Oblong Inc (OBLG) 2005 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q1 2005 Glowpoint, Inc.

Earnings conference call.

My name is Jean.

I will be your coordinator for today.

At this time, all lines are in a listen-only mode.

Towards the end of the conference call, we will be taking questions.

[OPERATOR INSTRUCTIONS]

At this time, I’ll turn the call over to your host, Mr. Rod Dorsey, Chief Financial Officer.

Sir, over to you.

Thank you, Jean.

Before we start, let me remind everyone that the statements made on this call, other than historical information, are or may be deemed to be forward-looking statements and involve factors, risks, and uncertainties that may cause actual results in future periods to differ materially from such statements.

These factors, risks, and uncertainties include -- market acceptance and availability of new video communication services; the nonexclusive and terminable-at-will nature of sales agent agreements; rapid technological change affecting demand for the company's services; competition from other video communications service providers; and the availability of sufficient financial resources to enable the company to expand its operations, as well as other risks detailed from time to time in the company's filings with the Securities and Exchange Commission.

Today’s call and webcast may include non-GAAP financial measures within the meaning of SEC Regulation G. When required, a reconciliation of all non-GAAP financial measures to the most directly comparable financial measure calculated presented in accordance with GAAP, can be found in today’s press release.

We want to welcome you to our call for the first quarter and with that I’d like to introduce David Trachtenberg, our CEO.

Thank you, Rod, and welcome to our Q1 2005 call.

I’m David Trachtenberg, Chief Executive Officer and President of GlowPoint.

Rod Dorsey, our CFO, and Mike Brandofino, our Chief Technology Officer, are also with me here in Hillside.

Rod will be presenting our first quarter 2005 results.

Mike, as usual, will be available during the Q&A session after our prepared remarks.

I will take the time today to update you on activities since our last call, give you a flavor of this past quarter, and briefly discuss our plans for the future.

There are a number of milestones since we last spoke.

While Rod will go into detail shortly on the financial side, GlowPoint was in line with the revenue expectations set from the last call closing the first quarter at $4.3 million, over 32% growth from the year earlier period and right on target with sequential quarterly expectations.

We also showed healthy sequential order growth with 137 billable subscriber locations, a nearly 30% increase in orders quarter-over-quarter, as well as year-over-year.

Given the timing of the sales cycle, the majority of these orders will be getting onto the network and driving revenue beginning in the current quarter.

Finally, gross margins continued to improve coming in at 21.2% for the quarter, up slightly from Q4 2004, and an over 40% improvement from the year earlier period.

There are a number of activities with our legacy customer base that we’ll be executing against in the current quarter to continue to drive the upward trend.

Rod will address these in his remarks.

There are also a number of strategic milestones that were announced these past weeks including the signing of definitive contracts between Sony and GlowPoint for our distribution, marketing, and product development activities.

The announcement and commitment by Sony to IP communications for the launch of their IPELA product line and strategy, John Scarcella, president of Sony’s Broadcast and Business Solutions Company, cited their partnership with GlowPoint as an example of their commitment to the IP communications market and recognized GlowPoint as an industry leader alongside Cisco, putting us in some very good company.

The announcement of the Sony-GlowPoint IP-based video communications solution for the broadcast protocol, a first of its kind, and one that received rave reviews from both the media and potential customers at the recent NAB conference that I will touch on momentarily.

And even better the wins in revenue that this solution has driven during the last quarter and just recently announced, first with ESPN and the NFL Draft, and second, with the NFL Network for permanent DSLs throughout their footprint, a two-year deal worth over $1 million during the term of the contract.

Details on these announcements and deals have already been released.

What’s important as the key takeaway is that our vision for video communications is becoming a reality and one that is being embraced and exhausted by others because of the course we set over the past months, our technology, and our partnerships.

It was not that long ago that I spoke about the need to create disruptive distribution partnerships to reshape the competitive landscape.

It is clear to me and I have been very public in stating that traditional video product and distribution models do not work.

During our last call, I stressed the need for a virtual revolution in our market that requires an expansion from the traditional definition of video as a technology that enables video conferencing solely in the confines of a conference room.

It is all about getting out; getting out of the conference room to dominate the desktop, as well as the use of two-way video communications completely outside of the four walls of the office with mobility solutions.

So that we expand the market to go where people actually conduct and grow their business whether on the road, in an airport lounge, even at a Starbucks.

Literally everywhere there is an IP connection.

The Sony-GlowPoint relationship is disruptive.

The solutions that we have already brought to the market like our integrated broadcast events server are revolutionary to this industry.

And the opportunities that we are already working on with strategic partners, customers, and new products are redefining the competitive landscape and importantly for our shareholders, redefining the reach, momentum, and revenue opportunities for GlowPoint.

Let me give you some color as to the state of the relationship.

I was in Las Vegas as NAB, the National Association of Broadcasters convention just a few weeks ago.

NAB is Sony’s event given their dominance in the broadcast field and they dominated the show with a football field size booth in which GlowPoint and Sony showcased our recently announced IP-based broadcast solution.

We were in the prime location at the front of their booth and right at the entry to the event floor.

We announced a new broadcast solution, the NFL Draft on ESPN event, and the permanent 40 location LEN(ph) with the NFL channel at Sony’s annual product launch press conference.

