Clearone Inc (CLRO) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the ClearOne Fourth Quarter 2015 and Full-Year Earnings Results Conference Call. This call is being recorded, at this time for opening remarks and introductions I'd like to turn the call over to Mr. Roger Pondel.

Mr. Pondel please go ahead.

Thank you, Michelle. Good morning, welcome everyone, and thank you for joining us today to discuss ClearOne's 2015 Fourth Quarter and Full-Year Financial Results.

On today's call are Zee Hakimoglu, President and CEO, and Narsi Narayanan, Senior Vice President of Finance. First, some housekeeping measures before we start; please be advised that this call is being broadcast live on the internet at www.clearone.com. Playback of the call will be available for at least three months, and may be accessed on the internet at ClearOne's website.

Before we begin I would like to make a cautionary statement and remind everyone that all of the information discussed on the call today is covered under the safe harbor provisions the litigation reformat. The Company's discussion today will include forward-looking information regarding management's current forecast of certain aspects of the Company's future, and actual results could differ materially from those stated or implied.

With that said, I will not turn the call over to Zee.

Zee?

Thank you, Roger, and good morning, everyone. Today I'd like to discuss our fourth quarter and full-year 2015 results. Our revenue decreased 7% to $14.3 million from $15.4 million in 2014 Q4. Our top-line was impacted by economic headwinds in certain key markets, overshadowing continued growth in our Middle East and India markets.

Weak economies in Australia, China, Japan, South Korea, and parts of Europe contributed significantly to the short fall in revenue. Fourth quarter non-GAAP operating income decreased 4% to $3.7 million from $3.8 million in 2014 Q4. Non-GAAP fourth quarter net income decreased 27% to $2.3 million, or $.024 cents diluted share, from $3.2 million, or $0.33 per diluted share.

The net income decreased mainly due to an increased tax rate when compared to the 2014 Q4 tax rate. The effective tax rate for this quarter is 38% compared to only 18% 2014 Q4. Non-GAAP operating expense for the fourth quarter was $5.4 million down from $6.1 million last year.

We continue our quarterly dividend program, and in March 2016, we declared a $0.05 per share cash dividend. This morning, we announced that our Board of Directors has authorized the repurchase of up to $10 million of the Company's outstanding shares of common stock. This repurchase program demonstrates our confidence in ClearOne's business and prospects, as well as our commitment to deliver shareholder value.

For the full 2015, profitability was significantly up on stable revenue compared with the prior year. Gross profit was $36.7 million, or 64% of revenue compared with $35.3 million, or 61% of revenue for 2014. This significant increase in margin was achieved mainly through a favorable product mix and also due to contributions from licensing fees to the revenue mix.

For the full-year, non-GAAP operating income increased 29% in 2015 to $13.3 million from $10.3 million in 2014. Non-GAAP net income for the full-year 2015 increased a very solid 21% to $8.7 million, or it's $0.91 per diluted share from $7.2 million, or $0.75 per a diluted share in 2014.

Non-GAAP adjusted EBETA increased a very healthy 27% percent in 2015 to $14.4 million, or $1.50 per diluted share, from $11.3 million for $1.18 per diluted share in 2014. Cash, cash equivalent, and investments were $39.8 million as of December 31, 2015, up from $33.6 million at December 31, 2014.

This $6.2 million increase comes after the Company paid dividend, totaling $1.4 million in 2015. On the business front, between November 2015 and February 2016, ClearOne was granted an additional seven new patents by the US Patent and Trade Office, the USPTO.

These patents related to technologies including; network media streaming, beam forming microphone rays, spatial audio, audio for all-in-one display systems, and multi camera, multi display videoconferencing for intelligent spatial imaging. We believe our patents and intellectual property are a direct link to ClearOne's market leadership position, its innovation, and successful commercially profitable development of cutting edge products.

We continue to get positive market interest in, and feedback for, our video products; these include network video streaming, our view pro, and videoconferencing, our collaborate.

We won several high profile AD network streaming projects across the world; these include to a leading provider of healthcare information services, to a popular casino and hospitality venue, for a criminal justice setting, and for a marquee convention center.

On the videoconferencing side, we won a nice mix of opportunities that include healthcare, foreign government ministries, education, transportation, manufacturing, and retail.

Looking ahead, the powerful combination of our strong balance sheet, the loyal support of our established and global channel partners, and the most comprehensive and complete line up of products in our industry give us confidence that we are a well positioned for growth as economic conditions in this business cycle improve.

