Asure Software Inc (ASUR) 2005 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by.

Welcome to the third-quarter 2005 Forgent earnings conference call.

My name is Jackie, and I will be your coordinator for today. (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.

You may go ahead, sir.

Well, thank you, Jackie, and welcome everybody to Forgent's conference call.

Before we start, 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 our outcome.

You are urged to consider 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.

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

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

Thank you, Michael.

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

With me this morning is Jay Peterson, Vice President and Chief Financial Officer, and as customary on these calls, I will make some comments on our results, have Jay give you some details, and then as Michael mentioned, we will open it up for questions from you.

Well, our focus for the third quarter was to continue to strengthen our patent program, which included activities in both licensing and litigation.

On the latter, we were able to make significant progress in transferring our 672 case to the new court in San Francisco.

We made progress with separate legal issues, prevailing in the jury trial against the Matthews Estate, and complying with a rather extensive FTC subpoena requirement.

We also continued efforts to keep a lean cost structure, and we released new enhancements and products to 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 to finish with some comments about our software business.

We licensed about 600,000 in intellectual property for the quarter.

The delays in moving venue for the 672 litigation have tended to slow potential licensing, but we clearly continue to have a very active program.

I want to remind everyone that our strategy does not include giveaways or pricing licenses at deep discount prices.

Now that we have a Markman hearing date, we will remain firm in our resolve to receive a fair market-based licensed value.

We continue to scale the NetSimplicity business, and we achieved over a 50% a year basis.

We continue to focus on keeping operating costs to a minimum (technical difficulty)-- some one-time spikes in corporate and IT expenses due to the various legal issues we have faced; however, we expect these costs not to be repeated, and lastly we have maintained healthy cash balances for the quarter.

Now with respect to litigation, the United States District Court of the Northern District of California released a case management order that indicated that we would have a Markman hearing on February 13, 2006.

This is a very important step in the legal process because it exposes more detail and facts relating to the strengths and weaknesses of the case.

During the next several months, the claims construction process leading to the Markman hearing is expected to dominate the 672 litigation calendar.

Claims construction is the process by which specific terms in the patent are given precise meaning for the case.

We will first complete the exchange of proposed terms and claim element work that has already been started when we were in the Eastern district of Texas.

Both sides will also complete claims construction discovery.

We will then submit claims construction briefs and related materials, and finally after a tutorial and a hearing, the court will issue a claims construction ruling.

We are very confident as we enter this new phase of the litigation process, and I want to emphasize that we do have the financial resources to meet a longer pretrial schedule.

While we were preparing for this large and complex case, we will continue to drive cost to a minimum.

We have centralized the actions in the court, we have an excellent court with solid resources, and most importantly we have a firm date for a key pretrial milestone in the form of the Markman hearing.

On another note, some of you expressed concern when Microsoft filed a declaratory judgment during the quarter.

Let me just comment that declaratory judgments are a common legal tactic for which we were quite prepared.

Second, we have extensively reviewed Microsoft's filing and do not see anything new.

It is basically a rehash of old arguments that we have seen before.

We will certainly treat Microsoft respectfully but as any other of our defendants.

In terms of licensing, as I mentioned, we did about 600,000 in the third quarter.

As we have stated many times in the past, predicting license revenue is difficult given the pending litigation.

Further, any trial delays tend to dampen the program, particularly for potentially large infringers.

To address this, we're actively communicating with other medium and small opportunities, say companies under 100 million in revenue.

Again, I would like to repeat that while there are many small companies out there, we believe a good guideline is the 80/20 rule. 80% of our IP revenue will come from 20% of the license fees.

Those typically very large companies, particularly those involved in the litigation.

However, we are not ignoring any one, and we are offering licenses to all.

During the quarter, we contacted over 900 companies regarding the unauthorized use of our technology, bringing the total to more than 1100 companies that Forgent has contacted regarding licensing.

So in summary, where are we today with this program?

Over 35 companies have licensed and paid over 100 million in licensing fees.

We have pending litigation against 44 companies.

We have contacted over 1100 companies, and we are continuing to contact many more companies in the process.

