Asure Software Inc (ASUR) 2006 Q1 法說會逐字稿

Good morning and welcome to the 2006 first quarter Forgent earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the presentation over to your host for today's call, Mr. Michael Noonan.

Sir, you may proceed.

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

Now, 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 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.

After we have completed our review of the quarter we will open up the call 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.

Thank you, Michael, and good morning.

Thank you for attending Forgent's 2006 first fiscal quarter conference call.

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

And as customary on these calls, I'll be making some comments with regard to our results, have Jay give you some details around the numbers, and then we'll open it up for your questions.

Our focus in the fourth quarter continued to be on the intellectual property program.

We continued to work on the litigation process for the '672 and the '746 patents.

And we believe we've made significant progress with dates and with schedules.

We're working on both actions simultaneously and are in a heads-down mode in litigation.

Let me update you on the progress of each one of these actions.

On the '672 patent, in the northern district of California, Judge Fogel reconfirmed the Markman hearing for February 13 2006, which, as you know, is only ten weeks away.

This is going to be an important milestone for the case.

The court also placed Microsoft on the same schedule, and now that we have a regular schedule and order with claims, construction dates, the litigation process is on course and moving forward.

We also added the law firm of Susman Godfrey to head our legal team on '672.

Steve Susman and his team have an excellent record of success, and I'm very pleased to be working directly with Steve to win this case based upon its merits and sound legal process.

On the '746 patent, in the eastern district of Texas, Judge Davis set a Markman hearing for July 2006 and a trial date of February 7, 2007.

The court also transferred and consolidated Scientific Atlanta and Motorola with the original case.

We have a scheduling order, claims construction dates, and a trial date.

So we are moving full steam ahead with this action as well.

For those of you who have not visited our website, I would encourage you to do so, for there are the latest and more detailed information on the cases as well as links to other sites that give background and substance around these cases.

Now, changing subjects, I'd like to comment on our software business.

NetSimplicity software sales grew significantly by adding new customers that reflect a variety of market segments, and we're particularly pleased to see large enterprise customers moving toward this simple and easy method of scheduling their meeting rooms.

With that, I'd like to do a quick overview of our financial results for the quarter.

We generated about 3.6 million in total revenue for the quarter, while we're pleased with these improved results and the increased licensing activity, we are continuing to aggressively seek additional licenses to continue to maintain a strong cash balance.

NetSimplicity grew at a brisk pace and on a year-to-year basis we almost doubled the revenue from this software business.

Third, we continued to maintain a healthy cash balance for the quarter, and we also continued to lower our overhead and expense structure.

Now, on the intellectual property, in terms of licensing we did 2.9 million in the first quarter of '06.

We are continuing with settlement discussions, and we'll seek additional license opportunities from companies like those who settled during the quarter, such as RIM -- R-I-M -- Axis, and EFI.

Let me comment briefly on the software.

NetSimplicity continues to improve with growth of 19% in the quarter and almost 100% year-over-year.

We're seeing healthy margins, rising ASPs, and approaching a break-even and generating cash.

We continue to be encouraged by the progress that we're seeing in this business.

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

Thank you, Dick.

Good morning.

I would like to discuss the financial highlights from this past quarter for our intellectual property business and our NetSimplicity software business.

In addition, I will briefly discuss our balance sheet and cash position.

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

First off, intellectual property.

Revenue for IP licenses increased to $2.9 million this past quarter, and we signed seven intellectual property licenses bringing the total for the program to 52 licenses.

Licensees this past quarter included, among others, Research In Motion, Axis, and Electronics For Imaging -- EFI.

Programs to date, we have realized approximately $105 million in total license revenue from the '672 patent.

Intellectual property operating expenses for the quarter were $750,000, up from the prior quarter's level of $600,000, due to increased litigation related activity.

Intellectual property margins were 28% this past quarter.

This figure is exposed upward going forward due to two reasons.

One, a lower monthly retainer with our new law firm, and two, we will soon reduce the residual interest to our former law firm from 50% down to 10%.

In the future, we will need approximately $4.5 million in intellectual property revenue in order to be profitable.

This assumes no growth in software revenue.

Compare this $4.5 million figure to the $6.5 million figure that we talked about a year ago.

Let me now turn to our software business.

Revenue grew by 19% this past quarter, and by 68% over Q1 fiscal year '05.

In addition, we grew bookings, software maintenance backlog, and ASPs.

Also, since we acquired this business, we have doubled the size of our ASPs since the purchase of the business.

