of Texas on behalf of Halliburton for about $41 million.

Further, they have created separate litigation and licensing teams so that each group within the firm is focused on their respective tasks and goals.

We are working on a new overall fee agreement with all law firms engaged in activities surrounding IP licensing and litigation.

That arrangement is not final, but we are confident that there will be a significant financial improvement to Forgent going forward.

I am pleased with the progress Godwin Gruber has made since we engaged them.

The firm is already up to speed, bringing in fresh ideas and more resources to aggressively address the next phase of the intellectual property program.

As an example, Godwin Gruber has begun efforts to contact over 100 companies that have been noticed in the past to reopen licensing discussions.

In summary, we believe these changes will bring better process with more resource and a significantly better return to Forgent.

So let me comment on how I see the program unfolding in the future.

The litigation process is obviously important and we are taking every step necessary to prevail.

We were the first to file in the Eastern District of Texas a capable and efficient Court and we believe that the cases will be tried in that jurisdiction, and that as a result, we remain very confident in our position.

The litigation process continues to progress and it appears we are moving toward a speedy trial, which means we could be in front of a jury in less than a year.

During that time we will do everything reasonably possible to reach agreements with companies who choose to license.

As I mentioned, we see a new phase to the licensing program.

After 3 years, 35 licenses, and 100 million in settlements, we believe we understand all the arguments pertaining to invalidity, infringement and assertion with respect to the Patent.

We have seen no new evidence that suggests anything to the contrary, and our confidence in the validity of the Patent is stronger than ever.

The licensing discussions are now focused on either a business resolution in the form of a license or we litigate.

Let me comment briefly on our software business.

NetSimplicity continues to show progress.

It's growing with healthy margins.

Subsequent to the end of the last quarter we were successful in selling our ALLIANCE software suite and its related patents to Tandberg for 3.75 million in cash.

This is in line with our strategy to continue to simplify and focus on our core business and to generate cash.

Now let me turn the call over to Jay for some specific financial information.

Thank you, Dick.

I would like to discuss 5 highlights from the past quarter.

First off revenue, margins, continued management of operating expenses, profitability and then our balance sheet.

My final comment will relate to high-level guidance for the future.

Let me start with revenue.

Our total revenue increased by 5% this past quarter to $6.5 million, due to improved intellectual property revenues.

This past quarter we signed 4 intellectual property licenses bringing the total for the program to 35 licenses.

Licensees this past quarter, included among others, Siemens, Macromedia and, ArcSoft.

This last quarter our IP revenue totaled $5.9 million, an increase over the prior quarter by 6%.

And as Dick mentioned, programs to date, we have eclipsed the $100 million total for intellectual property revenues.

Total software for the revenue -- excuse me, total software revenues for the quarter declined by 9%, whereas our NetSimplicity software revenues actually grew slightly.

ALLIANCE revenues decreased, as anticipated, due to a run off in maintenance contract revenues.

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

In addition, we are forecasting the ALLIANCE maintenance revenues to continue to decline in the future.

Gross margins.

Margins for the quarter were $3.3 million, a slight improvement above last quarter's performance.

Our software business generated gross margins of 66%, down slightly from the prior quarter's 69%.

Let me now turn to operating expenses.

Last quarter's guidance for operating expense was a reduction of 10% and we bettered that, achieving a 14% reduction.

Concurrent with this overall spending reduction was a corresponding 8% increase in intellectual property spending and an increase in certain public company expenses relating primarily to Sarbanes-Oxley and external audit fees.

Our headcount as of to date is 32 full-time employees, exactly flat with the prior quarter.

Now let me turn to the income statement.

We were profitable this last quarter, earning 2 cents a share in net income.

And as you can calculate, we need approximately $5.5 million in intellectual property license revenue per quarter to be profitable and that is without further growing software from its current revenues or by further reducing expenses.

The balance sheet.

In terms of our balance sheet, it continues to remain strong this past quarter.

We were able to again grow cash in short-term investments.

Our balance at the end of the quarter was $21.7 million, up approximately 200 K over the prior quarter.

And I'd like to note that this balance did not include the $3.75 million proceeds we received from Tandberg in November for the sale of the ALLIANCE assets.

Working capital was $18.7 million, up slightly over the prior quarter, and our current ratio was 5.9, essentially flat with the prior quarter's performance of 6.0.

I would also like to note that given our understanding of the litigation timeline, we believe that we have more than enough cash to fund all of our operations, including the cost of litigation between now and we get in front of a jury.

Last topic is guidance.