With this wrap up of our recent highlights, I'd like to turn the call over to Narsi for a detailed discussion of our fourth quarter and annual 2015 financial performance. Following Narsi's discussion, we will take questions for the remainder of the available time.

Narsi?

Thank you, Zee, and good morning, everyone. Before I begin, I would like to point out two things; first, I will be discussing certain non-GAAP financial measures. The reconciliation of the non-GAAP measures to reported GAAP measures is included in the earnings release that went out this morning.

Now turning to financial results for the fourth quarter 2015, please note the following comparisons refer to fourth quarter 2015 verses the same quarter of 2014. Net revenue at $14.3 million, or 7% lower than last year Q4 revenue of $15.4 million. Gross (inaudible) $9.1 million, or 64% of revenue, compared with $9.9 million, or 63% of revenue.

Gross profit declined by 8%. Gross profit margins for this quarter have been in-line with our recent gross profit margin history. Gross profit in Q4 2014 was higher among other things due to the benefit of inventory [2008] adjustments in the quarter. Non-GAAP operating expenses for the fourth quarter, plus-$5.4 million, down from $6.1 million from last year. Non-GAAP operating income decreased by 4% to $3.7 million from $3.8 million in 2014 Q4.

Non-GAAP net income decreased 27% to $2.3 million, or $0.34 per diluted share, from $3.2 million, or $0.33 per diluted share. The net income decreased mainly due to increased tax rate when compared to 2014 tax rates. The (inaudible) tax rate for this quarter is 38%, compared to 18% in 2014 Q4. Non-GAAP adjusted EBETA was down by 4% from $4.1 million to $3.9 million.

Now turning to our financial results for the four months ended December 31, 2015, please note the following comparisons refer to full-year 2015 verses the full-year 2014. Net revenue essentially remains unchanged, going from $57.9 million to $57.8 million. Gross profit was $36.7 million, or 54% of revenue compared with $35.3 million, or 61% of revenue.

The significant increase in margin achieved mainly through favorable product mix and due to contribution of licensing fees to the revenue mix. Total non-GAAP operating expenses decreased by 6% from $23 million in 2014 to $23.5 million in 2015. Non-GAAP operating income increased 29% in 2015 to $13.3 million from $10.3 million in 2014. Non-GAAP net income increased 21% in 2015 to $8.7 million, or $0.91 per diluted share from $7.2 million, or $0.75 per diluted share in 2014.

Non-GAAP adjusted EBETA increased [23%] in 2015 to $14.4 million, or $1.50 per diluted share from $11.3 million, or $1.18 per diluted share in 2014.

Turning briefly to the balance sheet. Our balance sheet remains strong; cash, cash equivalence, and investments were $39.8 million at December 31, 2015; up from $33.6 million December 31, 2014. This $6.2 million increase comes after the Company paid dividends totaling $1.4 million in 2015. We continued distributing quarterly dividends, our quarterly dividend declared for Q4 was $0.05 a share, up from $0.03.5 cents a share declared for Q3.

I would now like to turn the call back to Zee. Thank you.

Thank you, Narsi. We will now take questions, operator?

(Operator Instructions) Ian Corydon of B. Riley & Company.

Zee, could you talk about what you're seeing in the competitive environment in professional audio, both in the US and internationally?

Well, that's a broad question. If you can just be a bit more specific so that I could address it. You're talking about general economic state for all of our competitors? Can you clarify, please?

Yes. I'm just trying to understand if there's been any change in the competitive environment in Q4, in professional audio, specifically.

I would not say that there has been a change that is recognizable in the competitive environment. I think that we haven't run into anything new, most of the announcements that come and go, of course, we always track. I think all our prospects remain the same, we're comfortable with our products, we're comfortable with our channel, we're comfortable with our strategy going forward.

We haven't seen anything that concerns us or makes us believe that we need to make adjustments in our strategy or in executing on our plan.

Zee, I guess also, what needs to happen for the Company to get back to revenue growth? Are there things you can do that are in your control, or is it largely a function of some weakness in geography that's out of your control?

I think, really, to a certain extent, it's really out of our control at this time. Assuming that we want to preserve our profitability and execute on our strategic plan. We don't buy revenue; we don't grow the top-line, forfeiting our profitability, because that is a never ending cycle.

Number two is, in these economic times uncertain economies create delays; our clients, those who use our equipment and our solutions, make large investments in project planning. Project planning, on the part of our ultimate end-users, takes time and money. So, during these uncertain economic times, these projects are not necessarily cancelled, but they're put on hold. We saw that in 2009 coming out like gang busters.

