Clearone Inc (CLRO) 2017 Q1 法說會逐字稿

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Good morning, everyone, and welcome to the ClearOne 2017 First Quarter Earnings 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, Christy. Welcome, everyone, and thank you for joining us today for the ClearOne First Quarter 2017 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 3 months.

Before we begin, I would like to make the cautionary statement and remind everyone that 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 provide a business update. 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, Cathy, and good morning, everyone. 2007 (sic) is trending positively, our newest products are gaining market traction, our innovation is being validated and our financial results are improving. Also, as recently announced, our Board of Directors extended our stock repurchase program back up to $10 million. Under this program in Q1 2017, we spent approximately $900,000 to acquire approximately 79,000 shares. Also, we increased our dividend payment from $0.05 per share to $0.07 per share in Q2 2017.

Our total Q1 revenue was $11.7 million. And while still not at the first quarter 2016 level revenue increased 9%, sequentially from Q4. Our video investments continued to pay off, generating steady and strong gains. Video posted revenue growth of 60% year-over-year. Further, the CONVERGE Pro 2 platform gained market traction with revenue more than doubling sequentially.

Non-GAAP gross profit margin grew sequentially from 55% in Q4 2016 to 57% in Q1 2017, even though Q1 gross profit margins were not at the same level as Q1 2016. When compared to Q1 2016, gross profit margin declined mostly due to price reductions affected to the CONVERGE Pro 1 products, which still remain a significant part of our sales mix. The increasing share of video products in our revenue mix was also a factor impacting reduced gross profit margins. When compared to Q4 2016, sequential gross profit margin improved mostly due to increased CONVERGE Pro 2 revenue.

GAAP net income in Q1 2017 was affected by reduced gross profit as I just described as well as due to legal expenses incurred to defend our Beamforming related patent. Before I provide greater detail on the quarter, I'll address our recent patent award and our intellectual property strategy. ClearOne was awarded a new patent on April 25, 2017, the '186 patent in short, on a system and method involving the combination of echo cancellation and Beamforming Microphone Arrays. This patented technology is one of many innovations that help ClearOne conferencing systems provide the best, clearest and most intelligible audio possible. Our extensive patent portfolio is an important core asset that protects our groundbreaking technology, powers ClearOne's industry-leading edge in conferencing technology, and represents significant value for the company. Our history in investing in new ideas and technology that enable market transformation in our industry is a key differentiator, and has enabled ClearOne as an innovation leader. We are particularly excited about the '186 patent as it underpins the acoustic intelligence of our award-winning Beamforming Microphone Array. This patent delivered the pro-AV industry's first, pro-grade microphone array with Beamforming, adaptive steering, smart beam selection and acoustic echo cancellation, which we believe to be of significant value in our market. We have initiated a strategy to ensure our intellectual property is respected by the industry and which is consistent with our commitment to building long-term shareholder value.

As many of our long-term investors know, we have a successful track record of managing and winning litigation in intellectual property and other complex matters to defend ClearOne's rights. While we cannot comment on ongoing litigation, we believe the '186 patent is enforceable.

Now, I'll provide further color on ClearOne's progress in the quarter. In our continuing drive to optimize production costs across new products, we strengthened our global manufacturing operations team. On the sales and marketing front, we continue to strengthen our team through new additions for improved coverage and to increase market awareness of our new solutions. We moved our Middle East sales and service headquarters to a more prestigious, high tech location in Dubai to serve our customers and channel partners better. Let me review some of our wins in Q1 that we secured thanks to our complete and complementary value chain of solutions. Our new CONVERGE Pro 2 platform had several wins. These included: The fastest-growing sports organization in the word; a global Fortune 100 entertainment company; a big 4 accounting firm; a global biopharmaceutical company; an international financial exchange, a large U.S. government agency; a couple of South American banks, and a couple of U.S. hospitals.

Our legacy CONVERGE Pro products continue to win projects in Q1. These projects included a large military installation, a Fortune 10 U.S. automaker, a global Fortune 100 entertainment company, a large retail chain of house -- hardware outlets, a Canadian government agency and a large Canadian city administration. In Q1, our video collaboration solution secured several wins including: A popular subscription video-on-demand service corporation, a big 4 accounting firm, a leading U.S. medical devices corporation, the Air Force in a large South American country; an international financial exchange, a Canadian government agency, a large Asian provincial education department; an international waste management company, an African hospital chain; and a state county court system.