I would like to provide guidance in 4 areas.

First off we will achieve IP license revenue this quarter and throughout the remainder of fiscal-year 2005.

And again, as in the past, predicting the exact timing of intellectual property revenue remains a difficult task.

We will continue to diligently manage our operating expenses and we are committed to reducing expenses in non-essential areas.

Also, we are planning on increasing spending in our IP program between now and at the time we go to trial.

Third guidance point is that we believe the NetSimplicity business will continue to grow and we will generate cash in the second half of this fiscal year.

We are forecasting this business to be profitable later this fiscal year, and we believe that we will have to invest a nominal amount in cash over that period to achieve profitability.

The final guidance point is that we are forecasting our cash balances to grow for the third consecutive quarter and to maintain strong working capital.

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

Well, thank you, gentlemen.

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

We will ask Anthony to coordinate the session.

(Operator Instructions).

Your first question comes from Richard West from JM Dutton.

Please proceed, sir.

Good morning and good quarter.

And I thank you for a very detailed presentation.

I wonder on the termination of the legal counsel if it was just a true termination, no problems, them against you?

There is that other lawsuit with their people suing them and so forth, if you could maybe go into that a little bit.

Well, Richard, I'm precluded from too much detail there, but I will tell you the resolution of that is very close and we believe that we are pleased with the contribution that Jenkins made to the program and I think everyone will move on from here in their own respective directions.

This past quarter was a 50% expense for the -- was that under Jenkins?

Yes, that's correct, in the past quarter.

And from what I've heard I can intuit that perhaps it will be less going forward.

Yes, that is correct.

All right.

Good.

Thank you.

I might have more later.

Thank you.

Your next question comes from Carter Mansbach from the Concord Equity Group.

Please proceed.

Hey, guys.

Great quarter, great call so far.

I have a question regarding the basics of the people that have not been mentioned.

There are obviously some very large names that use JPEG companies like Microsoft or AOL Time Warner.

Can we assume that if they haven't been sued or they haven't been put up against litigation that they are cooperating or in conversations?

I would say that you could assume that they are on a list somewhere in here, Carter.

We have various lists for types of people who are using the technology and we are in various stages of contact, but I can't really say which particular list they are on at this point.

Let me ask you one last thing.

In the way of cash growing and continuing to come in, you guys have not mentioned anything on the call, that's the one thing that you left out, everything else was pretty thorough.

But just in the way of what the plans are for the cash.

Obviously, we're a tiny little software business and we have the possibility of massive amounts of cash.

What's the plan, hypothetically down the road, we have $50 million in cash, $100 million in cash, what's the plan for the cash if there is one at this point?

I'll hang up and listen.

Carter, we have said in the past that we would be looking to possibly do a significant cash dividend to our shareholders.

We have talked in the past about buying back stock and recall we bought almost 2 million shares over the last several years.

And those are 2o ideas that are top of mind at present.

I appreciate it.

Thank you.

Good quarter, guys.

Thank you, Carter.

(Operator Instructions).

Your next question comes from Michael James from Keukenhof Capital Management.

Please proceed.

I was wondering, guys, if you can tell me how many employees you currently have and what departments they are working in?

Yeah, Michael, this is Jay, let me help you with that.

We have exactly 32 people and here is how they break out.

We have 10 -- excuse me, 20 people who's primary focus is our NetSimplicity software business.

We have 3 people who's primary focus is the ALLIANCE software, including working with the customers that we still have maintenance and support obligations to.

We have 4 people who are dedicated to our intellectual property program.

And the remaining five people are accountants, people who work in treasury, people who manage facilities and Dick and myself.

So that's how the 32 break out.

Okay.

And being that the revenue is so small in the software side of the business, I guess at what point do we say it's not working out guys, we've run through a lot of money on the ALLIANCE and let's just cut back on that to zero and focus on the IP, the intellectual property side of the business?

We are not at that point, Michael.

We believe that if business continues to grow and that is our belief at present, that it is still a good investment for the shareholders this past quarter, that business consumes somewhere in the range of $250,000 in cash.

We do not compare the events of NetSimplicity anyway with the ALLIANCE business.

The investment in NetSimplicity is a small fraction compared to our ALLIANCE business.

Could you just expand on the Godwin Gruber deal?

Before in the previous law firm we were paying 50% to them or they were retaining 50%, which seemed a bit high especially as we've now achieved $100 million on settlements.

Could you tell us?

Michael, this is Dick Snyder.

As I mentioned in my comments, we are sort of in the process of establishing that going forward.

