Clearone Inc (CLRO) 2016 Q2 法說會逐字稿

Good morning, everyone, and welcome to the ClearOne 2016 Second Quarter Financial Results Conference Call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to company's Investor Relations representative, Mr. Robert Jaffe of Robert Jaffe Co. Mr. Robert Jaffe, please go ahead.

Thanks, [Missy]. Welcome, everyone, and thank you for joining us today to discuss ClearOne's 2016 Second Quarter Financial Results. On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Senior Vice President of Finance.

Please be advised that this call is being broadcast live on the Internet at www.clearone.com. A playback of this call will be available for at least three months and may be accessed on the Internet at ClearOne's website.

Before we begin, I'd like to make the cautionary statement and remind everyone that all of the information discussed on call -- on the call today is covered under the safe harbor provisions of the Litigation Reform Act.

The company's discussion today will include forward-looking information reflecting management's current forecast of certain aspects of the company's future, and our actual results could differ materially from those stated or implied.

With that said, let me turn the call over to Zee Hakimoglu. Zee?

Thank you, Robert, and good morning, everyone. Thanks for joining us today to discuss our second quarter 2016 results. In Q2, our revenue decreased 15% to $12 million from $14 million in 2015 Q2. Our gross profit margin, however, remained strong and unchanged at 64% when compared to the second quarter of 2015. Our financial results were negatively impacted by continuing global economic headwinds. Our top line was impacted by all around weakness in the global economy, including the U.S. and especially due to weaknesses in Canada, China, Japan and Korea and parts of Europe and Africa.

Despite lower overall demand, sales of our video products grew more than 50% when compared to Q2 of last year.

During Q2, ClearOne paid a cash dividend of $0.05 per share as for our quarterly dividend program. And yesterday, we declared a $0.05 per share cash dividend for Q3. We acquired approximately 332,000 shares of our common stock during Q2, under the $10 million stock repurchase program that we announced in March 2016.

As of June 30 this year, we acquired approximately 365,000 shares amounting to $4.1 million under the stock repurchase program. In addition to the stock repurchase program, we spent $1.8 million on the repurchase of approximately 226,000 stock option in the first quarter of 2016, which also reduced diluted shares outstanding. We will continue to repurchase our stock under the program in the open market, subject to price, volume and other safe harbor restrictions.

In total, during the first six months of 2016, we spent $6.8 million towards the payment of dividends on our common stock, payment for the stock repurchase program and payment for the options repurchase.

In June, at InfoComm 2016, we launched a number of new and very strategic products. Most importantly, we introduced our next-generation professional audio conferencing platform. This new immensely powerful and competitive platform generated phenomenal excitement from our channel partners and our end-users. Named CONVERGE Pro 2, this fourth-generation platform will reinforce our dominant leadership position in the installed audio conferencing market. The platform delivers stunningly clear audio, thanks to the world's most advanced audio signal processing. It is scalable, reliable and competitively priced and will outperform any competitive product in any sized room, any audio environment and any application. Its versatility is second to none.

We also announced of other new products at InfoComm, which I will talk about briefly. We introduced the new Beamforming Microphone Array 2, which is optimized to complement and operate with ClearOne's next-generation CONVERGE Pro 2 audio platform. As you may know, ClearOne's original Beamforming Microphone Array was the AV industry's first professional-grade microphone array with beamforming and adoptive acoustic steering. The Beamforming Microphone Array 2 affirms ClearOne's industry leadership by delivering significantly enhanced echo cancellation for the most demanding acoustic environment, faster convergence and more advanced adaptation to changes in room acoustics. It provides dramatically better mic pick up, sharpening the capability to detect softer voices. And it provides natural and clearly intelligible audio even when two people speak at the same time. And importantly, for the AV integrator, it bodes zero consumption of analog mic input when connected to the CONVERGE Pro 2, making it extraordinarily efficient for the integrators.

