Clearone Inc (CLRO) 2016 Q4 法說會逐字稿

Good morning, everyone, and welcome to the ClearOne 2016 Fourth Quarter and Full Year Earnings 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 the company's Investor Relations representative, Ms. Cathy Mattison of LHA. Ms. Mattison, please go ahead.

Thank you, Andrew. Welcome everyone, and thank you for joining us today for the ClearOne Fourth Quarter and Full Year 2016 Results Conference Call. On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Senior Vice President of Finance.

Please note this call is being broadcast live on the Internet at www.clearone.com, and a playback will be available for at least three months.

Before we begin, I would like to make the cautionary statement and remind everyone the information discussed 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.

Today, Zee will open with a review of performance highlights and focus on current and future outlook. Then Narsi will provide a detailed discussion of the financial results. We will then open the call for questions.

Now it is my pleasure to turn the call over to Zee.

Thank you, Kathy, and good morning, everyone. In the fourth quarter, we hit a perfect storm. However, we are strong enough to absorb this temporary setback and continue our focus on achieving our long-term goal and executing on our operating plans to align with those goals.

Our internal sales reports show that 2017 is improving. We are confident in ClearOne's business and long-term prospects, given the momentum in our video solutions and the market's strong positive response to our next-generation flagship audio conferencing platform.

Our Board of Directors share our confidence and has increased the quarterly dividend by $0.02 from $0.05 per share to $0.07 per share beginning the second quarter of 2017. The board has also extended our stock repurchase program back up to $10 million.

Today, I'll review the Q4 challenges and the actions we have taken as well as how our new product shipments position us in regards to industry trends.

In the third quarter, we noted that we expected a delay in the transition to our next-generation audio platform, CONVERGE Pro 2 and Beamforming Microphone Array 2. The delay in shipping, however, has taken even longer than projected. Taking into consideration that buyers were waiting for the new generation audio platform, we reduced pricing on our existing platform, the CONVERGE Pro 1, to stimulate customer interest in sales in the current generation of products.

While we successfully spurred sales volume, fourth quarter revenue was still lower than prior periods. Further, the revenue challenge was aggravated by external economic forces. As you know, 2016 infrastructure and capital equipment spending continued to be less than robust due to the weak overall global economy, which was exacerbated by political uncertainty, first in Europe with Brexit, and then in the fourth quarter with U.S. elections.

Although we do not control the markets, I'm pleased to say we have made definitive progress on our audio platform transition. While we began shipping a limited number of SKUs in the fourth quarter, now we are shipping all 10 SKUs of CONVERGE Pro 2 as well as our award-winning Beamforming Microphone Array 2.

As for gross margin, Q4 gross margin was negatively impacted by the existing audio platform price reduction as well as additional scrapping of inventory related to the transition of wireless microphones manufacturing from Florida to an outsourced EMS provider.

Finally, as for G&A, Q4 was higher than prior periods due to an additional expense incurred on a legal matter. We believe, in 2017, our G&A expenses will return to our normal run rate.

The combination of these adverse factors contributed to a disappointing fourth quarter result. Even with an overall difficult fourth quarter, our video products continue to gain traction. We posted double-digit video revenue growth for the ninth quarter out of 10 most recent.

For full year 2016, video contributed over $5 million in revenue and grew 40% year-over-year. We are extremely pleased with video's performance, and believe it will continue to grow in contribution in 2017.

Our complete and complementary value chain of solutions has helped secure some great wins. I'll review our successes in Q4. For video conferencing and collaboration products, namely COLLABORATE, the UNITE camera and our cloud-based video conferencing software, Spontania, we secured wins for a couple of hospital projects, a large university and a recently IPOed company, offering the hottest image messaging and multimedia mobile application.

For our network media streaming products, namely VIEW, wins included a large command and control center, an independent power grid operator and several outlets of a growing popular international franchise chain of restaurants.