But what I can tell you is that we are currently on an hourly basis with Godwin Gruber.

While we kind of establish what that should be.

It is a little more complicated because we do need representation as local counsel in the Eastern District of Texas.

So there is a a group of lawyers, and of course, we believe that they should be appropriately compensated in this endeavor.

So we are working through that right now, but as I mentioned, we believe that we will see a substantially better return for Forgent after we finish this process.

With some of the licensing fees that you have, are they just 1-time payments or are we going to see a stream of revenue coming out of these?

To date they've all been a single payment and that has been the choice of the licensee and it's been the most attractive way to handle the program.

I wouldn't preclude a stream of payments going forward, but typically that has been the best way to handle it.

And my last question is, in the past you've spoken about that the Company would be looking forward to do acquisitions and the record has been less than stellar on acquisitions and building a business.

What is the forward look of the Company regarding acquisitions?

Well, as you can tell from my comments we are really focused on the IP right now and we do have a small software business that's growing fairly rapidly.

Now whether that turns into a business that's sustainable, we certainly want to get it profitable quickly and generate cash.

It may be a candidate to diversify that piece of the business when it's valued correctly.

And we also look to other profitable businesses that might make sense for the Company.

But there is no plans currently to do any M&A work, and we just continue to focus on our core business.

And if there is opportunities in the future, we will continue to work with the Board and with our shareholders to see if that's where they want to go.

Thanks a lot, guys.

Good quarter.

Thank you, Michael.

Thanks, Michael.

Your next question comes from Mike Harmon, A.G. Edwards.

Please proceed, sir.

Hi, guys.

Good quarter.

Thanks, Michael.

A couple questions here.

With the new law firm on, is it pretty much they picked it right up or will there be any lag in terms of settlements?

No, Michael, this is Dick Snyder.

We probably had a period there of a week to 10 days where the files were being transferred and people were coming up to speed, but I will tell you that I'm very pleased with what I'm seeing now.

There are discussions with the Godwin Gruber attorneys and licensees and that process is already well engaged and back in order.

So we are counting on that this quarter.

And we believe that we are off and running.

Great.

With your trial coming up in less than a year, is there a sense of urgency with some of the more conservative companies you are in talks with right now to settle and not take the risk and go to court?

Well, you know, that's always part of the landscape of these kind of negotiations and we believe that logical firms are going to want to have that level of discussion and we are certainly very open to it.

I think I just wanted to make it clear that we are not wasting a lot of time now.

We are very interested in having business discussions, but if not, then we will just move on and focus on the litigation.

A question regarding ALLIANCE.

Is it my understanding we are still going to keep 3 people to support it or are they going to be gone once the sale is completed with Tandberg?

Well, we have the customer base that's still part of the scheduling piece, if you will.

Most of the media software went to Tandberg.

But we retained a bit of the scheduling piece and are in negotiations with some other firms for that part of the ALLIANCE suite.

And following the conclusion of that, we will be able to make a decision on those folks.

Last question, regarding future settlements and the long existing shareholders that have been very patient, is the front and foremost plan to try to deliver value back to the shareholder in terms of what you spoke about earlier, share buybacks, dividends?

We're really focused now on this being foremost a patent company and trying to deliver the value back to the shareholders?

Yeah, I would say that's the current core and focus, and our job is to generate as much cash as possible and to get our expenses and our profile as low as possible.

And then our Board is interested in looking at ways in which we can reward the shareholders with that cash as it builds.

Thank you.

You're welcome.

Thanks, Michael.

(Operator Instructions).

You have a follow-up question from Richard West from JM Dutton.

Please proceed, sir.

This is a strategy, obviously, with you having the $100 million in already and more settlements coming forward, I was wondering for some of the companies that are left, it's more of a curiosity for my sake, would you ever use the International Trade Commission and go that route for those companies that manufacture overseas or is it because JPEG is loaded when it gets into the U.S.?

Well, actually, Richard, we do have foreign counterparts to the patent which cover the European areas as well.

So we are really global in the reach that we are looking at and many of the companies that are in the 100 million are outside the U.S.

In fact the largest potential continues to be within the United States, so we are focused there as well.

Okay.

Thank you.

You bet.

Sir, you have no further questions at this time.

I will turn it back to you for closing remarks.

Well, thanks, Anthony.

And thanks everybody for listening.

And we look forward to speaking to you on the next call and talk to you soon.

If you have any follow-up questions, everybody knows my number.

I will be more than happy to take your call.

Goodbye now.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Everyone have a wonderful day.