We were invited by Sony to attend the press event that took place in a Vegas-size ballroom in front of hundreds of people including the most senior Sony execs from Japan and the U.S., Sony sales employees and partners, Sony customers, and over 300 members of the media.

What followed was the GlowPoint and Sony wow with one of ESPN’s talking heads addressing the audience live from their studio in Connecticut, showing in real-time and on a Jumbotron-size screen, with the Sony powered by GlowPoint broadcast solution with look like during the NFL draft.

It was truly a sight to behold.

The quality and buzz from the live demo cut across any language and cultural barriers.

Picture perfect lip-synch with impeccable video and sound.

It almost looked too good.

A lot of people assumed that this was still on HD or high definition, Sony’s theme and focus at the convention.

That’s how good it looked.

The top names in the broadcast industry made a beeline over to Sony and GlowPoint to request a demo at the booth.

Using video communications in integrated and nontraditional ways to expand the market has been a key objective for GlowPoint.

And though we’ve been involved in the broadcast vertical over the past two years, the partnership with Sony is opening the right doors wider and more quickly for us.

Broadcaster’s ability to use a Sony-branded solution to extend [constant] creation on the fly as quickly and as efficiently as possible resonates with our prospects.

They came to see our solution because it was with Sony.

They listened and bought into the solution because it had the Sony stamp of approval.

And they got the wow because it was GlowPoint good and it delivered an innovative solution that they couldn’t get anywhere else.

In a very short period of time, the partnership is already delivering on our vision to turn ad-hoc events into permanent and predictable revenue recognition as with the NFL Channel.

We work with Sony to create a win-win integrated hardware network solution and move from supporting a once a year application with the NFL training camp to an ongoing, multiyear solution that is creating more value, revenue, and opportunities for GlowPoint.

The solution is real, the prospects are real, and the revenue and margin are real.

This [GLIN] and others are driving credibility and higher visibility for GlowPoint both within Sony and within the industry.

We followed up the momentum from NAB with the NFL Draft event.

This is our third year running working with ESPN and the first that Sony won the deal from Polycom.

It was stellar.

Right in line with the Sony press conference.

For those of you that sat at home or at a bar like Andrew Davis, the senior analyst and managing partner of Wainhouse Research, who watched from a sports bar in Pittsburgh, you will have experienced video communications in a whole new light.

Andrew wrote in last week’s newsletter, “Much of the broadcast material seemed to be coming via videoconference as the screen said.

For those in the know, you should have been impressed by the lip-synch and high quality video images-- certainly equivalent to standard non-IP-based broadcast technologies.

My hat goes off to GlowPoint and Sony for a truly outstanding experience.”

This is a great win and will be a terrific sales and marketing reference tool to follow up on with the recent interest generated at NAB.

One quick aside.

I’ve had a number of people ask me why we did not have the GlowPoint logo on screen during the draft event.

My response is simple.

We did.

The brand was Sony.

In this space, Sony video is GlowPoint and that brings up a critical difference between the GlowPoint-Sony relationship and vision and standard industry partnerships.

Our missions are aligned and we are truly integrated in our execution.

When I look at the different business segments across Sony, literally around the world, the power of the partnership comes into focus.

Video conferencing is the obvious connection and we are aggressively working towards our branded solution powered by GlowPoint to the already announced June launch.

We have already partnered successfully with their broadcast business segment and our creating momentum in replicating our early win.

We also showcased Sony’s IP-based security and monitoring products on GlowPoint at NAB, a new vertical to GlowPoint and an important part of our segment to Sony’s IPELA product line.

And we see the future with Sony’s portability products, whether they are laptops, cell phones, even consumer gaming base.

The vision has many outlets and we are working on quick and important wins across the Sony organization to drive deeper and faster.

We’ve delivered on our commitment to partner with industry leaders, challenge the status quo with revolutionary services and solutions, redefine our distribution model.

In short, create a platform in which to launch sustainable profitable growth.

Sony delivered across each one of these dimensions in a very potent way.

With the upcoming launch of the Sony powered by GlowPoint solution, we will become an official part of the Sony portfolio.

Sony salespeople and partners will be selling Sony, Sony customers will be using Sony, and GlowPoint will be expanding and extending our reach and shortening our sales cycle.

The opportunities I see before us are already expanding into new market segments and a new customer profile.

Not the typical two and five site deals but high-valued solutions for very strategic accounts through new and extensive distribution channels.

While most of my comments this afternoon have been Sony-centric, you can be assured that many other initiatives are underway to continue our distribution diversification strategy and focus on our growing our traditional DSO business, as well as those that are -- are extending our white-label and GlowPoint-enabling opportunities for customers, as well as strategic partners.

For example, the GlowPoint-enabled decabinet(ph) network in Texas, the statewide IP network in order to sell into state-level government agencies, we hired a GlowPoint sales rep in Texas to focus specifically on this opportunity.

We’re also the first carrier-grade service provider to integrate TANDBERG’s new express rate solution for firewall traversal and we will be white-labeling Lisa, our IP-based services for our partner, I Vision(ph), in Australia.

That means Lisa will soon be saying, “Good day.” You’ll be hearing more on other strategic partnerships and distribution alliances as we make progress over the quarter.

In closing, I want to reiterate that our relationship with Sony is more than press releases and theories.

Instead, in this same month that we signed definitive agreements, we already launched real product, have real sales alignment, and are already generating real revenue.

And there is a lot more to come.