Let me comment briefly on the software business.

NetSimplicity continues to grow and show great progress.

We are seeing healthy margins and approaching breakeven in generating cash.

May was actually our strongest month, so we are very encouraged.

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

As a result of the settlement agreement, the final earnout payment to the former owner of NetSimplicity was waived, thus reducing the purchase price on the Company and saving Forgent just about $1 million.

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

Thank you, Dick.

Good morning.

I would like to discuss the highlights of our financial performance from the past quarter, including a brief discussion of revenue, margins, some operating expense dynamics that incurred in the quarter, our income statement and our balance sheet and liquidity.

And then my final comments will relate to some high-level guidance for the future, including fiscal year '06.

First off, let me start with revenue.

Revenue.

Total revenue decreased to 1.2 million for the quarter due to reduced intellectual property revenues.

This past quarter we signed one intellectual property license bringing the total for the program to 38 licensees.

And as Dick mentioned, over the last 60 days we have increased the number of companies that we noticed from approximately 200 companies to a total of 1100 different companies.

NetSimplicity's software revenues and bookings grew this past quarter to approximately $1.5 million, and we expect that growth trend to continue.

NetSimplicity grew revenues 3% over the prior quarter and 52% over the same quarter one year ago.

We are planning for NetSimplicity to generate cash within the next six months, and in the current fiscal quarter, we believe we will need to invest approximately $150,000 in cash into that business, down from the approximately $250,000 we invested into NetSimplicity this past quarter.

Let me now turn to gross margins.

Gross margins for the quarter were negative due to the $700,000 we paid our legal partners, Godwin Gruber.

Going forward beginning May 1st, we fixed that fee at $600,000 a quarter giving us both reduced spending levels and greater financial predictability.

Our software business generated gross margins of 50%.

Note that this margin performance was below historical averages and was negatively impacted by a onetime non-cash write-off relating to the acquisition of NetSimplicity.

This non-cash write-off was approximately $62,000.

Beginning this quarter, we believe that the NetSimplicity software margins will be back in the 60% plus range.

Now I would like to discuss operating expenses.

Overall operating expenses grew by approximately $200,000 this past quarter due to increased legal-related expenses.

The specifics of that increase are as follows.

We spent approximately $525,000 successfully defending the lawsuit with the estate of Gordon Matthews.

In addition, we spent close to $500,000 relating to production of legal documents for the 672 trial.

And last point we incurred approximately $600,000 in legal expenses in answering the SPC subpoena relating to our licensing of the 672 patent.

Note that we are forecasting a double-digit decline in operating expenses this current fiscal quarter.

Our headcount as of the end of the fiscal quarter was 29 full-time employees, down by three from the prior quarter.

The distribution of those individuals is as follows. 19 headcount are involved with our NetSimplicity software business, we have a total of nine in G&A, and intellectual property split approximately 50-50.

And at the end of the quarter, we had one headcount relating to our alliance.

Next point the income statement.

We have discussed in the past the inherent peaks and valleys in intellectual property licensing revenues and the associated impact on our profitability.

This past quarter we were not able to maintain profitability due to the reduced levels of intellectual property revenues.

Now the balance sheet.

Our balance sheet and working capital remains strong.

This past quarter our cash and securities balance ended at $20 million, our working capital was $16 million, down from last quarter's level of 19 million, and our current ratio was 4.2, down slightly from the prior quarter's level of 4.6.

And given our understanding of the litigation timeline, we believe we have more than adequate cash to fund all of our operations, including the cost of litigation between now and when we get in front of a jury.

Last topic is some high-level guidance.

I would like to provide guidance in four areas.

First, we will achieve IP license revenue this current quarter and throughout fiscal year 2006.

As in the past, predicting the exact timing of IP revenue remains a difficult task.

We will continue to diligently manage our operating expenses, and we are committed to reducing expenses in nonessential areas.

Also, we are planning on significant, again double-digit reductions in spending this quarter, primarily in the legal area.

We believe that NetSimplicity business will continue to grow, and we will need to generate bookings in the range of the $800,000 in order for NetSimplicity to generate cash.

And last 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 Richard Snyder.

