Asure Software Inc (ASUR) 2005 Q2 法說會逐字稿

Welcome to the Q2 2005 Forgent earnings conference call.

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. (OPERATOR INSTRUCTIONS).

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

Please proceed sir.

Thank you, Candace, 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 any discussion of the Company's business outlook.

These particular forward-looking statements, and all other statements that may be made in 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 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 financial analyst community.

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

Richard?

Thank you, Michael.

Good morning and thank you for attending Forgent's 2005 fiscal second quarter conference call.

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

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

Our focus in the second quarter was to continue to make steady progress.

This includes keeping a lean cost structure, making some key strategic decisions in the intellectual property business that we believe will have a long-term positive impact on licensing and litigation, and, therefore, to the overall company, and we also released some new enhancements and products for our software business.

I would like to start by doing a quick overview of the financial results for the quarter, an overview of the intellectual property program to date, and then finish with some comments about the software business.

First, we licensed almost 900,000 in intellectual property for the quarter, which, given the significant changes we made to our legal team, indicates that the licensing program continues to show momentum despite the ongoing litigation.

We grew the software business by 10 percent on a sequential basis, but on a year-over-year comparison, we achieved 128 percent growth -- a significant achievement.

We continued to focus on keeping our operating costs to a minimum.

And if you take out the onetime increase to IP expenses for the change in our legal team, we essentially were flat in expenses for the quarter.

We also were able to increase our cash balance for the quarter.

Now, on intellectual property.

So, how are the new attorneys working out?

The transition to Godwin Gruber is complete, and as a result we have significantly expanded our legal expertise.

We now have two teams that separately focus on licensing and litigation with overall coordination at the firm's management level.

The teams are working well together and bringing fresh creativity and expertise to this phase of the IP program.

The change may have cost us a bit in time and money, but the teams are now up to speed and we now have an overall better process by which to prevail in this lawsuit.

We believe that this is some very short-term pain for what we could see as significant long-term gain.

In terms of licensing, as I mentioned, we did about 900,000 in the second quarter.

We have a new process in place where we have segmented the targeted licensees into three tiers -- large, medium and small opportunities -- so that we can selectively apply resources and to address different needs and requirements that are evidenced by company size.

While there are many more small companies out there, we believe a good guideline is the 80/20 rule -- 80 percent of our IP revenues will come from 20 percent of those licensees.

Those typically are very large companies.

However, we are not ignoring anyone and, obviously, we offer licenses to all.

As a result, we will be sending out several hundred new notices to selected companies over the next several quarters that will significantly expand the potential for the licensing program.

Now, moving to the litigation.

As we announced last week, the Judicial Panel on Multidistrict Litigation, commonly known as the MDL Panel, ruled that the various actions regarding our infringement claims be decentralized and transferred to a new venue -- the United States District Court for the Northern District of California.

This ruling was ordered to simplify this large and complicated case.

The California Court is well known as a forum for litigating intellectual property claims and has the resources required to handle this complex proceeding.

While the venue in Marshall, Texas had a very compressed schedule to a trial date, it is difficult to estimate the impact the venue change will have on a new trial date.

Being realistic, it is safe to assume that the schedule will change, we just don't know by how much at this point in time.

We will update you as soon as we now; however, I want to emphasize this -- we do have the financial resources to meet a longer pretrial schedule.

While we are preparing for this large and complex case, we are maintaining a lean cost structure.

We have centralized the actions, we have an excellent court with solid resources, and most importantly, we will have our day in court.

So, where are we today with the program overall?

Over 35 companies have licensed and paid over 100 million, we have pending litigation against 41 companies and have noticed over 125 other companies.

Additionally, we are sending out notices to several hundred more, which means 2005 for us is going to be a very interesting year.

Let's turn to software for a minute.

NetSimplicity continues to show progress and grew by approximately 10 percent sequentially.

We are seeing healthy margins and approaching generating cash.

We have added new products and updates all within the existing budget and current headcount.

As part of focusing on our core business we sold the ALLIANCE software suite and related patents to Tandberg for 3.75 million in cash.

Now let me turn this over to Jay for some more specific financial information.

Think you, Dick.

I would like to discuss the highlights of our financial performance from the past quarter, including revenue, gross margins, the continued management of operating expenses, profitability, and our balance sheet and strong liquidity.

And my final comments will relate to high-level guidance for the future. (technical difficulty) revenue performance.

Total revenue for the quarter decreased to $1.6 million due to reduced intellectual property revenues.

Recall that we transitioned the representation of our '672 Patent to a new law firm in October.

We had anticipated a delay in licensing and now feel that the transition has been completed.

This past quarter we signed two intellectual property licenses, bringing the total for the program to 37 licenses.

Licensees this past quarter included Tandberg and a DVD manufacturer.

IP revenue totaled $900,000, and program to date, we have generated $101 million in intellectual property revenue.

Total NetSimplicity revenues for the quarter grew by 10 percent.

In addition, we were able to grow bookings for NetSimplicity by 16 percent, and consequently, we were able to growth the NetSimplicity backlog for the quarter.

Note that we injected approximately $750,000 of cash into NetSimplicity in the past quarter, versus approximately $550,000 in bookings.

Therefore, we need to grow our NetSimplicity bookings performance by approximately $200,000 in order for this business to generate cash.

We are getting close.

Let me now turn to gross margins.

Gross margins for the quarter were -$200,000.

This performance was due to fixed costs associated with the new agreement we have with our attorneys.

The agreement requires us to pay a certain level of expenses -- approximately $600,000 a quarter on a go-forward basis.

These expenses are represented in the income statement as cost of goods sold.

