Oblong Inc (OBLG) 2007 Q1 法說會逐字稿

Good afternoon, everyone.

Welcome to the Glowpoint first-quarter 2007 results conference call.

Before we begin, I want to remind listeners that this call is being webcast live over the Internet, and that a webcast replay will also be available on the Company's website, www.Glowpoint.com, following the call.

The call is being hosted by the Company's CEO and President, Michael Brandofino, and there will be a brief question-and-answer period following the Company's prepared remarks.

I would now like to introduce Glowpoint's CFO, Ed Heinen, who will review the Safe Harbor information with you now.

Ed?

Thank you very much.

The statements contained herein, other than the 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 non-exclusive and terminable-at-will nature of sales agents' agreements; rapid technological change affecting demand for our services; competition from other video communication services providers; and the availability of sufficient financial resources to enable us to expand our operations, as well as other risks detailed from time to time in our 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.

Thanks, Ed, and hello, everybody.

I am Mike Brandofino, President and CEO for Glowpoint.

Thank you for joining us today.

Since we had a fairly extensive call only a few weeks ago, we will be brief today and just cover some points before taking some questions.

I'm proud to report that with the release of our first-quarter 2007 results, we have reached yet another milestone in our efforts to get Glowpoint on the right track.

In addition, thanks to our drive to create multiple sources of revenue, Glowpoint achieved revenue growth of 19.9% for the first quarter of 2007 as compared with Q1 of 2006.

This growth resulted from across-the-board increases in subscription, multipoint conferencing, and subscription revenue from a number of industry sectors including broadcast, legal and financial services.

As for our bottom line, due to our continued and stringent cost-cutting plan, which we commenced when new management took the helm in April '06, we cut our total loss by nearly $3.4 million or from $0.13 per share in the first quarter of last year to $0.06 per share in Q1 of '07.

We continue to see improvement in almost all metrics used to analyze our Company's financial health, including gross margin, which improved almost 42% in Q1 2007 as compared to the same period in '06.

These improvements, coupled with our return to current reporting status, sets the stage for us to begin the process of issuing a proxy, and soon getting off the pink sheet.

The growth in the financial services sector comes primarily from our initial customer using our Customer Connect solution.

Customer Connect, which utilizes our patented and patent-pending technology, is a solution that combines Glowpoint's intelligent call routing with HD videoconferencing to enable audio call centers with video capability.

What this means is that for the first time, an HD video call made from a remote location will ring on a regular phone, and the call center operators can answer the video call by simply hitting the answer button on the phone.

In addition, features like putting the video call on hold, conferencing another expert, and transferring the video call are all controlled using buttons found on most standard phones.

This essentially positions Customer Connect to be bolted on to existing call center voice solutions, making it easier to deploy and support.

We are already generating revenue from this solution, and have a number of requests for new power proposals as a result of our successful launch at InfoComm last week.

We believe there is a wide range of potential uses for this solution, from video banking to retail customer service and sales support.

Telepresence continues to garner headlines and bring attention to the video industry and to Glowpoint.

We recently created a service offering called the managed telepresence services, which bundles our high-definition multipoint conferencing, video network operations center, live video concierge, and stewardship reporting into one comprehensive offering tailored exclusively for Telepresence rooms.

Glowpoint can provide these services bundled with the Glowpoint QOS network offering or over our customers' or a third-party network.

We would expect to start seeing revenue from this solution sometime in the third or fourth quarter, as we are already providing proposals for Telepresence opportunities.

This capability was highlighted at the recent InfoComm show, where Glowpoint provided the managed service and network for Tandberg's telepresence demo suite, as well as Tandberg's, Sony's, and [High Vision's] booths.

The encouraging thing about this is that each of these manufactures brought customers to the Glowpoint booth to see our full suite of services.

The relationship with Tandberg in particular has been positive in recent quarters, as we have worked on a number of opportunities with them, including Glowpoint being selected to an RFP process to support Tandberg's HD solution for Philip Morris.

This positive exposure and validation of Glowpoint's capabilities really helped us solidify our relationship with many of our current channel partners, and generated interest from companies who want to start selling Glowpoint services.

Obviously, having a distribution channel that believes in Glowpoint services and Glowpoint as a viable business allows us to multiply the number of feet on the street talking about Glowpoint, and will ultimately lead to us being involved in closing more opportunities.

By providing targeted solutions like Customer Connect and managed telepresence services, we give our partners even more reason to introduce Glowpoint to their customers and help them open new markets.