Margins for NetSimplicity were 73%, up 3% from the prior quarter's level of 70%.

And operating expenses for NetSimplicity were $880,000, essentially flat with the prior quarter.

This past quarter, our software business consumed approximately 40 to $50,000 in cash and is very close to generating cash.

In terms of total operating expenses for the quarter, they amounted to $2.8 million, essentially flat with the prior quarter.

Let me now turn to balance sheet and liquidity.

Our cash balance remained flat with the prior quarter's level of $17.3 million.

Our DSO this past quarter was a healthy 17 days, and our current ratio was 3.1, and our working capital totaled $12.5 million.

Last topic is guidance.

And I would like to provide guidance in four different areas.

First off, we are confident we will achieve IP license revenue during this current quarter.

In addition, we believe we will achieve IP revenue throughout fiscal year 2006.

And again, as in the past, predicting the exact timing and magnitude of IP revenue remains a difficult task.

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

Also, we are planning on increasing spending in our intellectual property program between now and the trial.

Number three, we believe that the NetSimplicity software business will continue to grow and will generate cash in the near term.

And the last guidance point is that we are forecasting that we will maintain strong cash balances and working capital.

In addition, we believe that we will have adequate financial resources to get our two patent cases in front of a jury.

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

Thanks, Jay.

Well, as you can see, we are continuing to stay on course, we're focused, we will continue to look at the IP opportunities.

We're particularly focused around our litigation process.

As someone once said during the quarter, the wheels of justice grind slowly but they do grind, and we're pleased that we have visibility to dates and to the process that it's going to take to be successful.

The software continues to grow and we will watch that and continue to manage that accordingly, and then on the cash side we're going to continue to maintain our cash balance as best we can and to bring down our expenses accordingly.

So all in all, I think it's a -- it was a good quarter for us, and we're continuing to move forward along these lines.

Now I'll turn it back over to Michael.

Well, thanks, gentlemen.

And with that, I'd like to open up the meeting for questions from the financial analysts.

We'll ask [the operator] to coordinate the session.

[OPERATOR INSTRUCTIONS] Your first question comes from Mike Heim of A. G. Edwards.

Please proceed.

Hi, guys.

Good quarter.

Question for you regarding the Markman.

Could you give us a little color and explain to us the magnitude of the Markman and what it means for the Company?

And my second question is, is if you continue to get license, what do you plan to do with any excess cash?

Thank you.

Mike, this is Dick Snyder.

With regard to the Markman hearing, this is a -- sort of a milestone, if you will, in the case for those who are not familiar with the patent litigation where both sides come together in the court and define the terms under which they'll proceed in the legal process.

And this is important because it sets the definitions around the patent and around the discussion of how the case will move forward.

And from then on, the -- both sides are really restricted in the way in which they deal with these matters.

So typically this is seen as an event where clarity comes for both sides, and we believe that this will be a significant event which will allow us to move forward.

On the second part of your question, with regard to if we're successful in continuing to get cash in our licensing activities, I would give you the following kind of guidance.

Number one, we're going to continue to make sure that we have sufficient cash to be able to get this through trial, make sure that we have sufficient resources to bring to bear all of the resources necessary to be successful in court.

If we have cash beyond that, we'll continue to look at a dividend or perhaps a stock buyback, and after that, we'll continue to look at the ability to invest some of that for the growth of our software business.

So I think that gives you kind of an outline of what we and the Board are thinking in terms of cash.

And your next question comes from Richard West of J.M. Dutton.

Good morning.

I have two questions.

One, the RIM situation, do you see any effect on the patent license that you've already granted to them?

No, none whatsoever.

Okay.

And two, about in mid-November, an organization -- I don't know it -- [INAUDIBLE] is challenging the JPEG patent for reexamine.

Does this have any need for worry, or can it be delaying the trials at all, now that the Markman hearing has been set?

Yes, it's not uncommon to see defendants in a patent litigation case look at asking the patent office to reexamine patents.

So we see this as a normal activity.

We also look at the -- at that petition itself.

It doesn't contain any new information from our perspective, so we're proceeding forward.

We're confident that we can prevail in this matter.

It's unknown with regard to delays in the case, because it really depends upon how the processes unfold, so I can't predict that.

But from our perspective, it's moving forward at full speed.

Thank you.

Your next question comes from the line of [Michael James], [Kuckinosh] Capital.

Please proceed.

Hey, guys, can you give me a breakdown of the number of employees that the Company has?

And then also, can you tell me what the addressable market is for NetSimplicity and at what point does the Company shut it down because it continues to burn cash after we've seen the management run alliance, and that burned through 25 million of the shareholders money?

