Oblong Inc (OBLG) 2007 Q2 法說會逐字稿

Good afternoon, everyone.

Welcome to the Glowpoint second-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 Glowpoint's website at www.Glowpoint.com following the call.

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

Brandofino's prepared remarks.

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

Thank you very much.

The statements contained herein, other than historical information, are or may be deemed to be forward-looking statements and involve factors, risks, uncertainties that may cause actual results and 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 agents' agreements, rapid technological change affecting demand for our services, competition from other video communication service 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.

Now, I would like to turn the discussion over to Mike.

Hello, everyone.

I'm Mike Brandofino, President and CEO for Glowpoint.

Thank you for joining us.

As you see on the call, we have Ed Heinen, our CFO.

And we also have Joe Laezza, our COO, who will be available during the question-and-answer session.

Much has occurred since our last conference call in June.

And I am pleased to report that we continue to achieve the key objectives we set out to accomplish.

I'm going to ask Ed to bring you up-to-date on some of the details.

And then, I will follow up with comments.

As Mike mentioned, we have accomplished some key milestones since our last call, not the least of which is filing our financials in compliance with SEC guidelines and issuing our first proxy since 2005.

Another key event was accomplished earlier today when we held our first stockholders meeting since 2005.

And I am pleased to report that all of the measures put forth in the proxy have been approved by our stockholders and we thank all of you who voted your shares.

Since issuing the proxy, we have received a number of inquiries from investors concerned about the request to extend the allocated shares from 100 million to 150 million, fearing it was a precursor to an imminent offering.

We attempted to explain this in detail in the proxy, but I believe it's important for us to discuss it briefly on this call.

As we prepared for issuing the proxy, one of the items we focused on was verifying what the total potential share allocation needs to be in order to satisfy all outstanding warrants, options, preferred stock, and convertible notes.

We say potential because we require allocating the appropriate amount of shares even if there is a potential that they will never be issued.

So, even though there may be warrants and options with strike prices well above market price, these still must be allocated.

When we calculated the existing common shares outstanding and add in potential shares represented by all of the other instruments, along with the requirement to maintain 120% buffer on unallocated stock, we were at about 92 million shares, close to the 100 million allocation defined by our charter.

The increased authorized shares provide the cushion needed and the flexibility to renegotiate the terms and maturity date of the outstanding notes or issue new debt or equity to repay the notes all as described in our 10-K and react to opportunities in the future where we may be able to leverage our [public] currency to eliminate some or all of our debt or pursue acquisition potentials down the road.

We recommend that you refer to page 28 of the proxy for details and the exact numbers we used in our calculations.

Moving on to the financial results we announced today, Glowpoint is realizing acceleration in revenue and sales beyond any growth in the past.

We achieved revenue of $5,847,000 for the second quarter, which represents the highest quarterly total we have achieved to date.

Combined with our first-quarter results, we are at $11,508,000 year-to-date revenue, representing an increase of 18.6% over the same period in 2006.

You may recall that in the first quarter included revenue for integration services related to NASCAR images deal of $430,000.

This quarter included a similar but smaller amount of 242,000 for integration service supplied to ESPN for a remote analyst application.

If you exclude these onetime integration services, the growth from Q1 to Q2 is $371,000 representing a 7.2% quarter-over-quarter increase with Q2 2007 growing at 17.4% over Q2 2006.

Growth in revenue from our multipoint conferencing service is strong.

This revenue has grown 360,000 in the first two quarters of 2007.

We recently landed some nice new customers, which will contribute significantly to the monthly multipoint conferencing service revenue as they are fully implemented and we're beginning to use our services for their applications.

One new customer is a large university, who will use our services in a distance learning application supporting the remote MBA programs and goes into full production in September.

We believe this client alone will generate over $30,000 per month in new multipoint conferencing revenues.

We continue to see improvements in gross margin, increasing from 30.9% in Q1 to 33.4% in Q2 2007.

We have numerous initiatives under way, which will continue to improve our margins by cutting as much as 50,000 per month out of our cost of goods, and we expect to begin to realize the results of these efforts late in the third quarter and the fourth quarter of this year.

Cash on-hand at the end of June was 712,000.