Next, I'll talk about our wireless microphone system, the new DIALOG 20 that WE introduced. DIALOG 20 is a compact two-channel system packed with innovative features that increases the breadth of ClearOne's wireless microphone product line. The new wireless microphone system targets usage in which only a few wireless mics are required, such as in classrooms, presentation and training venues, huddle rooms and other smaller spaces.

On the video side, we introduced a new video encoder, a new video decoder to complement our existing network media streaming solution, VIEW. This new encoder is a single-channel alternative to the popular dual-channel encoder and provides the lowest cost encoder for customers preferring a single-channel option. The new decoder enables basic display of a single-image video application while delivering superb price-to-performance value. All these new offerings launched at InfoComm 2016 are expected to ship before the end of the year.

During Q2, we were awarded three more patents to our portfolio of intellectual property. The first patent enables the beamformers to have better low-frequency response, fewer microphones in the array and less associated computational complexity. The second patent is related to a network speaker that can synchronize audio output in multi-speaker sessions for the best possible sound reproduction. The third patent pertains to a scalable conferencing system designed to support multiparty call that can decrease the cost of multiparty conferencing.

Despite our disappointing second quarter revenue performance, we are confident that ClearOne is solidly positioned to financially benefit from any improvements to the economic macro environment.

With this wrap-up of our Q2 highlights, I'll turn the call over to Narsi. Following Narsi's discussion, we'll 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'll be discussing certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to reported GAAP measures is included in the earnings release that went out this morning.

Now turning to our financial results for the second quarter of 2016. Please note that following comparisons refer to second quarter of 2016 versus the same quarter of 2015. Net revenue at $12 million was 15% lower than last year Q2 revenue of $14 million. Gross profit amount of $7.6 million were 15% lower than last year Q2 gross profit of $9 million. However, gross margin remained the same at 64% for both 2016 and 2015 Q2. The decline in gross profit was due to the drop in revenue.

Non-GAAP operating expenses reduced by 6%, mainly due to reduction in G&A expenses by 27%. G&A expenses declined mainly due to decrease in legal expenses, audit and accounting fees and employee-related costs, partially offset by increase in recruitment costs.

Non-GAAP operating income decreased 33% to $1.9 million from $2.9 million in Q2 2015. Most of the decline in operating income was due to decline in revenues. Some of these decline was offset by savings in operating expenses.

Non-GAAP net income decreased 26% to $1.4 million or $0.15 per diluted share from $1.9 million or $0.20 per diluted share. The decline was primarily due to reduced revenue and associated gross profit. However, net income was benefited by reduced operating expenses and better tax rate for 2016 second quarter. Non-GAAP adjusted EBITDA was down by 31% from $2.2 million to $3.2 million.

Now turning to our financial results for the six months ended June 30, 2016. Please note the following comparisons refer to first half of 2016 versus the first half of 2015. Net revenue decreased to $25 million from $27.6 million, a decline of 9%.

Gross profit was $16.1 million or [53%] of revenue compared with $17.5 million or 63% of revenue. The increase in gross profit margin was primarily due to increase in sales of higher margin products in the revenue mix and the contribution of licensing fees to revenue.

Turning to operating expenses. Sales and marketing expense decreased slightly by 1% to $5.3 million from $5.4 million. Non-GAAP R&D expense increased by about 9% to $4.4 million from $4 million. This is primarily due to increase in R&D project-related expenses.

Non-GAAP G&A expense decreased by 26% to $2.1 million from $2.8 million. Total non-GAAP operating expenses decreased by 3% from $12 million in the first half of 2015 to $11.7 million in 2016 first half.

G&A expenses decreased due to decreases in legal expenses and audit and accounting fees. These decreases were partially offset by an increase in recruitment cost.