I'm also pleased to report we are building positive momentum in the first quarter of 2017. We are now shipping all 10 SKUs of the CONVERGE Pro 2 platform as well as the Beamforming Microphone Array 2. And at the end of this month, we will be offering more features through software updates, which will enhance the functionality and scalability of the platform.

Already, our revenue, including backlog for Q1 2017, is tracking to the first quarter of 2016. And revenue from the new audio platform is well ahead of fourth quarter. There is no doubt that the transition to our new platform is gaining traction.

Our commitment to incorporating the latest technologies into our product lines continue to be validated. Our second-generation Beamforming Microphone Array won Best of Show at Amsterdam's Integrated Systems Europe 2017 convention, just in February. New Bay Media's AV technology selected our newest solution among more than 3,000 products and 1,100 exhibitors. It was recognized as a standout product for attention to detail, emphasis on the end user and breakthrough features.

Now that our core platforms are ready to benefit from these investments and to accelerate momentum in the market in 2017, we are focused on broadening our sales and marketing reach through a variety of initiatives and activities.

ClearOne's strength, good audio, is the cornerstone and springboard for effective conferencing and collaboration. Just as the telephone handset served the need of communication a generation or two more ago, today the winning combination of great audio with rich video applications for a dispersed team, wherever they are, on the road, at their desk, in a huddled space or a conference room of any size, is the key for market adoption and success.

While there are solution providers, who can provide audio or video or both, ClearOne uniquely differentiates itself in the market by offering audio and video solutions that are the most complete, most scalable and most unified for conferencing and collaboration.

Now I'll turn the call over to Narsi.

Thank you, Zee, and good morning, everyone.

Before I begin, I would like to note that I will be discussing certain non-GAAP financial measures. A reconciliation is included in our earnings release.

Now I will turn to our financial results for the fourth quarter of 2016 compared to the fourth quarter of 2015. Net revenue was $10.7 million compared to $14.3 million a year ago, reflecting the impact of the delay in our transition to our new product platform, aggravated by the global economic slowdown. However, if you look more closely, you will see some positive changes as well.

Reviewing the year-over-year change in percentage of revenue by region. Asia Pacific, including the Middle East, grew 26%. Although, Americas decreased by 31% and Europe and Africa was down 46%, respectively.

Reviewing the year-over-year revenue change in percentage by product. Video increased 19%, while professional audio was down by 29% and UC point -- endpoints were down by 28%. We are very encouraged. Video product sales are continuing to show a good rate of increase year-over-year. This is our ninth quarter of year-over-year increase in the last 10.

Looking ahead, we are also encouraged that our current Q1 revenue, including backlog, is tracking our Q1 levels in 2016, in fact, up above 2% compared to Q1 2016. And revenue from the new audio platform is well ahead of fourth quarter revenue. Also, we are quoting the new product more. And the product is -- makes us much different than in Q4.

GAAP gross profit margin was 53% compared to 64%. The decrease in margin percent was due to, one, the price reduction made to CONVERGE Pro products to encourage CONVERGE Pro 1 sales, while customers were awaiting CONVERGE Pro 2 products; number two, a decline in higher margin professional audio conferencing products in the mix; number three, higher obsolescence costs; number four, increased overhead absorption due to a sharp decline in inventory; and number five, scrap of inventory related to transition of wireless microphones manufacturing to an outsourced EMS provider.

Non-GAAP gross profit margin was 53% compared to 62% in 2015. GAAP operating expenses were $6.8 million in 2016 Q4, increasing from $6.5 million in 2015 Q4 due to higher G&A expenses, partially offset by reduced sales and marketing and R&D expenses. G&A increased to $2.4 million from $1.8 million, mostly due to higher legal expenses related to a employee-related matter, partially offset by reduction in audit fees. We believe it's unlikely that we will incur legal expenses at similar levels for this matter in the future, and also we expect 2017 G&A levels to return to normal run rate.