For our network media streaming products, namely VIEW, wins included: A big 4 accounting firm, a global casino entertainment and hospitality company, and a showcase international exchange and service center.

Regarding product development, we continue to add features and functionality to our new CONVERGE Pro 2 platform. We released a mobile app to easily access dial and control the CONVERGE Pro 2 line of mixers on both Android and iOS platforms. These new user-friendly applications extend choices of devices and interfaces for users and come on the heels of an already released application for Windows and Mac operating systems.

Finally, during the week of June 11, we look forward to seeing many of our partners at the biggest audiovisual exhibition of the year in North America, InfoComm, this year in Orlando, Florida. During the event, we will be showing several of our newest solutions for audio, video collaboration and network streaming. We wholeheartedly welcome investors and other stakeholders to stop by to see, hear and experience for yourselves the evolution ClearOne has made and continues to make in this rapidly evolving audiovisual communications market. 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 first quarter of 2017 compared to the first quarter of 2016. Net revenue was $11.7 million compared to $13 million in Q1 2016, and $10.7 million in Q4 2016.

Reviewing the year-over-year change in percentage of revenue by region. Asia Pacific, which includes the Middle East, grew 36%, although, Americas decreased by 17% and Europe and Africa decreased 29%. That said, all regions grew sequentially.

Reviewing now the year-over-year revenue change in percentage by product category. Video increased 60%, although, Pro-Audio and UC endpoints were down 15% and 23% respectively. But again, I'm pleased to say all categories increased sequentially.

Non-GAAP gross profit margin grew sequentially from 53% in Q4 2016 to 57% in Q1 2017. Even though, Q1 gross profit margins were not at the same level as Q1 2016. When compared to Q1 2016, gross profit margins declined mostly due to price reductions we effected for the CONVERGE Pro 1 products, which still remain a significant part of our sales mix. The increasing share of video products in our revenue mix was also a factor in reduced gross profit margin. When compared to Q4 2016, sequential gross profit margin improved mostly due to increased CONVERGE Pro 2 revenue.

Non-GAAP operating expenses were $6.3 million in 2017 Q1 and $5.9 million in 2016 Q1. The majority of the increase was in G&A, reflecting litigation expenses, primarily related to the '186 patent lawsuit. Non-GAAP operating income was $366,000 compared to $2.5 million. Our tax rate for Q1 2017 did not get the benefit of losses in non-U. S. jurisdictions and contributed to increased net loss in 2017 Q1. Non-GAAP net income was $149,000 compared to $1.8 million. Non-GAAP adjusted EBITDA was $634,000 compared to $2.8 million.

Now turning to the balance sheet. We continue to be very strong. Cash and cash equivalents and investments were $35.6 million compared to $38.5 million at December 31, 2016, still without any debt. The decrease in cash balance was primarily due to higher spend on inventory, related to new CONVERGE Pro 2 platform and wireless microphones. During the quarter, we continued our shareholder friendly initiatives. We repurchased approximately 79,000 shares for about $900,000, bringing the total to about 621,000 shares for $7 million, since the program inception in March 2016. As announced in March 2017, the Board of Directors have extended the program for up to $10 million over additional 1 year. We intend to continue to repurchase our shares in the open market, subject to price, value and other Safe Harbor restrictions. Also, the Board of Directors increased the dividend from $0.05 per share to $0.07, which will be paid on May 31, to shareholders of record on May 17. Let me turn the call back to Zee.

Thank you, Narsi. We are dedicated to redefining AV through innovation, and providing advanced conferencing collaboration and network streaming solutions that deliver unprecedented levels of functionality, reliability and scalability. We are pleased with our Q1 improvements, however, as discussed previously, it generally takes about 3 quarters for a new pro-audio platform to replace the previous generation, due to the time required for the sales cycle. So it is still early in the launch since we began shipping and we fully expect our new audio solutions along with video will drive 2017 growth and long-term shareholder value. Operator, you may open the line to questions now.

(Operator Instructions) Of our first question is from the line of Kara Anderson of B.Riley and Company.

So I'm a little bit newer to the story, and so can you help me understand what's happening with the gross margin, what's behind the price reductions and are there expectations for that margin to return to 60 plus percent?