We finished last year was with approximately 40% of our closed deals coming from our distribution channels.

So far this year, we are tracking at about 51%, with approximately 60% of our sales pipeline consisting of deals brought to us by our channel partners.

Clearly, our distribution channel is a key part of our growth strategy going forward.

In conclusion, we have accomplished our goal of putting the history behind us and getting our financials up to date.

We have accomplished our goal of getting costs under control.

We have accomplished our goal of broadening the areas in which we can see revenue growth, and can cross-pollinate to other areas of our business.

And we have accomplished our goal of establishing Glowpoint as a valuable business partner for our distribution channel.

As we move forward in 2007, our goals are pretty straightforward.

We seek to drive growth and increase margins.

And I'm fully confident that with the groundwork we have laid so far this year, we will be successful in achieving these objectives.

I have asked Ed to provide some comments on Q1 financials and a few other items.

And then we will open the line for questions.

Thanks, Mike.

Hello, everyone.

I want to provide some color on a few points from the first-quarter 2007 financial statements.

We reported total revenue of $5,661,000 for the first quarter, which is a 19.9% increase over the same period in 2006.

Mike's comments earlier, as it relates to our goal of broadening areas of revenue growth, are clearly seen in the first quarter.

We were able to secure a long-term, high margin monthly subscription contract [by] providing the broadcast customer with onetime integration services.

Excluding the onetime integration services of $430,000, our revenue still grew 10.8% from the first quarter of 2006 and 5.4% from the fourth quarter of 2006.

Multipoint conferencing is another good example of our focus on diversifying our revenue sources and leveraging existing capabilities.

Towards the end of the third quarter of 2006, we began a concerted effort to grow revenue from multipoint conferencing by the hiring of a product manager who focused on this area.

The results are now materializing.

Multipoint conferencing revenues grew by $159,000 or 23.5% versus the fourth quarter of 2006, and 27.4% as compared to the first quarter of 2006.

The major benefit of this business is the time period from signing an agreement to realizing income.

We can take advantage of our ability to provide services on other IP networks and ISDN to get a customer using our bridging services within minutes of signing them up.

Subscription revenue, which saw growth of around 8.4% over the first quarter of 2006 and 3.6% from the fourth quarter, has a longer lead time to realize revenue.

These broadcast and multipoint conferencing opportunities may have been missed if we had not refocused our efforts from just providing billable subscriber location to utilizing all our capabilities.

Multipoint conferencing not only can generate revenues quickly, but it also creates a broader base of customers who come to appreciate the quality and breadth of Glowpoint's services which, in turn, aids in moving them into our subscription-based services.

Gross margin improvement continues to be a goal.

And we saw a nice improvement, from 26.2% in the first quarter of 2006 and 30.3% in the fourth quarter to 30.9% in the first quarter of 2007.

But the gross margin improves to 33.4% when you exclude the onetime integration service, which was done at cost in order to secure the higher-margin recurring revenue.

Our cash as of March 31, 2007 was $2,290,000.

The $137,000 increase in cash from December 31 was primarily the results of $657,000 of onetime customer deposits and prepayments.

Excluding these deposits and prepayments, we would have had $1,633,000 in cash at March 31, 2007, and we would have used $218,000 of cash for the operating activities in the first quarter of 2007.

Our cash usage will continue to be negatively affected by our ongoing tax payments related to prior operations; accounting costs of the restatements, which will end in the second quarter; and fixed asset additions, which offset the Company's success in achieving near breakeven in our other operating activities.

Finally, I would like to elaborate on what Mike said about Customer Connect being a growth area for us.

With Customer Connect, we essentially combined a number of our components of what we already do into a solution that has four potential revenue components.

First is a hosted application which generates a monthly hosting fee.

Second, there is a monthly license fee for each remote location and video agent.

Third, if we are selected to provide the network, there is a monthly subscription for a network at each location and the call center.

And fourth, if needed, there is a managed services component to support the video equipment in each location and call center.

So for example, if Customer Connect was adopted by a customer who wanted 80 remote locations and 20 video agents, we would be generating roughly 70,000 per month in revenue from this one account.

Considering the various businesses that can use this solution and the potential for remote locations and video agents to grow once deployed, it is obvious why we are considering this one of our key areas for growth potential.

The key for us is executing on our plan and staying focused.

Thanks, Ed.

One more point before we open it up for questions.

I know you're all anxious for us to move off the pink sheets.