Sales and marketing expenses declined to $2.3 million from $2.5 million, due to reduction in commissions paid to independent reps. R&D expenses declined to $2.1 million from $2.2 million, due to savings in employee-related costs.

Non-GAAP operating expenses were $5.3 million compared to $5.4 million, reflecting a 3% drop in expenses. Non-GAAP operating income was $0.6 million compared to $3.7 million.

Our effective tax rate for the year climbed to 37% from 28% at the end of 2016 Q3, mainly due to reduction in expended -- expected R&D tax credits. Non-GAAP net loss was $0.2 million or $0.02 per diluted share compared to net income of $2.3 million or $0.24 per diluted share. Non-GAAP adjusted EBITDA was $0.9 million compared to $3.9 million.

Turning to our financial results for the 12 months ended December 31, 2016. Revenue was $48.6 million (sic - see press release "$48.7 million") compared to $57.8 million for the full year 2015. Non-GAAP gross profit was 62% compared to 64%. Non-GAAP net income was $5 million or $0.54 (sic - see press release "$0.53") per diluted share compared to $8.7 million or $0.91 per diluted share, reduction of 41%. Non-GAAP adjusted EBITDA was $8.6 million compared to $14.4 million. The effective tax rate was 37% compared to 36% a year ago.

We continue to be very strong. Cash, cash equivalents and investments were $38.5 million at December 31, 2016, compared to $39.8 million at December 31, 2015, still without any debt. Once again, we paid dividends and $0.05 a share was declared and about $444,000 was paid in Q4. On January 31, a dividend of $0.05 per share for Q1 2017 was declared.

Further during the quarter, we repurchased approximately 86,000 shares for approximately $900,000. Since March 2016, when this latest stock repurchase program was announced until yesterday, we have repurchased approximately 608,000 shares, amounting to $6.9 million. The Board of Directors have extended the program for up to $10 million or additional one year. We intend to continue to repurchase our shares in the open market, subject to price, value and other safe harbor restrictions. As we noted, the Board of Directors also increased the dividend from $0.05 per share to $0.07 beginning the second quarter of 2017.

Let me turn the call back to Zee. Thank you.

Thank you, Narsi. In 2016, we managed several challenges. However, our underlying fundamentals held strong and set the stage for a better 2017. Revenue from the new audio platform is well ahead of the fourth quarter revenue, and Q1 revenue, including backlog, is improving and tracking up slightly from our Q1 levels in 2016.

Additionally, our board actions reiterate our commitment to creating long-term shareholder value. We look forward to reporting our progress in the quarters ahead.

Operator, you can open the call for questions.

(Operator Instructions) And our first question comes from Lisa Springer with Singular Research. Your line is now open.

I wondered if you could give us a sense of the revenue contribution from the CONVERGE Pro 2 in the fourth quarter? Was it a meaningful contribution to revenues?

I'm going to give the break up for CONVERGE Pro 1 and CONVERGE Pro 2, as a percentage of the total Pro mix. Professional products -- and actually this is only between CONVERGE Pro and CONVERGE Pro. I'm not talking about all microphones and everything, because that's the relevant comparison actually. The CP 2 was about 12% of the total mix in 2016 Q4. 2017 Q1, it's already -- as I can see until yesterday, it was about 22% actually.

Okay. And the price -- the reduction in price on the CONVERGE Pro 1, what was that -- was that a meaningful part of the reduction in gross margin? I mean, how much did that materially impact gross margin?

Yes, it was a meaningful part. In fact, it was the biggest contributor to the gross margin reduction. Yes.

Okay. And the broadening of sales and marketing initiatives in 2017, could you be a little more specific about that? Is the effort going to be across different geographies? A focus on a particular geography? And what's going to be the impact on sales and marketing expense in 2017?