At the same time, we are beefing up and expanding our direct sales force, we’re aggressively increasing our lead generation efforts, we continue to work with industry leaders like TANDBERG and leading partner resellers both in the U.S. and abroad, and we continue to look at other GlowPoint-enabling opportunities to replicate the success we’re already seeing from I Vision in Australia.

Even with all the positive changes and momentum with Sony, we, like you, would have hoped that sales and revenue growth had happened more quickly.

But some things are becoming fact.

The video conferencing world is now rapidly shifting to an IP-based standard.

Both customers and manufacturers are realizing that it’s not just about pipe and network bandwidth.

It’s about features and services that make it easy and spontaneous for businesses and end users to get more value out of a video conferencing experience.

And that the video conferencing industry is no longer confined to two or three dominant players in the four walls of a conference room.

It’s now shifting to the desktop and then out of the office completely.

It’s moving into broadcast production centers, it’s being embedded in more diverse, unique devices, and quality, broadcast quality, even HD quality, is becoming a key factor for all users and manufacturers.

As we said a year ago that this will be a different industry, a year later it is.

GlowPoint is playing a leading role in this industry revolution driving expansion of our business opportunities and our top-line potential.

I will now to turn the call over to Rod Dorsey who will walk you through our Q1 2005 results.

Thank you.

Thank you, David, and, again, good afternoon, everyone.

When we last spoke in early March of this year, I reported to you that I expected total revenue growth in Q1 to be in line with GlowPoint’s 2005 financial plan, as well as the fourth quarter of 2004.

I also mentioned, however, that we would see sequential new BSL order growth of approximately 20% over the Q4 2004 number of 106 new orders.

As evidenced by today’s Q1 earnings release, GlowPoint did hit its Q1 revenue target and exceeded its BSL growth target of 20% coming in at 137 new BSLs or approximately 30% higher sequentially from the 106 reported in the 4th quarter of 2004.

Let’s review the Q1 2005 results.

Total revenues of 4.3 million represented a 32% increase from the 3.2 million total revenue reported for the first quarter of 2004 and was in line sequentially with fourth quarter 2004 total revenue.

Contractual revenue at 3.2 million for Q1 grew 32% as well over the 2.4 million reported for the first quarter of 2004.

The number of contractual customers grew to 355 or 25% from the year ago quarter.

Average monthly revenue per contractual customer increased steadily over the quarter, resulting in an average of $3,014, a 6% increase from the first quarter of 2004.

Non-contractual revenue of 1.1 million in the first quarter of 2005, which included 358,000 of network services revenue, grew 34% over the 791,000 level reported in the first quarter of 2004.

GlowPoint non-subscription revenue declined by approximately 92,000 year-over-year.

This decline was due to a combination of a change in accounting method beginning in the second quarter of 2004 on how GlowPoint accounts for revenue associated with installations coupled with a decline in bridging revenue due to abnormally low minutes usage in the month of January of this year that recovered to more normalized levels in the next two months of the first quarter.

Beginning in the second quarter of last year, the company began recognizing installation revenue over a 20 more -- 24 month period versus the previous practice of recognizing such revenue at the time of completion of the installation.

Included in the first quarter 2005 revenue amount is the beginning of recognition of revenue associated with broadcast-related events such as the ESPN NFL Draft and the launch of white-label activities related to the Sony relationship.

Total revenue related to the network services customer base, formally known as NuVision, was 895,000 for the first quarter of 2005.

The key operating metrics for the business such as average monthly contractual revenue per customer, average billable subscriber locations, average monthly subscription revenue per location, and the number of billable subscriber locations all improved year-over-year for the first quarter.

The specific details can be seen in today’s press release but I want to highlight that our average monthly subscription revenue per location improved steadily over the first quarter averaging $716 over the three months and coming in at a high of $744 in the month of March of this year.

This demonstrates the increase in revenue being driven by upgrading of legacy customers.

Gross margin dollars almost doubled year-over-year from 485,000 in Q1 of 2004 to 906,000 for the first quarter of 2005.

And as a percentage of revenue, gross margin improved from 15% in Q1 of 2004 to 21.2% in the first quarter of 2005.

The year-over-year improvement reflects the positive impact of the “All You Can See” subscription model, along with continuing operating efficiencies and the effect of lower average access costs per billable subscriber location.

During the last two months of this first quarter, we experienced average gross margins in excess of 23%.

As a percentage of revenue, operating expense levels improved by 7% from the prior year’s first quarter.

Total operating expenses for the quarter ended March 31, 2005 were $5 million, an increase of approximately 1 million over the prior year’s first quarter.

Research and development expense increased approximately $143,000 year-over-year as a result of meeting the increasing demand for application development in conjunction with new product development for GlowPoint and our partners.

Sales and marketing expenses accounted for almost 50% of this year-over-year dollar increase.

One year ago, GlowPoint was still entirely dependent on its indirect sales channel with Wire One and had no direct sales force.

Today, the GlowPoint direct sales force numbers 11, 50% of whom have been added over the past four months.

We have also formalized our account management by dedicated a resource to this role.

Additionally, one year ago, GlowPoint was spending little, if any, marketing dollars.

During the first quarter of this year, GlowPoint made a conscious investment on a sales lead generation program that has yielded significant qualified leads, now identified in the company’s sales pipeline.

Speaking of GlowPoint’s sales pipeline, it has increased by a factor of 3 in the last 90 days.