I think the key is ClearOne certainly has tremendous resiliency, we have a plan that we've executed on, we plan to live through and, in fact, do as well as we can through this business cycle and, in fact, take advantage of the business cycle.

Our solutions are actually quite economically competitive, the market for software-based and network-based solutions are increasing, and I think that we have the right products at the right time with the right features at the right price and we're going to continue to drive those and just go ahead and live through this business cycle that we're in; it's not unfamiliar to us.

Narsi, if you could provide the revenue breakdown for - if you could for both Q3 and Q4 for professional UCN video, that'd be helpful.

Q3 professional share was 84%; let me first finish Q3 and then I'll go to Q4, okay? Pro, it was 84%, UC, it was about a 12%. Balance of video in Q4, Pro was about 79%, UC was about 12%; the balance was video, actually.

Dennis Van Zelfden of Brazos Research.

Zee, we all believe that the video market holds significant growth opportunity, and it sounds like you have a decent start in that market with the prospects that you talked about. Just one quick clarification before I ask my questions, have you actually made any sales yet, or what you talked about, or are they prospects?

No. Those were actual sales; the way the market sometimes goes, those were actual sales. We're new to videoconferencing, so we have to establish a reputation that our products are as great as we believe them to be. And so, oftentimes for many of these prospects that we have actually sold, they will take demo equipment, they will kick the tires, if they like the equipment and they like the price, then they will buy a small or reasonable number of units and take it. These are great beginnings to adoption, as I mentioned, to our new video products.

Actually, let met add quickly; even in Q4, our video revenue grew by 8%, actually, and overall 2015 we grew by 11%, actually. I think in a tough year it shows the resilience of our video products. And when things turn around, we feel video will be a bigger player in our overall performance, actually.

I just want to continue on with that. I mean, given the size of your competitors like Blue Jean and Acono and things like that, and given what you just said that you're the new player and they want to try it out, does that mean that this video ramp, so to speak, the revenue from these new video products will be a long cycle, it'll take a long time to generate significantly?

Nothing great happens overnight, we know that, but we certainly put the time, the money, the attention and the resources to get this going, and we're committed and we see good progress.

You mentioned some of our competitors are very large, certainly we have some very large competitors, there's no doubt about that, but when you mention companies like Blue Jeans, Blue Jeans is basically, in many ways, a marketing machine and a great marketing machine who is interested in selling their products in a different kind of environment than we do.

They go directly to the end-customers, they sell a lot of products online, and as far as profitability or an ultimate business model for Blue Jean's survival, that's very different than what ClearOne offers. ClearOne sells into the channel, we sell to distributors, integrators, we convince consultants that our products are best.

We also sell it, these video products in terms of conferencing and even network streaming, in complimentary form to our audio; there's really only one other large competitor, we all know who they are, who sells video and audio, but even our audio is fully complimentary across the sweep of our video - what we call media collaboration products.

We have audio that compliments at the desktop, in the huddle room, in the larger board room and bigger rooms beyond. We make the cameras, we have the complete solutions, we have the cloud and we have the endpoint, the low cost codec endpoint, that many larger businesses need to see.

Cloud is a wonderful strategy for video and we've adopted that, but unlike Blue Jeans that sells their cloud and does not offer an audio component nor do they offer a low cost appliance component, we put the cloud inside our low cost appliance component for free for the first year and get our customers to taste and try it.

If our customers want simply a cloud component, we have that as well through a subscription model.

So, while we are not a marketing machine, we're kind of like the turtle and the hare, but we have absolute confidence that our products, as I said, are the right products at the right time with right features, and we're going to put some more attention and money into marketing these things as we go along, and we've done that this quarter.

Given the advantages that you just laid out, and given that video in general is a relatively new category for you, i.e., comparing to no sales last year, do you think that the revenue from this segment can offset the poor economies that you talked about earlier, or are they also going to be not immune to those poor economies?

Well, I mean, I think across the board people just don't buy - this is not what you call a sudden consumer interest buy; we sell the businesses - enterprises, non-profits government organizations, etcetera. These things - sales are a result of investments in project planning, as I mentioned.

But companies that we deal with and the channels that we work with have made investments in projects to plan it to decide what they want to do. So when economic times are unknown, projects are often put on hold, they're put on delays, they may buy fewer than what they thought, they may have slower rollouts. All of our products are subject to the economic business cycle.