Yes, I can take that. We're going to basically be looking across the board in terms of our marketing efforts. We're going to make changes to headcount for a more direct sales force. We're trying to add a bit more of ClearOne badged employees on the street. We're going to look at direct marketing programs. We're going to increase our ad spend. We're probably going to be increasing our social media spend. We'll be increasing some of these marketing efforts, especially in terms of the video and network media streaming, and we're investing in a brand new from a bottoms up website that we should be launching sometime in July.

These efforts will go across the world. We will focus on the U.S., South America and we've even made some headcount adjustments in Europe and looking at addressing our channel structures in Europe as well. We don't intend to spend more than 20% greater than what we've spent in the past, and this takes time to ramp up. Though it's not an immediate -- it's not an immediate expenditure, but these are the areas that we're looking at.

(Operator Instructions) And our next question comes from Ian Corydon with B. Riley & Co. Your line is now open.

I'm just curious, what's it going to take to get margins back to the 60% plus level?

I think even starting with the Q1, we think it would be back to 60% levels actually. As we -- as I listed all the reasons, expect for overhead absorption, all the other things are unusual. It's not part of the normal way things are operated. So I would -- we don't expect any challenges to gross margin in the coming future.

Got it. And could you just give a little more detail around why you expect continued strong growth in video?

Well, yes. First of all, I think I had mentioned, one of the advantages that we have is we have an audio complement. We have SKUs that run from pure cloud to very low-cost appliances, including bring your own video, all the way up to maximizing our fantastic new audio and Beamforming Platform. Our video platform, in terms of media collaboration, also has some very nice features. We essentially have a wireless presentation application through software built directly into our solutions. And this is very important, because really others have not done this. While their software-based applications for wireless presentation, I dare say, the equivalent of a popular brand today, Barco, called ClickShare, we have the ability to add this application in its entirety purely through software embedded in our video.

So our model is not necessarily just videoconferencing, our model is to have a multiple kind of the Swiss Army knife of all applications embedded in software that span across all our SKUs, with the complementary video component, whether it be Chat, whether it be our Premium Solutions in our new platform, that can service across all of these. In terms of the network media streaming portion of the video, we have some very, very unique features there that others cannot compete with. We have the ability through our software-based video engine to compress basically 10 gigabytes by 264 compression into an 8-megabit stream. So we do significant compression of the video stream, which in an enterprise network is very important. We don't flood the network.

Among other things, we have excellent color compatibility, it's called 4:4:4. And this is not just something that's important for marketing, for example, where you want rich, great color, but if you are doing command and control centers, things where you really need to see fine detail, such as spread streets, maps, things that command and control centers see are 4:4:4 color is not found in many of the other competitors.

Finally, we have the ability in our streaming -- network streaming solutions to run on a standard network, your standard Ethernet network, no special cabling needed. And we have the ability to do things such as digital walls, composition and many other functionalities through software upgrades. No hardware is needed, such as digital switchers and scalers to create video walls.

Finally, I will say that we have a nice spectrum of solutions from high-end solutions, all the way to the latest solution we just started shipping, which is the 310, which is an Android-based, low-cost decoder that's very economical. So we're excited about it. The markets are moving in the direction that, I could say that we've set early on. And these are the reasons we're optimistic.

And our next question comes from Dennis Van Zelfden with Brazos Research. Your line is now open.

Zee, with the strong continuing growth in video and the apparent strong start to the CONVERGE 2 line, is there any reason not to expect good revenue growth in 2017?

We do expect revenue growth. We're going to have to make up for some lost territory, but we're seeing it in Q1 compared to Q4. And as I mentioned, we're going to focus our efforts, of course, always on development in products, but we're going to focus on marketing and sales to make sure that we capitalize on what we've accomplished.

Right. But you're not seeing any additional brand new headwinds like we've seen over the past couple of years, correct? Like, there's no U.S. elections? The dollar is high, but compared to last year, it's not that much higher, things like that.

Well, things like -- let's look at things like oil companies, which is a very big sector for capital spending, if that settles down or if that finds a home in terms of where it needs to be, that will be helpful to us. Government is always helpful to us. Of course, the U.S. elections are there. We understand there's going to be big infrastructure spend, et cetera, so we're hoping for the best.