As we increase the revenue in the future, we expect margins in the range of 60 percent plus.

Note that in agreement with our prior law firm, our gross margins were 50 percent.

Our total software business generated margins of 71 percent, up from the prior quarter's 66 percent.

Let me now turn to operating expenses.

Overall operating expenses grew by 30 percent due to a onetime nonrecurring payment of approximately $1 million to our former law firm.

This payment related to the termination of their representation in our intellectual property program.

Excluding this payment, operating expenses were approximately flat with last quarter at $3 million.

We continue to manage the increased expenses associated with being a public company, as well as the increasing expense demands of the intellectual property program.

Additionally, we are balancing these expense increases by reducing expenses in non-essential, non-critical areas.

Our headcount as of today is 31 full-time employees, down one from the prior quarter.

The distribution of these individuals is as follows -- approximately 20 people are involved with our NetSimplicity software business and the balance are associated with the intellectual property business and the public company operations, including SEC reporting, Sarbanes-Oxley requirements and back-office operations.

Let me turn to the income statement.

We were profitable this past quarter, earning 1 cent a share in net income.

This profitability was directly attributable to a sale of ALLIANCE assets to Tandberg.

On a go-forward basis, we need approximately $6.5 million in IT license revenue per quarter to be profitable.

Now let me turn to the balance sheet and liquidity.

Our balance sheet and working capital continues to remain strong.

This past quarter we were able to grow cash for the third consecutive quarter.

Our cash balance at the end of the quarter was (technical difficulty), up $1.6 million over the prior quarter.

Working capital was $19.2 million, and this was the highest level in the past 12 months and up approximately $500,000 over the prior quarter.

Our current ratio was 4.6, down from the prior period, due to accounts payable growth.

Given our general 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 the jury trial.

We are encouraged by the centralization of the (indiscernible) action in the United States District Court of Southern California, and we believe this action will make the litigation process more efficient, and as an added benefit, aid in the conservation of cash through the trial date.

Let me now turn to guidance.

I would like to provide guidance in four different areas.

First off, we will achieve IP license revenue this current quarter and throughout the balance of fiscal year 2005.

As in the past, predicting the exact timing of intellectual property revenue remains a challenging task.

We remain optimistic regarding the activity in the licensing area and have already concluded the first intellectual property license this quarter -- the license that we announced earlier this week.

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

Also, we have budgeted for increased spending for our intellectual property program between now and the trial date, due to litigation and licensing-related activity.

We believe that the NetSimplicity business will continue to grow and we are not going to increase spending in the NetSimplicity business until that business is able to generate cash.

And the last guidance point -- we are forecasting to maintain healthy cash balances and to maintain strong working capital.

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

Thank you, gentlemen.

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

And we'll ask Candace to coordinate the session.

(OPERATOR INSTRUCTIONS).

Richard West, J.M.

Dutton & Associates.

My question has to do with the increase in your intellectual property licensing and the operating expenses due to the changes.

Is that going to continue at this level for the rest of the year without any large settlements?

Yes -- at least that's what we are planning and forecasting, Richard.

We are going at that very aggressively.

And we believe that based on the prior results, putting additional resources and spending additional money on that program is well served for our shareholders.

I do want to state, though, that there was a onetime nonrecurring $1 million charge in our $4 million operating expense performance that was related to the termination of the former law firm.

That component will not go forward in the future.

So without that, you are even quarter-to-quarter?

Exactly even.

And where we will be spending additional money in the future is -- recall that Dick indicated that we are going to be noticing several hundred additional companies over the coming weeks and months, and we will now have somewhere in the range of 400 companies that we are in licensing discussions, or at least we've put them on notice that we would like to discuss a license with them.

And that costs time and money.

Carter Mansbach, Concord Equity.

Great job on the patent so far; the Audiovox news is pretty encouraging.

I just had a question regarding the spending of money and your shareholder value.

I think it's up from quarter to quarter.

I hadn't heard anything regarding any kind of dividend or any kind of buyback.

And you guys had mentioned it in the past, so I wanted to know where you stood on that.

Carter, as you know, we have board approval to repurchase shares.

We continue to look at that program.

One of the things that we have experienced, particularly in the last quarter or so, are extended blackout periods.

So, we really haven't been able to be in the market.

But we do continue to feel that this is something that we want to participate in.

We will be vigilant about it and we'll see if we're able to do something in this quarter.

Mike Herman, AG Edwards.

A question for you.

Is there any chance that you can quantify the Audiovox settlement at this time?

Michael, unfortunately we are not able to.

Historically, and we believe in the future, that those companies that will permit us to announce their name -- almost all of them in the past, I think all but one, have indicated we cannot indicate the license amount.

So unfortunately, Audiovox is in that camp also.

Can you elaborate a little bit on -- you've had some talks with some relatively large technology companies such as Microsoft and AOL.

Are they still in the discussion stage or will they be named in the future in the lawsuit?

Michael, it is very difficult to talk about any specific company and where we are at in the licensing stage.

So it really would not be something we could talk about during this call.

Last question.

Last quarter, if I'm correct, I thought your breakeven on a revenue basis was about 3.5 million.

Has that changed due to the new structure with the new law firm, where I understand you're going to be paying -- what is it -- $600,000 a quarter in expenses?

Did I hear that correctly?

Yes, you did.

I'm not certain where the $3.5 million number came from, however.

My misunderstanding.

Thank you.

Ladies and gentlemen, this concludes the question-and-answer portion of today's call.

I will turn it back to Mr. Noonan for closing remarks.

Sir?

Thanks, Candace, and thanks, everybody, for listening.

And we look forward to speaking with you again soon.

Goodbye for now.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.