Narsi may be able to add. But when we introduced the newest platforms, the CONVERGE Pro 2, when you announce a new platform, oftentimes it creates a situation where customers, integrators want to wait for the new platform rather than investing in the old platform. Of course, we like to keep our channel informed of what will be coming. So in order to spur interest and continue to generate sales in the legacy platforms CONVERGE Pro 1, we reduced the pricing of that platform. For us, we had anticipated that, that platform, the CP 2, CONVERGE Pro 2, would began shipping sooner. That did not happen. We had certain engineering delays, et cetera. And the shipping did not happen until really the very literally last day of 2016. On top of that, we had some very important software upgrades that we wanted to incorporate as well, which came at the very end of Q1. So all in all, the CONVERGE Pro 1 existing platform is still selling at its reduced cost which tends to drag down the gross margin. I should also add that the CONVERGE Pro 2 is more competitively priced than the CONVERGE Pro 1. And so, it's not equal, and will have some impact on the gross margin. Finally, as the mix of video increases in the overall mix, the gross margin for video solutions is not quite as high the gross margin on the audio, and accordingly makes an impact on the gross margins.

That is very helpful. And then, can you repeat the revenue growth by product category? And maybe even take it a step further and provide total revenue contributions for the 3 product categories?

Okay. Revenue change for Pro year-over-year was 15% down. UC endpoints was 23% down, video was up 60%. Pro's share was 75%, UC endpoints' share was about 11% and video's share was about 14%.

Thank you, for that. And then last housekeeping question from me. Did you say how much litigation expense was during the quarter?

We did not break out specifically. But we made a non-GAAP adjustment, and it's in our earnings release actually. I'll -- And it includes the litigation expense, it's not just litigation expense, but you can see the amount included in there.

Our next question is from Lisa Springer of Singular Research.

My question concerns, when you announce big customer wins during a quarter, what would be your expectation for when those customer wins will start generating revenues? How long of a lag is there between the contract signing and revenue generation?

Those are actually -- actual wins where we have shipped product and recognized revenue. Anytime we talk about a win on these calls, we have recognized revenue for those projects. They relate to the Q1.

And historically, when you've attended conferences like the InfoComm, do you see a bump in revenues following those conferences?

Actually, there is occasionally a bit of lull just before the conference, people try to do get work in, and it certainly impacts the quarter to some extent but you could see it reflected in our many years of InfoComm.

And I know you can't talk specifically about the patent lawsuit. But could you guide me, do you assume that -- or should I assume that litigation expense is going to be a meaningful part of expenses during 2017?

It depends on couple of factors. We don't know how the other side is going to react to our strategy. So it depends largely to the extent of how they will react. And litigation is only one way to resolve an issue, that's one thing. So we don't know all the different ways it will get the result.

I would say it's very early the process, extremely early. But certainly, we have planned for it, and we went into with our eyes wide open. And we consider it a strategic activity to bring further value to ClearOne, ultimately.

Our next question is from Chip Saye with AWH Capital.

I have a question for you. I think the last call, Q4 call, was around March 10, 11. I can't remember it offhand, I think it's about that time. You mentioned, Zee, that the revenue was tracking up slightly from Q1 of 2016, that's revenue -- including the backlog. And then, revenues I guess came in a little lighter than we had anticipated they might. What happened in the last 20 days in Q1 for that not to materialize?

Actually we were tracking at the time, taking into account backlog and whatever we had shipped at the time. March was not obviously a pretty good month, when compared to the previous part of the quarter.

Okay. So can you expand on why March was not as strong as January and February. I thought maybe the momentum might have been building?

Actually, you can -- we went unnoticed but even the GDP numbers that were put out recently for U.S. economy in particular for Q1, it was one of the lowest in the last 3 years actually. And I think it was kind of a surprising thing, especially when we saw the momentum in favor of -- this is speaking confidence growing, after the elections, U.S. elections. So it was surprising and disappointing. I think it might have had a role in a disappointing March performance. But -- and we were surprised, but it looks like the numbers do prove that it's not something that happened just for us actually, it's more an industry-wide concern actually.

Okay, so you're saying it's a macro reason. There's not something competitively that was hurting you in the market?

Yes...

I would say that, as you can see by our numbers, we made progress both on the video and on the CP 2, and that's coming along. But overall, it impacts everything.

And you have to notice that Q1 is generally our leanest quarter and Q4 -- Q4 is also bad actually. But to beat Q4 results by 9%, 10%, I think it's a pretty good indication that things are turning around actually.

Yes, I was glad see revenues up from Q4. So maybe the revenue bottom is in. Yes, you mentioned on the call that it takes about 3 quarters for a new product to really work its way through the channel. Would you consider Q1 to be the first quarter of that or is Q2 the first quarter where your CONVERGE Pro 2 is really in the market?