Non-GAAP operating income decreased to $4.5 million from $5.4 million, a decrease of 18%. Non-GAAP net income decreased by 11% to $3.2 million or $0.33 per diluted share from $3.6 million or $0.27 per diluted share for the prior period. Non-GAAP adjusted EBITDA decreased by 17% from $6 million to $5 million.

Turning briefly to the balance sheet. Our balance sheet continues to be enviably strong. Cash, cash equivalents and investments were $37 million at June 30, 2016, down from $39.8 million at December 31, 2015. The balance went down primarily due to $6.8 million spent on dividend payments, stock repurchases and the stock option repurchases during the six months ended June 30, 2016. Our quarterly dividend program continued in 2016 Q2. During Q2 2016, $0.05 a share was declared and paid.

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

Thank you, Narsi. We'll now take some questions. Operator?

(Operator Instructions) Our first question will come from the line of Ian Corydon from B. Riley. Your line is open.

This is [Sarkis] actually calling in for Ian.

Pretty good, Ian.

It's not Ian. Can we get your name again?

Yes, this is Sarkis calling in for Ian. I work with him. So first, can you maybe give us a breakdown of segment revenues for the quarter, please?

By the way, we don't call them segments. We just categorize the products for the benefit of investors. We consider ourselves of having only one segment for the entire company. Those are important for our GAAP disclosures, so I'm letting you know that.

Let me give you the breakdown. For region-wise, Americas, it was 71.5%; APAC, was 17 point -- okay, let me give just the Q2 numbers. Americas, so 71%; APAC was about 18.5%; EMEA was about 11%, actually. On the product side, Pro was 76% of revenue, UC was about 14% and video was 11%, actually.

Okay, great. And then can you maybe give us some outlook or commentary looking at the different product segments here going forward?

Sarkis, we don't give outlook. Obviously, we saw good growth in our video products and we have introduced a most important platform, which is strategic to our business, and we're optimistic from the feedbacks that we've gotten from our partners and our end-users that it's going to be a great success.

Okay. I guess, maybe looking at the back half of last year, I had a pretty good revenue run rate there. Any indication as to kind of look into the back half of this year? I know you mentioned the economic headwinds that you're seeing, although you do have nice new products here. Any indications whether that kind of revenue metric would be on a similar run rate?

Okay. Actually, I can give you a little bit information on what we are going on with each. We already reported video has been doing pretty good. It has been now pretty consistent. We have three successive quarters of good growth. And this quarter, it grew by about 50% plus. And UC has been declining. So that's not our focus in a big way. With the Pro products, all these new products will address competitive issues and also reinforce our strength as the leader in the market. We still have 50% less market share, it will address it.

And on the revenue side, the macroeconomic factors are important function in the reduction of revenues. But we also feel, since we introduced the such an important platform, some of the budget that goes to our product might have been delayed. We introduce the product in June. It happens all the time. This is not the first time we have seen whenever we introduce a successor to an existing product, there will be some demand that will be withheld. The demand that's meant for ClearOne CONVERGE Pro product that may -- we feel that might have been another factor that caused this drop in revenues in Q2.

Usually, it takes about two to three quarters after we introduce the product and ship the product for those products to show real increase in revenue. For the CONVERGE Pro 2, it may happen a little bit sooner, but still we may see this issue in the next quarter or two, actually.

One other thing I wanted to mention about the platform, we talked about the flexibility of the platform. The platforms, one of the more important features outside of the audio, of course, which is number one, is its scalability. Of course, you heard of things such as huddle rooms. The market is moving, you hear our competition talking about 100 million huddle rooms that are available for audio. Whether that number is 100 million, we hear 50 million, there's a large number of rooms where the trend is to use very good audio in the smaller rooms, which is the trend in enterprise. So our platform is extremely flexible, kind of like a transformer. It can handle both the emerging market for huddle rooms as well as very large scale rooms and environments, which makes it quite flexible and opens up nice opportunities for us with this platform.

Great. Thanks. That's it for me.

Thank you.