General and administrative expense increased year-over-year by $396,000 reflecting the investment in recruiting the executive management team, higher legal costs associated with the various strategic partner agreements signed during the first quarter of 2005, including the distribution, marketing and product development agreements with Sony and the planned increase in the reserve for doubtful accounts in line with the growth in customer accounts receivable year-over-year.

Sequentially we saw operating expenses decrease from 5.4 million for the fourth quarter of 2004 to 5 million for the first quarter of 2005, a sequential improvement of just under 10%.

The company is constantly seeking additional opportunities to reduce such expenses in absolute dollars and to that end has signed a two-year extension for its headquarters space in Hillside, New Jersey, at a cost of $10 per square foot and is in the process of recruiting an in-house general council that over time will result in both cost and operating efficiency compared to its current approach of outsourcing all of its legal work.

The company is also addressing the dollars spent against its public relations activities.

We will also use the current quarter to continue our focus on legacy subscribers.

As you know, we grandfathered our legacy products with the launch of our “All You Can See” Unlimited Video Calling Plan.

It was the right decision at the time since we wanted to stabilize our customer base as we began changing the way we did business.

However, because our legacy base does not always drive attractive margins, we are continuing to proactively manage these customer locations to increase their profitability.

That may mean requalifying the underlying local loop connectivity option, which we are doing consistently on a monthly basis in order to lower the underlying costs to support the customers.

It also may mean losing some customers entirely if they do not want to work with us to increase the top-line revenue we are receiving for supporting their video business.

While the impact may be a short-term, top-line hit for some customers, it will only be done if the bottom-line improvement is measurable and real.

We will report on results from these activities during the next earnings call.

EBITDA from continuing operations for the first quarter of 2005 was a loss of 2.9 million compared to 2.3 million for the first quarter of 2004 and reflects the year-over-year improvement in gross margin offset by the planned increases in operating expenses during the first quarter of 2005.

The company ended the first quarter with 13.7 million in cash.

The actual cash earned for the first quarter of 2005 was approximately 3.3 million, 500,000 of which was from non-recurring sources.

This was slightly lower than the planned cash earned for the first quarter.

We expect this cash earned to be significantly lower in subsequent quarters in accordance with our 2005 financial plan.

Our DSOs ended the quarter at 60 days and I expect this to decline in subsequent quarters as well.

What is the outlook for the second quarter and the balance of 2005?

Unlike the previous quarter when we knew flat BSL growth would translate into flat revenue growth for the first quarter of 2005, the picture for the second quarter is much brighter.

I expect total revenue for the second quarter of 2005 to increase by a minimum of 10% sequentially from Q1 of 2005.

And I also expect new BSL orders to grow by a minimum of 20% sequentially from the 137 new BSL orders reported for the first quarter of 2005.

The revenue growth will come from both contractual and non-contractual sources.

Preliminary results for the month of April, traditionally the slowest month of a quarter for revenue and BSL at GlowPoint are quite encouraging.

Assuming second quarter revenue expectations are met or exceeded, gross margin will improve as well and could match or even exceed the average gross margin for the last two months of the first quarter.

Operating expenses should decline sequentially in both absolute dollar terms and as a percentage of revenue.

Finally, as mentioned on the previous call, we are continuing to look for strategic opportunities to grow revenue and improve profitability and hope to report progress by our next conference call.

The pace of our business is accelerating across the board from both our direct sales force as well as the increasing number of opportunities coming from our strategic relationship partners.

We have sufficient cash to fund our business plan and I continue to believe we will achieve positive cash flow by the end of 2005 given the opportunities in front of us.

It is all about execution, and this management team has not missed a beat during the first four months of this year.

Thank you very much.

David, now back to you.

Thank you, Rod.

We’ll now open the line up to questions.

Mike Brandofino is also in the room and will be available to respond but please keep your questions to one per person.

Jean if you’d open the lines up.

[OPERATOR INSTRUCTIONS]

And your first question is from Howard Meyerson of A. G. Edwards.

Good and congratulations and thanks for all your hard work.

Could you expand a little bit of what GlowPoint might look like on laptops and cell phones and what the financial model might look like?

Yes, I’ll give a little bit of color on that and it’s something I was alluding to and talked a little bit about on the last call.

One of the things that we’ve been really strongly advocating over the last two calls is the getting out of the conference room.

We believe that the conference -- video communication in the conference room is still going to be an ongoing business.

However, we believe in order to see the hockey stick that we proverbially been talking about well before I got into the video space, we’re going to have to expand the market definition to get to the desktop and then beyond the four walls.

Some of that beyond the four walls are new applications like the broadcast vertical but also literally taking it on the road.

And I explained on the last call being in the airport lounge at the Continental -- I’m sorry, the Continental airport lounge at Newark airport and I was using my laptop, had a Sony camera on top and literally made a GlowPoint call over a native Internet connection.

So to be clear, it’s going to be a different quality experience or potentially different quality experience than on a QoS environment but with a really integrated and consistent user experience meaning access to triple zero operators, access to instant bridging, all of the things that make the GlowPoint wow available in an IQoS environment.

I really can’t go into much more specifics about what the plans are except to say that you’ll soon be able to literally see GlowPoint on the road.

From an economic model perspective, everything we do is going to be targeted towards that 60 to 65% margin that is typical for our core BSL business.