Thank, Jay.

I just wanted to summarize some key points for you for the call and for the quarter.

I would say that our focus is on shareholder value by winning this case, continuing to license the technology, keeping our operating expenses down, and maintaining a healthy cash balance.

Number two, licensing continues.

It did continue in the quarter despite the venue and scheduling change.

We have expanded our IP program with new patents; however, we will not prosecute a patent that we don't fully believe in.

We remain confident in our position due to the 100 million in licensing already received.

We are part of a standard.

We have good science, solid court, and we will have our day in court in front of the jury.

Defendants are clearly taking this very seriously and so are we.

And lastly, we do have a healthy and growing software business that provides a great diversity for our business model.

Thank you once again, and I will turn it back over to Michael Noonan.

Well, thank you, gentlemen, and with that I would like to open up the meeting for questions from the financial analyst community, and we will ask Jackie to coordinate the session.

(OPERATOR INSTRUCTIONS).

Richard West, J.M.

Dutton & Associates.

I wonder if you could talk about the difference between the Audiovox and the Onkyo agreement that you received because I think Jay said there was one license during the quarter.

Yes, I'm going to have Jay answer that.

Yes, Richard.

The license agreement that we reported in the P&L this quarter was, in fact, Audiovox.

The Onkyo agreement was announced this quarter, although the revenue for that was resident in the P&L in second quarter.

We ended up announcing Onkyo this current quarter in that our practice has been to announce licenses when we, in fact, receive the cash.

And the cash was received from Onkyo this current quarter.

Okay.

And then one question on the Microsoft.

My understanding is there is no dollar damages included in that suit, and was that suit thrown in with the other suits in California?

I mean their suit against you?

With regard to damages, I believe there is no specified damages, and we expect that the Microsoft case will be tagged along, if you will, to the Northern district of California along with the other defendants.

Great.

Thank you.

Carter Mansbach, The Concord Equity.

Two questions.

One back to Microsoft.

In the court documents, you guys are claiming that Microsoft has used JPEG to the tune of $150 billion.

Now if that is the case, from what I'm understanding, you guys are looking for settlements between a quarter and quarter of a half of 1%, which is looking like $16 a share minimum alone from Microsoft.

Now am I correct in those numbers?

And I correct in the one quarter to half of 1% that you are looking to get from these companies?

Yes, there is clearly a range of licensing, of potential licensing that we look at, and the range that you mentioned is certainly one that we use.

Okay.

Lastly, shareholder value.

I have heard it.

I read it in an article this month.

I heard it on the conference that you did just recently, and I just heard it on the conference call.

You referred to it as by winning in court.

In the meantime we have shareholders in the last couple of months that are down as much as 40% as the stock ran up to $3.00.

What is the mindset and what is the plan in the meantime for shareholders doing something via, we have discussed this before, buyback, dividend, things of that nature?

I guess my feeling at this point and the reason I said I think we need to consolidate our strategy around winning the case.

I do not think it would be in the shareholder's best interest to use cash in the buyback at this point.

Michael Herman, A.G. Edwards.

A question.

I just saw an article in Wired Magazine where (inaudible) were interviewed.

Can you give us some more color on the DVR patent at this time?

We have gotten, as you know, Michael, close to 40 different patents, and we believe that our patent program is really much more than the 672 patent.

We have not made any specific announcements in terms of what other patents we believe have commercial value at this point in time.

It is a little early in the process.

We are going through some extensive due diligence of some other patents we believe that could have some commercial value, but it is just a little premature in the process to make any announcements at this point in time, Michael.

In fact, that was one of the reasons the article was fairly short in Wired Magazine is that I think that we did not really want to go into any detail there.

Yes.

They asked a lot of other questions that were not put into the interview, and unfortunately we had to terminate the interview in that they were asking some questions that we were just not comfortable in answering at that point in time.

(OPERATOR INSTRUCTIONS).

At this time, there are no further questions.

I'm going to turn the call back over to Michael Noonan for closing comments.

Well, thanks, everybody, for listening, and we look forward to speaking to you again very soon.

Good-bye for now, and we will talk to you next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.