Thank you. Our next question will come from the line of Lisa Springer from Singular Research. Your line is open.

Thank you for taking my question. I was wondering if you could give us a little more color around the 50% uptick in video sales. Was that one large order? Was that in a particular geography?

Well, actually, we -- good question and thank you, Lisa. The nice news on the video is it was not one large order and it was not in any particular geography. We had, I would say, very balanced sale across different regions, and it included different venues. We had media collaboration, sales at large athletic store retailer. We had it for hospitals. We had it for universities. We had it for casinos. We had it for colleges, ministries. We had a very nice mix of wins for our video, which is always a good indicator that the product is the right product at the right price at the right time. So we were happy with our results in that respect.

Okay, thank you.

Thank you, Lisa.

Thank you. Our next question will come from the line of Chip Saye from AWH Capital. Your line is open.

I have a question and follow-up on the previous caller. That is a very nice ramp in the video products business, and I was at InfoComm for a day. And there seem to be a lot of interest in VIEW Pro, and I know there are some competitive products there. But can you talk about the advantages that VIEW Pro has like the 4:4:4 true color, the ability to work on multiple operating systems that other competitors may not have?

And second part of that question is, I heard that Netflix is a customer of yours for the VIEW Pro. Can you tell me what they're using the product for? Thanks.

Okay. First, just to get to your question about an end customer, it's not something that I would want to discuss in great detail. They don't disclose all their applications. I could only say that they're in the video business, and they considered ClearOne providing the absolute best quality video for the features that they needed and deployed it in their company for the application that they needed. So we were happy with that.

In terms of VIEW Pro and what makes our systems compelling compared to the competition, our viewpoint, one is that it runs on standard TCP/IP, basically standard Ethernet networks. In other words, you don't have to re-cable your systems. You don't have to lay wire. You don't have to go through complex modulation schemes. You could run our system on your existing Ethernet network, end of story. So if you want to deploy it, you just deploy it.

Number two, we have something that's unique and no one else offers. With our systems, since the core engine is software-based for the encoders and decoders, the video encoders and decoders, we have the capability by just doing software upgrade modules. Basically, these are licenses. We can do things and add features that others need extensive hardware upgrades for.

I'll give you one example, digital wall or composition. If you want to create a digital wall and put a few displays, perhaps you had one location with one display, we're just doing it here in the office, I just wanted to add a digital wall to a display that we had. You simply add the display, how many you need, and with a software license upgrade that ClearOne will provide for an added fee, onetime fee, now you could do a digital wall without the addition of network switches and scalers and other hardware components that will need a truck roll, need to be mounted, take power, take footprint.

Number three is that we have the absolute supreme video quality. We do 4:4:4 video. What does that mean? That means that we have, on your pallet, the true color that you need not just for artistic reasons, but if you have large information wall such as at the airport or at command and control center, when you put up text such as Excel spreadsheet or fine text, you actually need the 4:4:4 color for the absolute best quality of reading that text on large walls.

The final thing I will say is that we have a solution for everything. We don't flood the network like some of the low-cost solutions where they basically blast the data to every node. And we have solutions for single displays, single encoders, all the way up to multiple displays, multiple decoders with our last introduction. So we're very positive about our solution, and when we do introduce it, we find the customers really, really like it. And so we're optimistic we'll continue to add features to differentiate the product through software licenses and other features.

Okay, I really appreciate. That's a lot of detail there. Thanks for giving that. My second question would be around CONVERGE Pro 2. Can you talk about the improvements in this version versus the prior version? I think it's even positioned as even better value, but can you just explain why?

Okay. First of all, any person who installed -- any end-customer that wants audio installed means he's going for the most important aspect. They want the best possible audio on their critical calls or their critical video environment. So the ClearOne CONVERGE, we have -- what we have done is we have completely improved and redesigned many of the very core algorithms for echo cancellation, noise reduction and other things. So our audio, we challenge anybody. It's second to none in terms of audio superiority.