As we discussed on our last call, we anticipated this as we had received 657,000 of customer deposits for the integration services in the first quarter, which was used to purchase equipment in the second quarter.

This amount inflated our cash as of March 31, 2007 and nonstandard operating expenses, which we knew would appear in the second quarter from items such as cost of finalizing the restatements and audits, tax payments, and additional investments in sales and marketing namely to two tradeshows we participated at in April and June.

Included in the second quarter were also approximately 600,000 of non-recurring expenses for accounting fees related to the finalizing restatements and audits, stock-based compensation and tradeshows.

We also wanted to provide an update relating to our desire to restructure the note currently due to mature September 30 of this year and take on some additional working capital.

Over the last four or five months, we have explored a vast array of alternative options targeted at replacing the current debt instrument.

In the end, we determined it was best to work to restructure the existing note with the current noteholders as a result of various features of the original note, namely the absence of a prepayment clause.

Our primary goals in restructuring the existing note are as follows -- one, to extend the maturity date; two, to introduce a prepayment clause in the new note; and three, to obtain around $2 million in growth and working capital.

There are a number of other smaller concessions we are seeking too in our negotiations.

But these represent our primary goals.

While there is still work to be done to finalize details, we believe that we're on track to accomplish these goals prior to the maturity date, though there can be no assurance.

In closing, with revenue and gross margins increasing and the last vestiges of extraordinary expenses stemming from the restatements behind us, we are moving into a period where once we complete the additional expense cutting efforts, we will be poised to start seeing positive cash flow as we move into the later part of this year and the beginning of next year.

We think the momentum is clearly building as evidenced by what we achieved through June, and we look to capitalize on this momentum and accelerate growth through the rest of the year.

Thank you very much.

It certainly is a pleasure to report another quarter of revenue and margin growth.

With half the year completed, it appears that we have finally begun trending towards the higher growth we have always thought was achievable.

The growth in revenue in the first half of the year was driven by strong sales closed in the fourth quarter of 2006 and the first quarter of 2007, as there is a lag between closing the deal and realizing full billing.

To provide some insight into how far we have come, I would like to share some interesting numbers relative to sales.

If we look at the second quarter of 2006, which was the first quarter this management team began running the business, and measure new sales represented as assigned contracts for new monthly recurring revenue, in the three months ending June 30, 2006, we achieved new sales of approximately 50,000 of new monthly recurring revenue.

Annualized, that represents approximately $600,000 in revenue.

For the second quarter of 2007, we signed contracts valued at over 90,000 in new monthly recurring.

This means we achieved over 73% growth in new monthly recurring revenue sales over the same period last year.

Annualized, that equates to approximately 1.1 million in recurring revenues sold in the second quarter of 2007 alone.

It's important to note that this does not include growth in revenue from sales of multipoint conferencing or our one-off events, which we track separately.

If you consider that Glowpoint's business model is based primarily on a recurring revenue stream, real growth is attained by a combination of retaining the installed base while continually adding new monthly recurring.

What makes the Glowpoint model so attractive is unlike businesses that simply sell equipment, we do not start at zero every month.

Other than event services, our services are sold with a minimum 12-month commitment.

And as long as we continue to control churn, new sales, once they become billable, are accretive.

Two statistics that really support how well we're doing maintaining stable revenue base and growing for the future are average age of customers and the term of commitments on new deals.

If we exclude new customers who signed the last six months, the average age of Glowpoint subscribers is 3.25 years.

That means that when we sign an average new customer to a minimum 12-month commitment, there is an expectation that that revenue will continue for over three years on average.

And the average age of customers will increase as long as we continue to minimize churn as we have done to date.

The second statistic is a trend we have seen through the first half of 2007 and I think really underscores the confidence customers have in Glowpoint.

Over 50% of new deals or renewals we signed in 2007 have been multi-year agreements.

We have been signing two, three and even four year agreements with customers.

There are a number of facets to the importance of signing extended agreements with customers.

It solidifies our revenue stream for the long-term.

It locks in our customers and prevents would be competitors from being able to steal accounts.

It proves that customers are confident that the Glowpoint solution and services are going to be required for years to come.