I couldn't say that one will make up for the other; we push them all. We hope to see more growth, or faster growth, in the video products because they're new, naturally, but one is not necessarily more subject to others.

Even cloud solutions, a large enterprise that makes an investment in a cloud solution, that's a major investment, that's not a today decision, that's something that they planned for sometime ago, are looking at, and they will deploy on a scale - is that reflexing investment that it is.

(Operator Instructions) George Melas of MKH Management.

Quick question on the margin; the margin that you produced this year are remarkable, do you feel like you can actually maintain these growths and operating margins in 2016?

Yes, we think we can maintain it, actually, yes.

And then I have a follow-up on the previous question. If we look at some of the gross initiatives, or the products that you have, I think, Zee, you're saying that those products are - you've made a lot of investment in these products and the products are good and you're satisfied with them, and I'm talking about the view to collaborate, the [spontania], and also maybe the matrix sound distribution. What are your plans in 2016 to try to accelerate this sale of products? What are you doing differently in 2016?

In 2016 we are going to focus our resources on marketing of these products. We are coming up with a brand new website that really clearly tells the story of ClearOne and our full value proposition from audio to collaborations to network streaming in a coherent, clear and compelling way; that's critical, and we wanted to get to the point before we did that that our products were ready for primetime.

Number two, we've started an advertising campaign, modest, but we've initiated a plan so that we are talking about our network streaming, our media collaborations. Number three, we've engaged a PR firm, modest, but we've engaged a PR firm to get our name out there in terms of the publications and some of the venues that talk about technology.

We've hired another marketing firm who is focusing on some of our pro audio, by the way, for the new platform that we will be coming out with in the near future, and they are working with our PR firm and our other consultant marketing consultant that's working on telling the story of our video.

While of course we will continue to improve on our products, the key ingredient to success in the year to come, I think, is marketing, and that's our focus and I think that's going to make a difference.

Can you talk about, maybe related to that, one of your great asset is your channel. Can you talk about the adoption of these products and maybe you can separate the products with view collaborate and [spontania] and also the sound distribution. What is the adoption of these products by your a channel?

Well, our channel is very interested in these products, in fact, we, in fact, been making certain channel adjustments as it turns out, there is some competition among some of our competitors; their business models changes so much, quite frankly, do they sell to end customers, do they sell to channels?

Their actual channel model has been so disruptive that partners are actually coming to us and telling us we're going to flip this job for you. That's very important.

It's really important - our channel is so important to our success because we have shown the channel, and with our videoconferencing they make money, they know we are a reliable partner, we are here for the long haul, and they like doing business with us because we offer a full suite; we are not offering just the cloud.

Selling just the cloud to the channel is a formula for failure. They like the cloud, they like the suite from the Versa to the 300, 600, 900, they like the complimentary nature of the audio. So our channel has expressed enthusiasm, I was at ISE, it's an Integrated Systems Show in Amsterdam, it's the largest AV conference in the world. And we had many new interested prospects that came to us that are learning about our video, and I think we're making all the right steps.

Again, it's a little bit like the turtle and the hare and we're not going to blow the wad on stupendous marketing for the next two years, but as we grow our business and increase our profitability then we're going to make investments in marketing to help our channel partners and help ourselves.

Our success in audio took some time and I'm confident our success in video will also happen, it will just take a little bit of time and we're seeing good progress.

And maybe, if you'd look at the US channel, right? Because the majority of US sales, of course, are in the US; if you look at the US channel and the adoption of the new products by the US channel, are you in what - how would you characterize that? I don't know what inning are you in or -

I've got to say our video products, I can't say are in the majority of the US channels. Because we're growing the business, we have nice jobs as we mentioned in the Middle East, in China, some in the US, some in Europe. I wouldn't weight the amount of business for our video products according to the same proportion whether to the other products that we have by region.

Narsi, just a quick question on the balance sheet, the long-term inventory popped up in the quarter, is there sort of an explanation for that?

Yes. We had a pretty flat year, especially Q3 and Q4 did not do well, actually. We (inaudible) for our procurement and also we replaced the [audios] on everything. We were planning for an update increase in activity Q3 and Q4, which always used to be our big quarters, actually.

Since it didn't happen that way, we ended up with more inventory than necessary, but it's not a concern; I had to do it for the FCC reporting purposes of GAAP. Since the inventory is higher [on our hand], and we can reduce the inflow of inventory into our procurement process. And within next couple of quarters you would see it's back to our normal levels, actually.