Yes, I can answer both questions.

This is Jay Peterson.

First off, we have at present 32 full-time employees in the Company.

Eight of those employees are involved in either accounting, executive positions, or intellectual property positions.

The remaining 24 are involved in our software business, and in terms of the NetSimplicity business, we do not believe that the minor investment we've made in that business of late is -- we believe that investment will pay off.

We are happy with the growth of that business.

We're happy with the margins, and we're happy with the overall prospect of that business going forward.

And the cash burn from that business in the last quarter was about 40 to $50,000.

Thank you.

Your next question comes from David DeWitt of DeWitt Capital.

Good morning, gentlemen.

As somebody who is relatively new to the story, and try to get my hands around the technology that is going to be examined here in the Markman hearing, any background at all about how the technology was invented, how the Company came about owning the technology, I think this would be helpful.

I've been in intellectual property situations before, and so I usually have had some better handle on the steps along the way.

And there are companies like NTP that go out and acquire patents for others, and they -- but this company seems to have acquired a company, Compression Labs, and I guess at one point it wasn't -- nobody questioned who invented this technology, but any comment in that regard would be helpful.

Sure, David.

This is Dick Snyder.

I would say that the background behind this was that Vtel, the predecessor of Forgent was in the video conferencing business, had a very deep and rich technology background, a large development department that looked at developing video codecs.

In other words, the ability to process video over networks.

And in doing that, they acquired a company called Compression Labs, and in acquiring that, that technology was very similar to Vtel's own, so the combined patent portfolio after the acquisition contained many patents related to compression and to video technology.

One of those is the '672 patent which relates to image compression.

And from there, obviously, we have looked at presenting this patent in the market as infringed by people who do that particular process.

One of the other patents out of the Vtel portfolio is the '746 patent which is the other patent that we are prosecuting at the moment.

So if you looked back at this ten years ago and Compression Labs was -- I mean would it have been apparent to somebody observing the industry back when this was all occurring that, yes, Compression Labs really did create this, and then sort of just people's attention just faded away from it?

Because that's -- you're talking about a huge, huge market here.

Yes, I think what you're pointing to is how did this become part of a -- of kind of a standard, and that really, those folks who were part of the standards body were well aware of the patents available, and proceeded forward.

So those in the know, if you will, the technology folks who have created various technologies for their products along the way to use, have been aware of the background behind the Compression Labs patent.

It's just to the extent to which people know that it's embedded in their product sometimes that can be a discussion.

Thank you.

And your last question comes from [Carter Waynbeck] of Concord Equity.

Please proceed.

Good morning gentlemen.

I have two questions.

First, regarding -- I've done a lot of -- I spent a lot of time reading court documents, and I've noticed that there have been a number of defendants that have notified Microsoft in the lieu of a letter of indemnification, basically stating that if Microsoft -- if we actually win this case and Forgent prevails, that they're going to ask Microsoft to pay their way.

And I think a lot of people are not familiar with that, and I want to understand it a little bit better, why exactly they're doing this and who they are that are doing it and what your thoughts are.

That's my first question.

Second question is, the second patent, which you guys haven't spoken a lot about except to really put the name up, from what I understand it's regarding DVR.

What I want to understand about it is, is TiVo the same as DVR, and if so, what part of DVR that you guys claim to have as a patent and why is TiVo not involved in the litigation?

Okay, Carter, this is Dick.

With regard to Microsoft, as you know, Microsoft has a lot of large customers in the computer industry.

And it's our understanding that they have a variety of different arrangements with their customers, including indemnity clauses, and I'm sure that this particular patent issue is one that they're considering in regard to their relationship with their customers, but it really is immaterial to Forgent.

We look at infringement by product and, of course, we talked with those customers specifically with regard to their infringement.

So I think Microsoft is dealing with that, and we're continuing with discussions with everyone.

Are you still going to put some more pressure on Microsoft?

Well, I'm sure they feel obligated to their customers, and they certainly have behaved that way in the past, and they have a reputation for standing up for their customers.

I think that's certainly something they're going to continue to do.

With regard to the DVR patent, that much the same as our '672 cuts across a wide swath of different applications.

Certainly TiVo is well-known in the industry, but I can't comment really on -- with regard to the application of this particular technology or any particular customer.

Thank you.

And you have a follow-up question from Richard West.

Please proceed.

Yes, I'd like to go back to the RIM announcement and agreement.

When you announced that -- didn't make any comment as to if that was a one-time payment or a running royalty future payment.