The longevity of our customer base and the willingness of high-profile customers to sign multi-year agreements speaks volumes about Glowpoint as a service provider in a viable business.

As a result, we've been receiving positive recognition from our peers in the video communications industry as we continue to close high-profile accounts.

Our reputation as the go-to solution provider has reopened doors previously closed to us.

There are far fewer questions about our viability, which has led to us participating in many more opportunities.

We have seen the confidence and momentum of our sales team and our distribution partners carry over into July where we started the third quarter strong with similar percentages -- similar growth percentages over 2006 as we have already seen in Q2.

We anticipate continued strong sales and margin improvement as a result.

There are a number of factors that have fueled this growth and will continue to accelerate growth as we move through the year.

Our distribution partners are more productive than they have ever been.

We understand that we cannot afford to grow a large direct sales force.

Therefore, we spend a considerable amount of time reshaping our distribution channel and investing in resources to focus on our channel partners.

The results are impressive.

In Q2 2007, approximately 51% of our closed deals came from our channels.

And we will continue to invest in programs and resources to nurture our channel in an effort to make them even more productive.

Telepresence continues to raise awareness and stimulate a lot of positive attention about the availability of high-quality video communications.

Glowpoint's capabilities and service solutions are being recognized as a perfect fit to support this new technology.

In order to capitalize on telepresence opportunities, we have tailored a managed services solution specifically for telepresence rooms.

While we are already involved in numerous telepresence opportunities, the real benefit to Glowpoint and what we believe will fuel more growth in the short term is desire for companies to have the quality of telepresence rooms without spending the money to build dedicated rooms.

We have shown by the quality displayed on live broadcast that Glowpoint can provide solutions at a fraction of the cost of telepresence rooms.

So, whether the customers decide to implement telepresence or decide they just want the quality using their current equipment, Glowpoint can provide a solution.

While we have been limited in our ability to deploy money and resources to specific initiatives, the ones we have focused resources on are yielding the expected results.

For example, we invested in a dedicated resource to drive our multipoint conferencing services.

We announced a little earlier this month that our efforts of growing our multipoint bridging revenue have clearly yielded positive results with revenue from this service growing over 29% in the second quarter of 2007 as compared to the same period in 2006.

We invested in a presence at the National Association of Broadcasters Show in April and we have already landed a major new account as a direct result.

The new deal with a major sports network will bring Glowpoint's Team Cam HD solution to 10 colleges and their studio headquarters in Chicago, generating over 20,000 in new monthly recurring.

We continue to see growth in the broadcast sector.

And in the first half of 2007, revenue from the broadcast-related customers has grown over 69% as compared with the same period last year.

In the fourth quarter of last year, we invested in and began the development of a service solution for video call centers, which led to the launch of Customer Connect in June.

This service solution has been a driving force in growth in revenue from the banking and finance sector with revenue growing by 40% in the first half of 2007 over 2006.

All of these activities and industry factors have contributed to the acceleration in growth we have realized so far this year and laid the groundwork for accelerating growth as we move forward.

Often, while I speak with investors, they say, okay, you have shown some growth.

But, what is the addressable market?

How much opportunity is out there for Glowpoint?

The short answer is, there is tremendous -- there's a tremendous addressable market.

The main reason is, Glowpoint is in the unique position to draw from numerous markets and pools of opportunity.

From hundreds of thousands of existing video systems, new video systems sold every quarter, from exploiting markets we have penetrated already like broadcast and from new markets like the video banker solution.

We think the achievements so far this year show we're penetrating each of these opportunity pools in a more frequent basis.

And our initiatives have yielded promising results on all fronts.

We will continue to refine and optimize our approach in order to further accelerate growth through the rest of the year.

I would like to leave you with a quote from a man who has proven very successful in identifying and exploiting the latest trends in technology.

John Chambers, the CEO of Cisco, stated the following in an interview with Computerworld.

"If there is such a thing as a killer application, video is the killer application for network load and it's also the killer application for collaboration services."

We continue to feel confident that we have only scratched the surface for Glowpoint's potential market share in this exciting space of video communications.

And we will continue our efforts to accelerate growth, which we hope will ultimately be rewarded and reflected in the overall valuation of the Company.

Thank you and we will open it up for a short question-and-answer period.