I'm going to consider it sort of in between because while at the very end of the quarter, basically at the beginning of Q1, we began shipping all 10 SKUs of CONVERGE Pro 2. But at the end of Q1, we implemented a major software upgrade that brought all the features, functions and scalability to the 10 SKUs.

Got it. So we were -- it'll be Q4 really before the channel's fully absorbed, 3 quarters out from the CONVERGE Pro 2 intro.

Well, as I said it's a long sales cycle. We give it an average about 3 quarters for this kind of infrastructure equipment.

Got it. Okay, you mentioned on the last call that sales and marketing expense you may increase that to support the new SKUs. Is that some of the increase that we saw in the sales and marketing number, is there any specific programs you can speak to?

The sales and marketing numbers for this quarter, '17 Q1, it tracks similar to how we have done in earlier years. Those initiatives that we talked about have not yet converted into cost in Q1, actually. We talk about strengthening our sales team, extending the coverage, increasing the awareness. But we were still able to manage it within our usual financial budget. We haven't started...

With an eye on to sensitivity of the growth of the CONVERGE Pro, we're doing some ad spend. We've increased our ad spends, we've increased our social media spend, we've added some PR on a particular line. We've rearranged some -- added some -- supplemented our sales team in areas that we think deserve to be increased to grow those regions. But of course, you know that ClearOne is always very sensitive to any expenditures, so while we are implementing some sales and marketing initiatives, and not to the extent fully, of course we take these incrementally, we don't just throw it all at marketing at once. We tried to save cost in other areas, that's what we're doing. We save cost in other areas, and we spend money in areas that we want to further develop.

I appreciate it. I wanted to ask lastly on the buyback. $900,000, 79,000 shares that's $11.39 a share. With the stock down some in April, were you able to buy any shares then when it was lower? Or was that a quiet period? Can you comment on that?

We are doing it the normal way, it depends on the volume also. When -- you know that when the stock price goes down, there's not enough activity in there actually. So we are doing Safe Harbor provision buying actually. So we are subject to all the volume restrictions and price restrictions. So it's nothing unusual in terms of our volume for any purchase in April actually.

And our -- and the firm that we're using our bank, bank -- our main bank is a market maker for ClearOne as well. So he knows our stock pretty well and is very, very effective in making these trades.

(Operator Instructions) Our next question is from Michael Kay of Kay Associates.

The question is, why does the rationale about using the company's money to buy back the shares. I really don't see how that adds value to the company. Wouldn't it be more -- if you look upon ClearOne as primarily a conservative growth company, wouldn't it be more judicious to use that money for strategic and -- strategic acquisitions that could add real value to the company, resulting in increased revenues and earnings rather than buying back the shares?

It's a very good question, and we're often asked that and I want to respond, Michael. We try to balance. We've made several acquisitions over the years for technology. And we do that with an eye towards not spending too much money, making sure that it's a technology fit, making sure that it has a good runway for the future market, making sure there's a cultural fit and it's something that we can manage. And our eye is always out for an acquisition, whether that be small or large. We're not afraid of spending our money, in fact, raising money, if a strategic acquisition comes our way. And we've proven that we can do it and we're good at it. And we get rid of the waste and we bring value to the company. So we're always on the hunt for that. But oftentimes, many companies are overpriced, have poor technology, require too much investment that we feel will bring extraordinary risk to the company. And we don't want to do that. But we are on the lookout, always. And we talk to companies constantly and we have a banker that brings deals to us that maybe of an interest, et cetera. So we are very active. At the same time, we've traditionally, except for this short period of hiccups, generate cash. And we have a hoard of cash. And we have no debt and we feel that it's only fair and beneficial for our shareholders that we share some of that cash. It doesn't affect our ability to go out and make some good valuable strategic acquisitions that will add revenue and value to the stock as well. So we keep an eye on both. It's very important. And I'm glad you asked. Maybe Narsi has some comments on that.

I think it's great. I agree with what Zee just said.

Yes, I'm really pleased to hear that, it's a perfect response, and I like the philosophy that one can do both in moderation.

Thank you, and that concludes our Q&A session for today. I'd like to then the call back over to Zee Hakimoglu for any further remarks.

All right, thank for joining us today. We'll be at the B.Riley Annual Investor conference in Los Angeles later this month. Hope to see some of you there. Have a wonderful day.

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