Number two, we have made the platform in an extremely flexible architecture. So we can go from a huddle room all the way up to very large venues, simply by mixing and matching the new SKUs that we have developed. We have integrated some of the boxes such as VoIP and USB and some of the other components that were prior split, and we have integrated them optimally inside the single SKU.

We have adopted and integrated Dante. Dante is a very powerful audio protocol on the network, which the AV industry is going, and we are offering Dante skews for those that want to embody Dante. And we've separated for those that don't want to embody Dante, we have non-Dante SKUs. So it really gives the integrator great options to get price-to-performance features.

Another large change that we made is that we added the software interface that we call Pro VIEW, which is very easy for this new generation of AV integrators that want to program these devices. It's very easy. It's a very pleasant. You don't need a lot of training. It's a very visual software interface.

And finally, of course, we have the Beamforming Microphone Array 2, which is -- works with our CONVERGE Pro platform that offers all the usual benefits that a beam steering microphone ad. We took a long time to architect a solution, maybe longer than we should have. But we took the time to do it right, and I think it's going to be a very excited product based on the feedback we got.

Once again, thank you for that detail. And my last question is for Narsi. Narsi, you gave us some commentary onto a prior caller about how when you introduce a product suite like you did at InfoComm that it sometimes -- you've noticed a pattern of buying where the channel may hold off until they see the new products. And then a couple of quarters out, you may see the channel starting to embrace those new products, is that what I heard right? Because I just want to -- I want you to explain that and go to a little more detail there.

Yes. Actually, it's not a question of embracing the new product, when they see a new product, which is better than the existing product, some of the budget allocations that were made to buy the existing CONVERGE Pro will be repaired actually. They would want to -- if they have the time and they are flexible to wait for the new product to be shipped, they will wait actually.

Not everybody has the kind of patience and CONVERGE Pro works actually. It's not like we are introducing something to fix a broken system. It's a fantastically working thing, and we think that will be demand for -- even the first -- the current CONVERGE Pro for the next couple of years because it goes with the existing projects. And so it has all those benefits actually. But people who have the flexibility to delay their projects, to go for the best available, they may withhold the purse strings actually. That's what we are looking at actually.

And the next point I talked about was the success of the new product actually. That's the couple of quarters delay in actually ramping up -- the thing I saw there, two different things are possible.

Okay. Yes, where I was going is that is you thought some of that may have hit in the second quarter, is that correct?

Yes. I think we introduced in June. Typically, June is a very active month. People coming back from InfoComm. They place large orders. And we kind of take it for granted that we should see a spike in June by the time. We did see a good June, but it was not anywhere close to our expectations or anywhere close to our usual standards actually. And we attribute most of this due to global economic thing, but some these is due to introducing CONVERGE Pro 2, actually.

Okay, thank you for the color.

Thank you. Our next question will come from the line of George Melas from MKH Management. Your line is open.

Hi. A follow-up on some of the previous questions. On the video revenue that picked up roughly 50%, was that mostly driven by VIEW? Or was there a meaningful contribution from the other products?

Actually, Spontania was kind of flat. MagicBox is not a big factor. So actually it's a combination of both, streaming and/or COLLABORATE are both together contributed to it. It's not either one of them, it's both of them did well, actually.

So both COLLABORATE and VIEW contributed?

Yes. It was a nice mix. Of course, let's put -- I wanted to let you know, on the VIEW, it is a big more project-oriented and spiky because those are very projects. On the VIEW, what we're trying to establish and what we're seeing is more of a run rate business because it doesn't involve as many complex projects. VIEW is an infrastructure project, media collaboration is more a less project-oriented. Of course, they're projects, but less planning, consulting, et cetera.

If I may add, we have good success with our cameras actually, cameras are contributing to [our success].

Okay. And the cameras are really sort of an additive to the -- for the videoconferences.