Moderator?

(Operator Instructions).

Bill Mauerman, Lone Star Asset Management.

Congratulations on the quarter.

That is fantastic that it was the biggest revenue ever for the Company.

I am just really happy to see that.

Just real quickly, on the debt refinancing, the additional 2 million, you're going to get those from the current noteholders.

Did I understand that correctly?

As we expressed, our goal is to try and just get that all accomplished in kind of one fell swoop.

So, the answer would be yes.

There's nothing definitive though.

But, they are showing some interest in doing that.

Correct.

Okay and also the 2.8 million I think it's Series B stock, are you just going to leave that sit the way it is?

That has been on the table for discussions.

I can't talk about it because there's nothing definitive.

But there is discussions to possibly exchange that for something else.

But there's nothing definitive.

Does that have a call date on it when they can -- or a redeem date when you have to redeem it?

No.

No.

Second thing.

Could you just give an approximate timeline for getting onto the bulletin board if you're still looking at doing that?

Sure, interesting thing.

The Company can't actually ask a market maker to file the 211.

We do know of two market makers that have filed the 211 but we're not market makers for a long enough period of time.

Apparently, you need to have been a market maker for Glowpoint for 30 days while we were on the pink sheets.

So, it looks like we know one market maker was one from the middle of July I think or July 25.

So we believe that that market maker can refile that form on August 24 or 25 unless there is another market maker that decides to file it sooner.

We have been told by folks that everything is in order and it really should only be a three or four-day process from filing the form to getting approval and being eligible.

So, it sounds like it's already in process.

And essentially, you've done everything you can and now it's in somebody else's hands and they are running with the ball or will be.

Correct, correct.

Last thing, talking about sales, you mentioned the broadcast markets, the video banking.

Would you say those are the markets you're having the best results in right now?

And then as far as the channels, you said you have 50% coming from I guess VARs.

Is that going to grow as a percentage of revenue or this is going to be more direct sales?

And then finally, if you can talk about what the pipeline looks like today for future sales versus like say a year ago, just kind of how the whole sales process is going.

If you could expand on that a little bit, that would be great.

That's all I have.

Thanks.

I will address the markets first.

We always talk about the markets that we've been focusing on in the past.

One is broadcast and legal.

We continue to do that.

But from a growth perspective, we're going to shift resources to where we think we can get the highest double-digit growth that we can.

Broadcast continues to be that.

We think banking and finance now is kind of one that we can do that, not that legal is going away.

It's just legal is probably -- we have about 22 of the largest (inaudible) law firms; we're going to continue to go after that.

But from a bang for the buck so to speak, we're going to invest in banking and finance and in broadcast as continued growth segments.

Banking and finance though also lends itself to retail -- the solution that we provided potentially in the retail space.

But those are the two markets we're going to go after.

You're also going to see us start talking more about education as we have begun landing a number of large education accounts that will be driving revenue from that sector.

So, those seem to be the three sectors that we're going to be paying attention to.

From a channel perspective, absolutely we expect to see our channels producing more percentage of new revenue as we move forward.

Our direct force really is focusing on those channels -- on those strategic markets and specifically because our channels are not in those.

We're in markets that were never addressable by the video space.

So our distribution channel in order not to compete with them of course, we only are going to focus our own direct forces on things that they are not in.

And then on the rest of the business, we're going to be trying to grow our distribution channel as much as we possibly can.

The more distribution channels we have that are productive, that's more feet on the street that are talking about and selling Glowpoint.

And, what was the last -- oh, the pipeline.

Obviously we can't -- we've never discussed the actual pipeline.

But I can tell you that it is substantially larger than it was last year.

We are growing the pipeline which is a function of us being involved in more opportunities with our partners and our channels and also opportunities related to some of the new segments that we're working on.

Congratulations again on the quarter.

It's just great to see the Company moving in the right direction again.

(Operator Instructions).

[Joe Fattaruso].

Congratulations.

Great quarter, congratulations.

I just have a couple of questions.

I remember you saying it cost us 400,000 for NASCAR expense wise.

And I'm looking here at page 4 of the consolidated statements today and I see that basically we would be at breakeven if it wasn't for the fact that we did almost double in sales and marketing and general expense.