In order to begin that process, we need to complete and file our proxy statement.

As we outlined in our 10-Q, the proxy should be completed in July.

And then, we have been informed that it will be about a 30- to 45-day time period from submission of a Form 211 by a market maker to the commencement of trading on the OTC bulletin boards.

We are happy to have our financials out, and we look forward to the day when we are no longer on the pink sheets.

But the most important thing is that we will stay focused on driving the business plan and doing what we can to accelerate growth as we progress through the rest of the year.

As we said, we wanted to keep this a little brief since we had a long call.

But we will open it up for questions.

Moderator, please -- take questions?

(OPERATOR INSTRUCTIONS).

[Jack Dilbert], private investor.

Mike, I've talked to you a number of times about naming some names of major companies that we do business with, because most of the names we hear are in the broadcast with the ESPN, etc.

I kind of missed your -- could you just elaborate a little bit with Tandberg Philip Morris?

Were those together or separate?

You went too fast for me to --

Oh, I'm sorry.

No, we actually were selected by Philip Morris to provide video services to a new research facility, and we won that through an RFP process -- actually won that in direct competition against Verizon, AT&T and Global Crossings, and I believe Wire One technologies.

So that was a really nice win for us that we had recently.

Okay.

I don't know how much money that is involved, but these are the kind of announcements that -- when we win these things and we do get them, that -- I mean, we just have to -- somehow find a way to announce them.

We continue to try.

I will tell you that every deal that we close, we try and get customers to let us talk about their name and what they're doing.

It is --

Are there any other names that we have done business with that won't let us, that you can tell us just on the phone, like Philip Morris?

We're working on it.

But actually, there a number of opportunities that Glowpoint has worked on, and is working on getting approval.

So, yes, there are a number.

And we will, whenever we can -- some folks say we can't do anything in writing, but we can talk about it.

And others say you can't say anything at all.

But as I said, we will do our best to try and get those names in there.

I guess it's a good time to reiterate that because there are not necessarily a press release out every week about deals, that does not mean that deals are not closing.

And I think --

I know, but if we want to get sponsorship, and we want to get our stock up, unfortunately, people don't -- with the history of this Company, they don't see that.

(multiple speakers) And they want names.

And if you can't give names, then say -- we have put out a press release.

We have signed somebody with a major tobacco company or (multiple speakers) company.

If it has to be generic, that is okay.

But at least put out something every week (multiple speakers) every other week.

We will do what we can.

[Joseph Fidarusso], private investor.

Yes, congratulations on the 19% increase.

One of the things I wanted to ask you about -- I also noticed that the cost of doing business went up as well.

Now was that number pertaining to the accounting -- and that was in this quarter?

Or is that a number that is involved with the cost of doing business?

Joe, you are talking about cost of revenues, correct?

Yes, the cost of revenues.

I think that climbed.

Let me explain that a little bit.

That really has to do with the fact that taxes are now put into cost of revenues, where before, they were listed under G&A.

Do you want to explain that, Ed?

Yes, what we have in there, Joe, is really two separate components.

One, in that $430,000 broadcast implementation I talked about, we also had $430,000 of cost sitting in cost of revenues that normally isn't there.

And then secondly, what we had was -- in our cost of revenues, we are now showing taxes being included in cost of revenues, where in prior quarters, it was down, cost -- in G&A.

And there was another $436,000 of sales taxes that were in cost of revenues in the first quarter that weren't there in the first quarter of 2006.

There were some of them in there in the fourth quarter, but they weren't there in the year ago.

So when you are really comparing our margin from last year to this year, where it was 26% and we're up to like 30.9, you have got $436,000 of sales taxes in there, which is approximately 8 percentage points better than what it was before.

And then you also have that cost of revenues for the implementation.

So those are --

So on subsequent -- we should see -- as the revenue goes up, this numbers shrink in proportion?

Correct, because again, that important figure is the [33 point -- I think it was 9] percent I mentioned for the gross margin if you exclude the onetime charge.

That is what the real ongoing gross margin was, which again, was an increase of 3 percentage points from the fourth quarter.

Okay, getting on to the next question, I understand you're sending out a proxy so that we can get off of the pink sheets, which is commendable.

But you go on to the bulletin board, although it is an accomplishment, the brokerage community doesn't see it that way.

The stock right now, I think, is [below] (inaudible), if I remember correctly, in about five states.

And some of your major bankers don't recognize this, and don't allow the brokers to push the stock.