Yes.

What would it take -- this business kind of sort of grown modestly. Now it seems to be growing at a faster pace. What would it take to try to get to a quarterly revenue of $2 million as opposed to $1 million or just a little bit over $1 million that we have now?

Well, we're doing everything we can to do that to the extent that were not busting the bank, obviously. We're hiring staff that are familiar with media collaboration and video. Okay, we brought on good staff. We're doing some more advertisings. Our team is getting more familiar. The channel is getting more familiar. We brought on partners that are familiar, more or less, with media collaborations. So it takes work, and we're continuing to do that.

Of course, if we had more -- if we made the decision to spend more on marketing, I think that could help. But again, the marketing pipeline takes time. A single [advertisement] doesn't move the needle, it's a long process. But we're looking in that direction. I think that's a very important part of the solution. And as customers and end-users realize, they don't have to spend a lot to get a great system.

As you may know, our media collaboration, for example, includes wireless sharing, so that you don't need these competitive systems, if I may say, such as one famous one, Barco, to do presentations. It's already built in. We've included our cloud into our room system.

Our advantage in media collaboration is we have great appliances, great cloud solution. But most importantly, the differentiating factor for ClearOne among all the others is we have audio complementary to it, which is very important. We don't have to refer our customer to another vendor if they want an audio component.

Okay, great. Okay, thank you for that. And then I was glad to be at InfoComm, and I can wholeheartedly support your statement that distributors were very excited about your CONVERGE Pro 2. When do you think they will be able to place some initial orders for the products?

While we -- yes, we said, George, that we'll be shipping before the end of the year. I could say that we're actually looking at quoting today the CONVERGE Pro 2 for large projects that, as Narsi mentioned, have the time to wait for the products itself. So we already have interest and we already are quoting CONVERGE Pro 2 for those that have the longer time line. Slightly longer, yes.

So it means that your distributors are already sort of really educating their customers in the marketplace about CONVERGE Pro 2?

Oh, yes. What you saw at InfoComm, and we were very happy to see you at InfoComm and we're happy to see all our investors at InfoComm, because you don't hear it from us, you hear it from our partners. They're already looking at quoting the systems. They are very, very anxious to get it shipped. Very anxious.

Okay, great. And then just one final question. Try to understand a little bit the weakness in the revenue on the Pro side in the quarter. Narsi, you talked a little bit about June being usually a strong month. It was a good month, but not what you expected. Can you maybe give a little bit more color in terms of linearity or geographic mix and also product, where the microphones are very strong, but it was -- you really saw that the -- sort of the install audio that didn't do as well. Is there a way to parse things a little bit?

Okay. Microphone [startups our] Pro numbers that I reported. As I had informed before, microphones do better than other products in that category. Basically, mixers, controllers, all those things. Microphones always do better, and it continues to be so, actually.

So in terms of regional thing, we had weaknesses across the world. Some of the bright spots are still places like India. India has been seeing steady growth. Middle East, it was a good quarter even though these [blue board are a] huge order the same quarter last year. We talked about it in our previous press release, if you remember. So Middle East is doing well.

And in terms of other regions, the U.S. is our key market. It still have 60%-plus market share. So it went down this quarter, so it contributed to those decline in a big way but it's not like the 2009, 2008 times where we have to be alarmed, I think, it has to -- there is a weakness, it's not -- and then China continues to suffer. They have been seeing weaknesses of last two quarters and --

Okay, thank you very much.

Thank you, George.

Thank you. At this time, I'm showing no further questions. I would like to turn the conference back over to management for any closing remarks.

Thank you, [Missy], and thank you for your interest in ClearOne. We appreciate those investors that did come to InfoComm and saw for themselves, status of ClearOne at least at the end of June. And if there are any further questions, please don't hesitate to contact us. This concludes our call for today, and we thank you for your time.

Ladies and gentlemen, you may now disconnect.