However, the revenue per location or subscriber may be lower but the margins will still be there.

Okay, thank you.

Thank you, Howard.

Jack Dilbert, DMS Secure

Yes, I’d like to -- you mentioned a little bit about the State of Texas that we’ve heard about.

Could you also expand just a little bit on what’s happening with the federal government?

Absolutely, I’ll let Mike talk about the State of Texas and then we’ll talk a little bit more about the federal government.

Actually, Mike, you might do both and then I’ll jump in.

Okay, I can do that.

Well, the State of Texas is-- we won a contract a number-- about two years ago to migrate an ISDN network to IP.

We’ve completed that and disassembled that ISDN network.

We’ve now gone to the second phase of that which is actually GlowPoint enabling the entire state broadband network and giving or GlowPoint-enabling it, if you will, and allowing those customers to register with GlowPoint for a fee per month and we are only the monthly-- on the schedules of that customers can just order GlowPoint services right off the state contract.

So that’s really what’s happening in Texas.

From a government perspective, we have actually been involved in a number of different government agencies and government departments.

We announced I think it was two quarters ago that GSA, Government Service Agency, and the U.S.

Trustees have expanded or doubled their sites.

We also have the National Labor Board that has over 50 sites on GlowPoint.

But we’ve also been integral in providing services to some government agencies like the State Department who’s just had an article in Information Week about the fact that GlowPoint’s their underlying infrastructure for video.

And that’s really for the-- the government has two types, three types of video really-- secure, which we can’t touch because they have specific encryption devices; non-secure, which is basically anything that they want to do from a public perspective; and what we’ll call somewhat secure, which is things that they want encrypted but it’s okay if it goes over a service like GlowPoint.

And we’re obviously in those two buckets.

Our goal, of course, is to provide a service that gives a experience, consistent experience across different agencies and really that’s what’s been happening.

There’s a drive within the government to provide communications services between organizations and make it easier to communicate.

Obviously, GlowPoint provides that kind of standard and that’s what we’re trying to exploit within the government agencies.

Just want to add two more things on there.

The State of Texas is an example of what others might call a “bring your own access” where by putting GlowPoint inside somebody else’s connectivity, what they’re paying for is access into our services and using our network as an interconnection point.

And so I just want to be, you know, that’s a model that we’ve talked about that we’re doing in Australia and we’ll be making announcements for some other deals.

But, again, that is widening up somebody else’s connectivity.

On the government side, the federal side as well, we’re working very closely with our partners, both Sony and TANDBERG.

We’ll actually be working with TANDBERG at an upcoming show in Washington at the Ronald Regan building.

And it is a vertical that is near and dear to the manufacturer’s hearts and, again, we are working very closely with our partners to be able to penetrate that market even more.

We’ll say, as I’ve said on other calls, it is a very long sales cycle, it is very much tied to their fiscal year, and most of the decisions for purchasing are made at the end of the third, beginning of the fourth quarter.

Thank you.

My pleasure.

Kevin Martin, Riverside Capital

Hi Guys.

I’ll try and combine this all into one question.

It essentially just has to do with your model.

But just looking at the revenues over the past 15 months, if you subtract out the revenues you acquired from TANDBERG, you’ve essentially shown zero growth since the first quarter of last year.

And then looking in the details of the numbers, excuse me, your customers are generating roughly 8,700 in annual revenue and you’re paying 6,500 per BSL in selling expense.

And given-- I mean the 20% in new BSLs sounds great but given the low base that we’re starting from I just don’t see that you’re getting the traction you need and getting the growth in BSLs that you need to get that 8,700:6,500 ratio down to where it’s a sustainable business.

And I just-- I have some concerns.

You talk about margins and sales and kicking old customers off.

I remember when I was running little startups, you know, we had to worry less about margins.

I mean, a 70% margin on zero is still zero.

I just, I don’t see how you’re getting the traction you need and the revenue growth and I wish you could explain that a little to me.

Well, I think you’re right in terms of, you know, revenue growth over the last three quarters.

It really starts with orders and we’ve not hidden the fact that a year ago this company didn’t have a direct sales force.

It was dependent on a hardware reseller for any of its opportunities to sell its services.

So, you know, we started in the third quarter of last year of building a direct sales force and if you know anything about that kind of an effort, it doesn’t happen overnight.

In the first quarter of this year, and I made this clear back in March, we made a conscious investment up front in sales and marketing to build the sales force, to more than double it from where we ended the calendar year ’04.

And that kind of return, you’re not going to see in the same quarter that you build the sales force.

We also decided to make a specific investment in a lead generation program and that program really came into being from about the third week in February until almost the end of the quarter.

And, again, that was lead generations which are now in our backlog, which are in the hands of our direct sales force.

In terms of the revenue growth, again, this is the first quarter where we had BSL, sequential BSL growth.

And I’ve already indicated that my expectation for the second quarter is to be at least 20% higher over the 137 that we booked in the first quarter.

So what I would tell you that the revenue ramp will start to occur in the second quarter.

I did indicate early in the conversation that we will jump at least 10% sequentially in total revenue from the first quarter.

So as that revenue ramp drives up, the infrastructure cost is now in place.

We’re not going to continue to grow the sales force by another 50%.

So the investments have been made and now the proof is in the pudding in terms of the return and I think that happens starting with this quarter.