Can you comment now?

Yes, Richard.

This is Jay.

It was a one-time payment to comprehend past sales and projected future sales.

Thank you.

And your next question comes from David DeWitt.

Please proceed.

Again, relatively new to the situation, you're looking at Microsoft as a defendant, and I'm sure there's a large addressable market there along with everybody else that's in there, and I don't know if you've -- I mean just generally speaking, is there any way to quantify what it is we're looking at, or is there any way you can discuss from an investor standpoint what would be the best case, worst case, or any general information in that regard in terms of royalty rates or anything else you can say in that regard?

David, I can echo what we've said in the past.

We believe this is a large opportunity.

There's definitely some uncertainty as we go forward trying to capitalize on that opportunity.

Program to date, I mentioned that we have about 50-odd licenses, and we have noticed -- sent notification of our patents to literally hundreds of additional companies.

How that gets quantified in terms of the opportunity in the future cash flow for the Company is just uncertain at this point in time.

We've got $105 million from those 52 licensees, and projecting this, in terms of the timing and the magnitude is just very difficult going forward.

Yes I guess I see some of the past licensees were significant in size.

I mean, I think I saw one for 15 million and one for 16 million, in that range.

Yes.

And we believe if we're successful we will have those size of agreements going forward.

Okay.

Well, that just gives me an idea what possibly could happen if you guys are successful.

Thank you.

Thank you.

Thank you, sir.

Your next question comes from [Blake Dettum] of National Securities.

How are you, gentlemen?

Good, thank you.

I have a question.

When the day finally comes, and I do feel that it will come, when the 40-odd defendants finally see the light, Forgent is on the winning end of all this litigation.

Where is Forgent five years down the road?

Well, that's a great question, and I think it has seeds in the discussion about what we're going to do with the cash.

The Board is very interested in making sure, number one, that we take care of the current situation and that we do return the value to shareholders through these patents.

And we have a variety of ways to do that.

Short-term after we're successful we can certainly look at things like dividends and buybacks, but we believe ultimately too, that we can deliver value through a growing and profitable business.

That may start with our software business being large enough to be able to return an investment to the shareholders, and there may be other opportunities as well.

But for now, we're really focused on the first step, which is making sure that we are successful.

Thank you.

Thank you.

Your next question comes from [Robert Strugel] of RIS Investments.

Please proceed.

Let me ask you, we've been involved with Vtel, and now with for Forgent for a long period of time, and you guys were at the forefront at one time with Vtel, and it seems like you just -- looking at your patent protection, you're not really developing any new products or doing anything other than suing other companies.

Our stock has gone from $5.50 down to under $1 at times, but now the whole value of the company is 40 million, a little over 40 million, maybe closer to 50, and we collected 100 on so-called patent protection lawsuits.

So the question I have is, why is the market looking at our stock so cheaply?

Do they feel that we are going to be overwhelmed with these litigation expenses, or we're not going to prevail, or why is nobody noticing us?

And the third question, the next question is, why do the insiders have so little shares?

We have guys with 40,000 shares, 50,000 on $1.73 stock.

Seems to me that we should be holding a little more stock in the Company from the insiders to show that they're really as optimistic as they're talking on the phone today.

Well, first of all I appreciate you staying with us as long as you have.

As you mentioned, Vtel had a very rich history and background, but frankly the Company was failing, or it did fail in that business.

The video conferencing segment of the industry did not produce the kind of growth and expectations as a whole.

And it's continued to evolve.

On our part, we were really forced to look at changing ourselves, reinventing ourselves, if you will, and looking at what assets that were here and available that we could ensure that we gave a adequate return to shareholders, and that turned out to be our patent portfolio.

That's what we're focused on today.

It may evolve.

As the previous questioner asked, what do we do in the future?

It may evolve into something else.

But today we know that these are the strongest assets that the Company has, and we are focused on making sure that we develop and maximize the most from them.

With regard to insiders, the Company has changed dramatically.

We are a very small company, moving from probably at the heyday of around 500 employees, we're down, as Jay said this morning, to 32.

So that has a big effect with regard to insiders and what shares they hold.

It is a volatile situation, or has been, but I believe that if you look at the holdings of the key people, this is fairly standard for this kind of size opportunity.

That concludes the question and answer session.

I would like to turn the call over to make Michael Noonan for closing comments.

Thanks, and thanks again everybody for participating in our call today.

We look forward to speaking with you again soon, and good-bye.

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

This concludes the presentation.

You may now disconnect.

Everyone have a great day.