Going forward, I want to know how much do we anticipate breaking away from actually selling our service rather than giving it away or having to give carrots to get them to come onboard?

Sure.

Let me explain what that was.

That was not -- what happened in NASCAR in ESPN's case is, Glowpoint is a trusted vendor and these solutions are -- require taking all this different technology, putting it together and getting into a race car driver's garage or getting it into the home of a popular TV analyst for ESPN.

And because we are a trusted vendor, these companies wanted us to control and manage all of the process.

So, it literally was NASCAR wiring money into our account, us coordinating everything and then us just paying the people for doing it.

We did not lose money on the services side.

In fact, the deals are highly profitable on the monthly recurring revenue side.

So it was really just a matter of these are big-name customers.

They want Glowpoint to do it all for them.

We're not going to let these customers down.

So, it's not a matter of giving it away.

It's handling something for them that we would do in the normal course of business as a management perspective but just facilitated it on their behalf.

So the general and administrative, the costs have nearly doubled.

Ed was alluding to -- had to do with old expense with the audit?

Expenses with the audits.

There was also the trade shows that we went to that was like $100,000 and some.

And in options and restricted stock that have been granted in the second quarter, the entire expense for those grants was expensed in the second quarter also.

That was about $600,000 of what I would say is non-recurring type expenses.

You know, for audit fees, the first and second quarter were always to be high because that's when we are doing the prior year's audit.

But going forward in the third and fourth quarter, they're going to be quite nominal because it's just 10-Qs we'll be doing going forward.

Okay, Mike, I know we talked in the past about when you need more capacity, it's easy to put it back on.

I think we talked roughly about really doubling the capacity; it was about $12,000.

Is that still true?

And what I would like to know is, what are we doing to look at the oncoming IMS service?

Do we have any plans to participate in that?

Or is Glowpoint going to say pat the way we are today?

So from a capacity perspective, the way the Glowpoint network is designed, the core equipment is capable of tripling in size essentially.

So, the equipment is already paid for.

A nominal expense of maybe upgrading some boards and some equipment would be required.

And then an extra bandwidth charge would be the month they were occurring to increase the bandwidth on the network.

We're still operating at roughly 30 to 40% peak utilization and we're monitoring that because telepresence can drive that higher and HD can drive that higher.

So, yes, we don't think it would be much more than that on a monthly recurring basis to increase.

As a matter-of-fact, I don't know if you listened to Ed's comments but we actually plan on cutting an additional maybe 30 or $40,000 out of the backbone expense in projects we currently have going on right now by switching providers and basically improving our pricing optimization.

So even though we're not done; we're never going to be done trying to cut expenses out of the network and every time we do that, it opens up the opportunity for us to actually increase the bandwidth that may be met no change in what we've been paying.

Has any of that Tandberg business that was supposed to go away, has that started yet that process?

I will touch on that.

You want me to touch on IMS which is essentially--?

Well, the IMS first.

Yes.

It's essentially a standard and we will comply to any IMS standards that are out there.

It's not, will Glowpoint be a part of it or not?

Glowpoint applies to all standards or basically conforms to all standards.

IMS is still in the early stages and it's not fully ratified.

So, suffice it to say that Glowpoint will always maintain and be in the loop on new technology changes that affect our customers.

As far as Tandberg is concerned, it is trickling off.

It's not going off in any fast pace.

We're constantly working with them and we will expect -- it did decline somewhat and it will continue to decline over the next couple of quarters.

Just the last thing Mike, any word possibly we might be hearing about any additional patents that might have come through?

That first patent came through about 6, 8, 10 months ago.

Our first patent came due in February.

You know I honestly have not checked on them in the last quarter or so.

We've been so busy with some other things.

But we will -- what I will do is we will look at it and make sure on the next call we will update everybody on where they stand if there is any updates.

But as of right now, none of our patents have been rejected which is a good thing.

So, they are all still in process.

Well, Mike, it was a great quarter.

We're looking forward to the next one.

Sir, at this time, there are no further questions.

Well, thank you everybody for attending the call and we look forward to talking to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude the presentation.

You may now disconnect.

Have a wonderful day.