I just want to add one other point to that is that if you have been following the trajectory of the company since I came on board last October, again, we’ve been very fair on the calls as well as in all our public statements that, as Rod was mentioning, you know, we kicked off the new GlowPoint, if you will, with the dependence on a single channel, which we knew that we needed to move away from from a diversification perspective.

But assuming that that channel was going to remain on board and selling as they traditionally have, as you know, we’ve been very up front that that channel imploded over the 12 months of 2004.

And therefore, when you take a look at the numbers, you really need to peel the layer back and show that we actually reflect to growing during a time period where we lost our single distribution channel.

So the fact that we were able to turn the model around from totally dependent on one channel and an indirect strategy to a direct channel going through other partners as well as obviously through our own sales channel is really testament to this ability for this company to focus, execute and really deliver on what we’ve been talking about.

And the other thing I want to really mention from the margins perspective, while there was revenue growth prior to the change for “All You Can See” video calling plans and the new management team, every dollar we brought on board was either zero margin or losing money.

And so the fact that every dollar we brought on board since the beginning of 2004 was driving a 60 to 65% margin was a critical component for us.

So as we do see the traction as we saw sequentially from the last quarter, we can all be comfortable that it’s actually moving us towards that break even point which was not what was happening in 2003.

If I could just follow up on the BSLs, I mean, the 20% growth is great but it seems like you’re going to have to have like 100% sequential growth to get to point where you can hit a break-even level.

And I, you know, are you expecting just 20% annual sequential or--

No, no, no, no, no.

I think--

There will be some acceleration in future quarters?

Yes, I mean, I’ve indicated that we expect to be at a EBITDA break even by the end of the fourth quarter.

So you’re right.

I mean, there’s this-- and remember I said a minimum of 20%.

I said a minimum of 20% for the first quarter back in March and we hit 30%.

So, you know, I’m being a little careful about how much that I say in terms of growth but I’m confident that we will hit at least 20% sequential for this quarter.

And I would hope that the relationships that we formed with Sony as well as some of the other relationships that I hope we’ll be talking about over the next two or three months will drive even higher sequential growth over the second half of this year.

That has to happen and that is in our financial model.

Okay, super.

I’ll just look forward to the future quarters then.

Appreciate it.

Thank you.

Bob Stafford, Stafford Capital

Good afternoon.

I was just wondering-- you mentioned a 60% gross margin target for subscription revenue and I was wondering what sort of overall gross margin you need to reach your EBITDA break even target by year end?

We’d have to be above 40% gross margin by the end of the year.

And the way that increases-- could you explain how that-- the arithmetic of that increase works?

Well, the way it’ll work is they’ll be a significant, to the earlier caller’s point, there will continue to be significant, sequential growth in new BSLs.

Those new BSLs carry 60 to 65% margins.

Simultaneously as I said in my prepared remarks, we are, by the end of this quarter, going to be through the legacy base of customers, many of which we inherited and chose to grandfather as David introduced the “All You Can See” plan at the beginning of 2004.

One way or another, those low margin customers will be either on a higher margin plan or will be off the network.

And then there’s a, this is David, there is a constant and consistent effort to attack the underlying cost of the network, really focusing in on the local loop connectivity and, you know, whether that’s on a monthly basis requalifying all of our customers and switching them onto lower-priced circuits or by our negotiations with our large carriers that are supplying that connectivity to us.

So, again, it’s both top-line growth for the weighted average gross margin to be going up by balancing out the lower margin of the legacy base and then, obviously, attacking the underlying cost structure.

Remember we built an infrastructure that can handle 4,000 BSLs and we’re, you know, 35% capacity at this point.

So we have a tremendous ability to leverage the network.

So you probably need revenue something in the range of 12.5 to $13 million leaving the year at an annual rate type thing.

You mean for the fourth quarter?

Or-- you said at an annual rate?

Sorry, you need to be at that quarterly level by the end of the fourth quarter.

That would be at-- that would be high.

Oh, okay.

So will your operating expenses actually decline?

Well, they will decline sequentially from Q1.

They did decline from Q4.

Over the second half of the year, they should hold pretty steady.

We have, again, in our financial model, we don’t really see any significant increases.

We have the senior management team on board and the sales and marketing expenses have been front-loaded relative to what we’re trying to drive for the rest of the year.

Okay, good.

Thanks a lot.

Jerry Heasly, Global

Thanks for taking my question.

I would like to know more about the technology.

I know that you have the sophisticated equipment for large companies where you buy equipment and you’re sitting in rooms and it’s like you’re in a theatre.

I’m more interested in the-- maybe a wider application with phone type aperitifs, you know, or equipment.

You know, we see the ads on TV with Microsoft with networking and you just do it on your computer.

Can you just elaborate a little bit more on the more popular, wide-spread use that I’m referring to?

Sure, well, the first thing is the ads that you see on TV are right now seem to be from Microsoft and Cisco, both of which are trying to sell a different product other than video.

So Microsoft is trying to sell its, you know, collaborative suite of light meeting which includes web collaboration, happens to also have a video capability to it.

And Cisco, of course, is trying to sell voice services.

Their video that they show on TV is really centered around people having a voice-over-IP phone on their desk and then being able to have that software on that pc that’s connected to their phone.

Neither one of those is really something that’s being used heavily in real life because they’re not connected to anything outside.

They’re really islands of communication, if you will.

Although Microsoft’s would tend to be more open, people would have to have it at both locations.