We're infrastructure, for the most part, except certain pieces of our products, which are -- serve the enterprise on a more simplified installment model. If Europe can -- Europe is in the middle, still with some political upheaval and we'll see what happens there. But the good news is other areas that we've invested in such as Middle East, Asia and of course, the U.S. and South America by the way, I think we should see growth.

Narsi, do you have any [comments]?

Okay. Fair enough. Well, just a totally separate question, just a clarification. Of the 608,000 shares that you bought, inception-to-date on the buyback program, I think that's what Narsi said. Is all of that -- was all of that from the open market?

Yes. It's all of them versus bought under 10b-18 safe harbor provisions, but it also includes block rate actually. That's a - [we mean] to say open market also includes a block rate, if that's what you mean actually.

Right. It just doesn't include any of management options and things like that?

No, that was a separate program actually. But there have been issues of instances where if anybody in the management exercised their options and sold those shares, it had gone through open market to be bought back by -- through the repurchase program actually. It was not a separate program. It is through the normal open market program that we have. Some of them might have been included actually.

Okay, okay. But you don't know how many? Of the 608,000, was it very many is what I'm trying to get at?

I don't have that number right away.

And our next question comes from Alan Mitrani with Sylvan Lake Management. Your line is now open.

Narsi, on the 15.8% drop in revenues year-over-year for 2016 over 2015, how much of that was currency?

Currency effect is very small. We have talked about it before. It's hard to measure the impact of currency for our products, because most of our billing, except for some billing from our Spain subsidiary. Most of them 98%, 99% of our billing is through U.S. dollars. So there is no typical foreign exchange currency risk that you normally expect companies to report through us actually. But we don't have --

Right. But with the dollar strengthening so much, it's clear that your products were cost disadvantaged, right?

Yes. That's the point I was going to talk about. You hit it on the nail actually. Especially in places like Europe, we have a disadvantage with dollar-denominated pricing. We do take this into account when we work with our partners on special projects and wherever we can have visibility into this. But it is a -- just like many U.S. companies faced this problem, we do have this problem actually.

And so what do you think -- is there a way to mitigate this some way, either to source parts that's cheaper or find something else? Because it doesn't seem like the dollar, with our interest rate policy going forward, is going to get much cheaper here. It looks like it's going to get more expensive relative to your business. So can you talk about what you're thinking about doing in the next 12, 18 months that could mitigate some of this?

I think what we've done or what we continue to do is as we rollout new products and solutions, we're coming out with competitively priced solutions. The new CP 2 is more competitively priced than CP 1. The video appliances are extremely competitive in pricing. If you look at that, even our software-based, Spontania, introducing, for example, on the network media streaming solution set, we introduced a very low-cost, very competitive, as I mentioned, Android decoder, just for the purpose of being able to address cost-sensitive markets and projects.

So we're very aware of it. And we try to build it into the products, so that we have a fair balance of gross margin to pricing and hope that the economy will -- well, dollar looks like it's pretty much the standard and there's little we can do beyond that (multiple speakers) --

Thank you, Zee. In talking about that, when you're talking about different products you're talking about, are these low-margin products?

We don't put a product out that isn't a good margin for us, I'll tell you that. And all of these products, we're happy with the margins. And as Narsi already indicated, the mix that we expect is going to be or 60% plus or minus. And that's what we aim for with new products and the older products.

By the way, to your question about costs, we have already done a lot to reduce the cost actually. So we -- including looking at different EMS providers, looking at pretty good models of using -- I can't reveal a lot of strategies, but we have done enough to bring down the cost to mitigate some of the price pressures and the dollar pressures actually.