So although we're making headway, they still cannot sell the stock, which puts us behind the eight ball.

Yes, I guess the goal is, of course, to walk before you run.

And we have really evaluated this from a number of different angles.

And there are people that argue for going back -- try to get on AMEX, or try to get on some other exchange.

We cannot get on NASDAQ currently because of requirements that they have because of stock price, because of assets that you have.

So we feel that this is at least a good first step.

It should get us a little more ability for people to buy and sell the stock.

And it does open it up to quite a few more people than we do now have available on the pink sheets.

So I agree, Joe, that we want to definitely do something more than that.

But the goal here is to take steps.

You know, when we took over last year, and I told you personally a number of times talking -- we had a pile of stuff to get through.

And you can only get through it one thing at a time.

And so right now, we think this is a good next step.

And it at least gets us open to more folks being able to buy us.

But suffice it to say, we do understand what you just said, and are looking (multiple speakers)

Now, I just -- not to interrupt you; as a salesman myself, I am all for rewarding good work.

But I am curious as to why we have vested some of the shares that we got on [perks] immediately, rather than put them off to the future?

I understand a lot of work to be done to get us forward.

But at the same time, you understand, we're still dealing with a $0.60 stock price with a lot of overhead supply.

Yes, that had to do with -- are you talking about what the management received recently?

Right, (multiple speakers)

I guess that was really just a decision to make it more fluid for us if -- as we move forward, you saw that we also had gotten options that we have in further vesting, two- and four-year vesting, which hopefully shows our faith in the Company.

You also, I'm sure, have seen that I have extended my contract two years.

The goal is just to be able to have that stuff available, should I have to pay or any management pay taxes on some of the stock that gets vested over time.

So it is really more of a strategic positioning in order to allow the management team not to be penalized for getting the stock from a tax perspective.

Last question.

Along with moving to the bulletin board, what are we doing in terms of another banking arrangement to get us away from Burnham Hill Partners?

I was waiting for that one to come up.

The goal is to not initially just get away from Jason, although I have stated many, many times that I think we need to move to a different type of banking partner.

The goal is to figure out what to do with the note.

The note is due September 30.

The Board of Directors and management team are fielding basically multiple options.

We are talking to the current noteholders, because they are the current noteholders.

And there is not currently a prepay feature or facility in the current note.

So we would need their cooperation, even if we were to find an alternative solution.

We are also looking at alternative solutions, or alternative financing options in order to replace that note.

But we are basically going down multiple paths.

It might be another one of those situations where it has got to be a two-step approach.

One is get the note pushed out possibly, and get some terms in there that allow us to prepay it, and then maybe seek to replace it at a later time.

Or if we can [facilitate] everything in one fell swoop, we will do so.

But -- (multiple speakers)

In the process, Michael, are we looking at more dilution, Mike?

And what are we doing to move forward to get maybe some kind of strategic alliance that might have some sales punch, as well as big bank accounts to help us along and help us grow a little bit faster than we have been?

With all due respect, Joe, it is a lot easier to say to do those things than that is to do those things.

Glowpoint obviously had a lot of hair on it for the last year and a half or so.

We have definitely garnered the respect of the industry in what we have accomplished, and we have conversations with a number of partners that could ultimately turn into that kind of a relationship.

But short-term, we absolutely need to deal with this note.

And that is still an overhang, not only from a investor perspective, from a partnership perspective.

So we need to deal with that as kind of a separate entity, if you will.

Is there going to be further dilution?

Of course.

There's going to be dilution because there's going to be a cost of doing this.

Whether we do it with a new person or a new financial institution, or whether we do it with the existing folks, there will be dilution.

So it is really up to the Board and the management team to try and find the deal that is least dilutive.

And that is why it is even more important that the management team and Glowpoint work very hard to avoid the 6 million shares of dilution related to the penny (inaudible).

That gives us a little bit of flexibility, and took that dilution off the table.

So (multiple speakers) that is the way it is, and that is unfortunately the reality of the situation.

Obviously, to get through this, we have to sell our way through this.

And hopefully, you guys get that job done.

We're working on it.

Again, congratulations.

(OPERATOR INSTRUCTIONS).

[Bill Marman], [Longstar Asset Management].

I have got a ton of questions.

I guess first off, let me ask -- some of them, I can probably handle off-line.

Ed, can I give you a call on some of the stuff regarding the balance sheet and income statement?

Sure.

Okay.