What we see happening is that clearly they’re going to be players in this space but what we’re trying to drive is a standards-based approach and the fact that the services are tied behind it.

The thing that’s preventing people from doing video communication on an otherwise wide scale are a couple things.

One is the cost of end points and that’s coming down.

It’s coming down as they’re more options available.

As you said, you can actually go to an OfficeMax and buy a phone, if you will, with video in it.

But that’s, you know, it’s fairly low quality but the price points are coming down.

The next thing is broadband availability.

Clearly, broadband availability is getting better and better with the announcement by Verizon, SBC, fiber to the neighborhood, fiber to the home.

Broadband availability’s going to be there.

And the last missing piece is the services behind the scenes.

And those are things like being able to call into your office systems, call into the legacy systems, have a real phone number so you can receive a call whether it’s audio or video.

And that’s where GlowPoint comes in; we provide those services.

So as these, you know, Microsoft and Cisco, you know, promote their equipment and software, there still needs to be a service behind the scenes tying it all together and that’s where we feel we play.

And my remarks earlier about getting out of the conference room or specifically in terms of where I think you’re heading, we are still focused in on the business market, the business person who is-- happens not to be in their office and not to be in a conference room and still be able to access video at one of their communications tools, whether they’re at their desk or whether they’re in an airport lounge or in a hotel room.

And that’s where we believe a big piece of the growth is going to be coming from.

So I don’t know if you’re referring more to the consumer market.

We’re still looking at how do you tie the fancy systems in the conference room to untethering business people from actually having to be in that room to use video.

So you’re not really looking at-- you’re not really so much a software company as you are a service provider.

Who else is in that service space and why would they have GlowPoint over the other company?

I’m not sure I understood the last question.

In terms of who else is in this services space, there are many people who provide bandwidth and transport.

They provide the IP pipes and say, “Go do it yourself.” GlowPoint has a different philosophy where the quality of the bandwidth is important but the managed services and the applications, the intelligence, if you will, excuse me, in that pipe is what makes people want to use it and why our customers are using twice the industry average of video.

Because number one, they can and number two, it’s easy to use.

The whole trick is not just providing the access and the pipe but actually providing a solution so that they’re using our product.

I just wonder when this market will explode because I don’t know why if this is so easy to use we don’t have a lot more people in this space.

Yes, I think we’ve talked about this a lot, both internally and externally.

And I think a lot of it has to do with the overhang from the traditional technology, ISDN, that’s been out there that has caused a lot of headaches and people to write-off, if you will, video conferencing.

We are in the video communication space and believe that the solution that makes it as easy as a telephone call and with all the other areas of change that Michael was talking about, whether that’s the equipment cost coming down, the bandwidth ubiquity so you actually have access into a high-speed environment where you can use video, and the fact that we are seeing different applications and different verticals that are embracing this.

That’s when you’re going to see the explosion.

And I-- people have been talking about the hockey stick for years but they’ve been talking about the hockey stick in a very limited marketplace which is the conference room.

If we expand that definition out of the conference room to the desktop and to the laptop, that’s where you see the numbers and that’s where it becomes a volume game.

All right, well, thank you.

Pleasure.

Joe Halprin, Halprin Research

Have a question about disconnects.

Can you give us the number of disconnects in the quarter?

I understand that.

Yes.

And then also just kind of give us an idea of what it’s looking like on a month to month excluding any one-time kind of things like Wire One.

Yes, there were a total of 79 for the quarter. 40 of the 79 were downsizing and I’ll cover that in a minute.

That means essentially closing officers. 39 were lost.

Of the 39 that were lost, 22 were Wire One disconnects.

So the way I look at that is the 79 total, Wire One accounted for 28% of that total.

If you looked at it by month, the bulk of the Wire One’s occurred in the first two months of the quarter.

And so I kind of take that out of the equation.

And when I look at March, which was a much more normalized month, the disconnect rate was 1.3% for the month.

Okay, so would you say 1.3% is kind of a good number to look at on a month by month?

You think that’s-- that’s what you kind of--

Yes, 1.3 to 1.5.

I think historically if you, again, take the Wire One because that also occurred during all of 2004, I’d probably be, you know, conservative and say 1.5.

Okay.

Thanks.

You’re welcome.

Frank Cupps, Wachovia Securities

Hey guys.

Joe kind of covered on one of my questions about the disconnects.

One of the things I looked at with the disconnects, if we keep disconnect-- and I was kind of under the assumption that a lot of the BSLs that we were disconnecting were kind of these 199 pay-as-you-go plan type disconnects.

That’s true.

But if we continue to see that and I look at the numbers, I would think that we’re replacing these with customers that paying 700 bucks a month and we’d get some kind of incremental growth in revenue even small.

Because if we’re disconnecting 79 at 199, they’re low profit guys and we’re putting on 79 at 700, it would seem like we would have been seeing some growth in revenue which we haven’t really seen.

Is there a particular reason for that or-- ?

Well, a couple of things.

The growth in BSLs for the first quarter, unfortunately, a lot of that occurred in the third month of the quarter.

You may recall that I said we had one specific order which turned out to be the NFL Network where we really booked that at the end of the month of March.

But you don’t see the impact of the growth in the BSLs really from a revenue viewpoint until Q2.

The other thing to remember about a disconnect, Frank, is that it’s 30 days after we get the notice before the actual disconnect occurs so we’re living with that legacy account, if that’s the example you want to use, for an additional 30 days past the notice.