Okay. And Zee, what I heard you say, in general, about your investments in sales and marketing, it really -- it strikes me that I'm looking at your model for all these years, it's very sensitive to revenue growth clearly. Your R&D pretty much does goes down, goes up the way in the way it should, modestly, but it should. Your G&A, where as you've kept it fairly constant and -- as your earnings, as your revenues have gone up, your G&A basically doesn't budge much here from that 7-ish level, whatever it is on G&A. I know there's plusses, puts and takes with legal fees and others, but roughly around 7, plus or minus. And your sales and marketing sounds like it's going up. So really, in order to get higher operating income, it's either take your margins up higher which seems difficult, given where they've come from in the past from 2015 or really revenue growth, new products, which you are focused on.

So what I'm wondering is how we get this business? How we get overall ClearOne to grow meaningfully the way we thought? You've always cited ClearOne as a venture-type of company long-term, but the revenues have gone the wrong way in the last couple of years. Not all your fault, of course, but obviously the markets. I mean, how do we create much more value without being part of a bigger company that already has the sales and marketing edges? If your distributors aren't doing it for you, you need your own ClearOne guys on the street to do it. I think you guys should consider strategic alternatives on being a bigger part of a company that already has this and stop -- and don't create duplicative costs. So what's your thoughts on that?

Okay. Yes, there's a lot there that you said. Starting at your last point, of course, ClearOne always considers all the options in front of it and beyond. That never goes away. But I'd like to go back and think about ClearOne's value some years ago. We are a public company, and so we somehow -- we balance growth, although we have not seen the growth we would like to see in 2015, and 2016 was difficult for a variety of reasons. But we live in the world between profitability and growth, that's one. But we certainly consider our options. And most importantly, internally, we feel that the company has growth to go.

We made a series of acquisitions in technology, and technologies are not quick turnarounds. And we believe we have put in the money and the time to get the pieces that will show growth for ClearOne, and they're showing it in terms of video. There's no question, video has been an important factor of our growth strategy and will continue to be so, and will, in fact, be carried by our new Pro Audio platform. We made a decision that we were going to focus on video and we did that. And our Pro Audio got a little behind. But that was a strategic decision we made. But the audio now is second to none, is second to none, our Pro Audio. It's perfectly complementary to our video. And we will see growth. And we will -- our goal is to make sure that our share price reflects that. And we've seen it in periods of growth. You've seen it in periods of growth. The video will be a platform for growth for us, along with some of our other strategic technologies, such as the microphone.

So we're addressing it. Companies take time. We're here for long-term value. I hope that you've seen long-term value. You've been an investor a long time. But there is more to come. And we think 2017, now that we have completed essentially our Pro Audio, which is our sort of flagship product, we will see growth. But the growth won't come just in the audio, which is why we went to video.

I appreciate the thoughtful answer. And I have gotten value in being a shareholder. But still it doesn't take away the idea that -- and I want to see growth. And you're right the stock does respond sometimes to growth, but when it's a better market. But my point really -- the key point is if you have to start going out and hiring extra sales and marketing to push the new products and to do everything off your basically roughly fixed cost base, that's not going down, it's actually going to go up with the sales and marketing, the issue is are there people out there that you could partner with, that you could sell to, that you could merge with, that would create a combined value for everyone, without having to spend the cost?

Well, the answer is, of course, there's entities that you could take that route. Who could deny that there aren't? We feel we want to maximize our own share value before we take any route that would be necessarily just easy for management. Our job is to take the steps needed as they become available to us and as they are the right steps to make sure we maximize shareholder value. We're doing it with dividends. We're doing it with stock buybacks. We're doing it with strategic products. We're doing it with strategic marketing. And if and when the time comes and such a combination meets our criteria that we feel we're going to get the maximum value, we're not afraid of taking any step. Our feeling today, as we speak, is we are not there today.

This concludes our Q&A session. I would now like to turn the call back to Zee Hakimoglu for any further remarks.

Okay. Thank you, Andrew, and we appreciate the continued interest in ClearOne and joining us today. If there are any further questions, do contact us, and we look forward to speaking to you again. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.