There are a couple, though, that I wanted to ask on the call just in case there was any disclosure requirements.

First one -- and I came on the call about seven minutes late; I had trouble getting through.

So if you've already answered this, I apologize.

But in the last conference call, you had mentioned that there was going to be a drop in revenue due to -- possibly terminating the Tandberg agreement.

And I was just wondering if you can quantify what amount that might be, and when we might see that?

Sure.

Tandberg -- that represents about, Ed, $1 million -- about $1 million in revenue.

Per quarter?

(multiple speakers) No, no, $1.2 million per year.

And we would anticipate that -- actually, we anticipated it declining already, but it hasn't.

We would anticipate that declining over time over the rest of this year and into next year.

We don't think it is going to be an all -- all at once, it is going to disappear.

So it is kind of one of those things where we are transitioning their services someplace else in working with them.

Because of the good relationship we have with Tandberg, we don't want to just end it and move on.

So we're working with them.

We're helping them transition to some different services, and helping them through that.

So it will be over time.

But it does represent about 1 million, or $1.2 million --

Low margin.

A very, very low margin, less -- about 10% margin revenue.

So roughly, did it already start in the second quarter, or will we see it in the third quarter?

Actually --

(multiple speakers) It hasn't happened yet.

We just wanted to kind of prepare everybody that it will be happening.

We thought it would happen in the first quarter originally back in 2006.

And then they've kept using the service.

And as of right now, it is still there.

So at least for probably June, July, August before we will start seeing anything.

So roughly, worst-case scenario, we see revenues go down by $300,000 per quarter starting in the third quarter, but then cost revenues will go down by (multiple speakers) [90]% of that roughly?

Yes; it would be less in the third quarter -- I would say, even right now --

Right, but worst-case scenario -- we will see it starting, and it will just slowly get to be more -- and hopefully, you'll have other stuff that will offset that; we may not even see a tail-off in revenue.

That's what we would like to see.

And the second question -- you'd mentioned taxes and cost of goods sold.

I am just curious -- since it's sales taxes, are you billing those to the customer?

And if so, are you grossing up the revenues for those sales taxes too?

Yes.

We are billing it to the customers.

We show it gross.

It's included in revenues, and it's included in cost of goods sold.

So roughly, revenues were up by $400,000 this quarter also, because of the sales taxes?

No.

What had happened before was we had been billing the customers for some taxes, what we called the pass-through taxes.

We used to be incurring cost for sales taxes from our common carriers.

They were also included in cost of goods sold before.

Starting in the fourth quarter of 2006, we created an entity called GP Communications, which we mentioned in the last call.

That entity is now negotiated agreements with carriers, and is ceasing paying taxes to the carriers now, because we are remitting them directly from the customers.

So what happened was before, we were paying the taxes to the carriers, and we were recapturing some of those taxes in our revenues.

Starting in the fourth quarter, we stopped paying those taxes to the carriers, started paying them to the states directly.

So what's happening is it's just -- we're switching one to the other.

So we are losing some costs as we start to stop paying taxes to the common carriers, but that is taking us a little time.

We have not realized all the benefits of that yet, because we are having to negotiate various agreements with the carriers.

Got you.

Okay, and then the last question that I was hoping you can answer on the call.

Regarding the note that you guys are trying to convert, I am just curious, since you have had talks with the current people, if you can say -- did they seem like they were wanting to work with you, or are they -- (multiple speakers)

Yes, it has been very cooperative conversations.

And we're hoping that we can come out with something that is amenable to everybody, and gets us -- gets the gun away from our head, so to speak, for the note in September.

And it opens up the opportunity for us to possibly ultimately replace it all with something else a little bit further down the road.

But those guys also own shares, so they're -- I guess they don't want to put the Company under.

They're not saying, you have got to pay us off in September --?

Absolutely not.

No, these guys have been, at least from that perspective, very supportive in wanting to see the Company succeed and move forward.

Okay, great.

And then the rest I'll just give Ed a call, if that's okay.

Gentlemen, you have no further questions at this time.

Okay, thank you.

Thank you, everybody.

I know this was kind of a brief one, but we did do a fairly long call two weeks ago.

We look forward to the call in August when we release Q2, and also to our stockholders' meeting and, as we said in our Q, that information for the stockholders' meeting will be going out towards the end of July.

Thank you, everybody.

Ladies and gentlemen.

Thank you for your participation in today's call.

This concludes the presentation.

You may now disconnect.

Have a wonderful day.