Okay, so you kind of got a little bit of a lag time on both sides, the reconnect up of new service that takes a little bit longer to get billed and--

And Frank, it’s more the time of the new BSLs to be fair.

That’s really--and this is a phenomena that I’m still trying to scratch my head and get.

But, I mean, if you look at BSLs historically in the business, you know, 50% of them, hitting the new BSLs, 50% of those orders typically hit in the third month of the quarter.

When do you think we’ll be stepping away from this BSL type thing?

And you mentioned on the last conference call talking more about pure revenue growth instead of the BSLs.

I still think the BSL model gets really confusing to a lot of people.

I mean, it should be the metric that we use in a way but I see that you guys are branching into more areas of revenue growth?

Yes, I would say as early as Q3.

You know, we’ll still be talking BSLs but we’ll be talking about some new sources of revenue because it will be more material to the overall revenue number when we do the Q2 earnings call.

But I think from a real traction viewpoint, you know, with some of the stuff that David is referring to outside of the conference room, that’s when you’ll see-- that’s when you’ll start to hear us talk more about revenue and less about BSL.

And Frank, it’s a great question because even if, when we’re talk about the traditional business, one of the things and one of the metrics that we see shifting is the types of connectivity that our customers are looking.

So as an example, an average BSL is over $7,000 a month and it’s typically, you know, a 512 to a 1.2 circuit.

Well, we’re getting and quoting for 10 Meg pipes into a campus environment so it’s 1 BSL that’s 10 Megs worth of connectivity.

So we’re going to be-- and it’s all good-- but we’ll be forced to really be thinking differently about how we report against it just because the metrics will start losing their meaning.

And especially if we move to the desktop and beyond, you can’t-- a BSL is not a BSL is not a BSL.

You know, a QoS BSL is going to be different from a soft codec on a laptop bring-your-own-access.

So, again, as Rod was saying, as we have those pieces of our business become more important and more visible, that’s when we’re going to be making those changes.

Is a soft codec on an access or on a laptop bring-your-own-access a possibility for GlowPoint?

It is definitely a possibility and one where the vision that we’ve laid out will most likely take us.

Okay.

Just real quick, the NBA, I read an interesting article that Sony had put out.

It was on Sony letterhead, I guess, on the NBA, what the NBA’s doing.

And they had talked about having their own T1 lines using the Sony video conferencing system.

Is that something that we’re involved with?

This is for the NBA action(ph).

Yes, the NBA has been a Sony shop before our relationship started with them.

And we’ve been doing the NBA draft, I think it will be the third year in a row that we’ll be doing the NBA-- the second year in a row, I’m sorry, we’ll be doing the NBA.

Well, we haven’t officially announced that that we should be doing the NBA draft.

But again, there is a legacy network already up and running in the NBA.

I’ll let Mike talk a little bit more about that.

So that was really pre-GlowPoint-Sony.

Yes, so what they did is they have some interesting statistical data applications that they put in T1s between team locations and NBA Channel headquarters.

And what it allows them to do is it really was initially designed to provide statistical, web-type statistical data back and forth between team locations and NBA Channel.

What they did when they bought the Sony gear, they started putting that on it and doing video calls and basically doing some interviews over the NBA Channel between the locations.

The interesting thing, of course, that people, that didn’t get talked about is that that is not really a QoS environment.

It also, they can’t do video calls when they are actually doing the statistical data because it affects the video call.

So it is definitely a situation where Sony’s trying to show they are being used in that model.

It is Sony equipment and they are definitely using their own network.

We believe, though, the quality that we showed at the NFL draft and will show at the NBA draft if we get it is something that’s going to, you know, be an opportunity for us.

You know, we obviously aren’t going to get every broadcast studio out there but I do believe that there are many opportunities and the more that people talk about it and use the technology, the more they’re going to want the quality of GlowPoint and not just a ad-hoc be if you’re lucky call.

Okay, so it’s something that may come our way.

And I hope somewhat that now we got this NFL thing, I hope someone in the sales organization’s out there calling, you know, every single sports agent that represents a football player and every team owner, now that the NFL headquarters already has it in there.

I think it would be just a perfect vertical for these guys to be able to communicate with their teams and their agents and, I mean, if you really expand the market for this.

And, Frank, it’s not just the GlowPoint sales people who are doing it.

But because of the Sony-branded solution, it is the Sony sales organization, both in the video space as well as in the broadcast space that’s bringing us into the deal.

Okay.

It just seems like a simple market to go after now that they’re in the NFL.

But let me just-- it does seem like that but realize that the decision-making process is not only, it’s-- you have to go through a bunch of different channels so it’s technical, it’s from an equipment perspective it’s network, and it’s also financial.

So it is-- it is a great market to go for.

We have someone and multiple people focused on it both here and with the Sony but it doesn’t happen overnight.

Okay.

Kevin Martin, Riverside Capital

Actually, the-- my question was on the NBA and you just answered it so thank you.

Okay, Kevin.

If just one more question and then we’ll wrap it up.

No more questions at this time.

I will turn the call back over to you for closing remarks.

Okay, just want to thank everybody for participating today and we look forward to getting on the call with you over the next quarter.

Thank you very much.

Bye-bye.

Ladies and gentlemen, thank you for joining us on the call.

You may now disconnect.