And the overall inventory is also slightly the higher side because we are in the process of moving our production facilities from Florida to a contract manufacturer in Asia.

To be clear, we were manufacturing the wireless mics ourselves at the location of that acquisition.

Yes, we are (inaudible). So, we are building enough inventory; I'll just have to plan further than you are partitioning, so that adds a little bit more inventory, but once the production is partitioned and we see clear demand for the upcoming quarters, we will be able to bring it back under control. In fact, a good measure that you may have noticed when you see your 10-k is our inventory absolute of costs have gone down in 2015 when compared to 2014, actually. So we have good control over inventory.

(Operator Instructions) Alan Mitrani of Sylvan Lake Asset Management.

To follow-up on the question that came out with moving the mic business, when do you expect that to be completed?

We expect the factory here in Florida to be shut down at the end of this quarter.

And the margin list that you can get from moving to a contract manufacturer for the products, can you give us a sense of how that can benefit us?

I think it's kind of confident information; it will be a good bump, actually; you won't see it in the total numbers, it would be like points you'll see in the total numbers, but for the product category it's a good bump, it was worth the move, actually.

And when the product category as a whole goes up, which is our plan, which we think it will happen with all the different frequencies that we have introduced. It'll be a very good improvement in terms of our gross margins, actually.

So maybe let me step back; when you [C-Beam], I think it was around $5 million in revenues, something like that at the beginning of March of 2014. Can you tell us what the revenues in the mic business was this past year?

Actually, when we bought [C-Beam] it was about $3.7 million in revenue run-rate, that's what we bought, actually. The (inaudible) have - we don't break it down, that is close, but we don't break the revenue down to that level, actually.

Has the business grown since you've owned it, 10%, 20% to what it normally as. And that business I remember -

We are happy with the way it's going and we have better plans for it, actually.

And that business has higher margins than your overall business?

No. When we bought it, it had lower margins than our combined margins for the Pro products and all the other products. With this contact manufacturing move, it will get to slightly above our combined margins, actually.

So if we're looking at, let's call it a down year in revenues, flattish to down maybe, certainly the first quarter is always a down quarter sequentially we know and sort of flattish margins. Is there room to cut costs in certain areas besides this move that you're doing right now?

Alan, we look literally on a daily basis, we look as far out as we can and we've proven it before, but we always look at cutting costs. We run lean anyway, we have very little overhead, and we don't want to - you can't cut yourself to success, but we'd look at our investments in R&D, our T&A, our marketing.

Across the board, we look at every single cent that we spend, believe me, our employees can attest to that, unfortunately, and we look to cut costs whether we're in this business cycle that's an economic slowdown or not. It really doesn't matter; we thrive on profitability, it's our golden rule and whenever we can cut costs we cut costs, we don't let costs build up because we're in a boom year.

So, let me take the other step. You wanted to get much bigger; you've made a number of acquisitions, you're going into different areas. The question is, can you use this downturn to buy some weaker competitors, put some of that cash to work besides buying back your stock and be able to jump to the next level? Is there someone out there that's bigger than a $2 million, $3 million, $4 million deal that you think you've been watching for a while that you think would make sense?

We would always bee interested, you hit it very well, we are definitely interested. If we could identify a match that would technically, strategically fit us, culturally work for us that we could culturally adopt them, strategically adopt them, that it would be highly complimentary to what we have and fairly priced. We will not overpay. And generally this is a good market if you, well, identify to be able to find such an opportunity and not overpay.

And if we found such an opportunity you can be sure we will jump on it, and we are always on the hunt, and opportunities do come our way and have come our way. Literally, they come our way every now and then, quite frankly, a couple times a quarter we may see an opportunity, but the issue is they're either so highly flawed that at this point we're better off to focus on the acquisition to be made, the marketing we need to do, and grow what we have.

But absolutely, if an opportunity comes our way which is large, we're not afraid of it at all. It's just a little harder to come by. If you have any that you know of you can pass them our way.

Actually, Zee has mentioned before that we are not even afraid of taking debt if the - size doesn't deter us, actually; it's the [frict] is what we look for, actually.

There are no further questions at this time. I'd like to turn the call back over to Zee for any closing remarks.

We appreciate our shareholders and interested parties continued interest in ClearOne and for joining us today for our quarterly and full-year update. If there's any further questions, please contact us or investor relations. And this concludes our call for the day. Thank you for your time.