Oblong Inc (OBLG) 2007 Q4 法說會逐字稿

Good afternoon everyone and welcome to the Glowpoint fourth quarter and full year 2007 results conference call.

Before we begin, I will 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 Glowpoint's President and CEO, 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.

Thank you very much.

Good afternoon, everybody.

The statements contained herein, other than historic 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 communications services; 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.

Thanks, Ed.

Hello, everyone.

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

Thank you for joining us today.

It's amazing to me that in a few weeks it will be two years since my team began the long process of turning this company around.

From the first day we started the restructuring initiative, we provided clear objectives and guidance on how we would proceed and what our focus was during the various phases in the process of repositioning Glowpoint.

The first phase, which consumed all of 2006, was the restructuring phase, during which we were almost entirely focused on right-sizing the business, reducing operating expense - operating expense as much as possible, and reestablishing our relationship with partners.

As we moved into 2007, we turned our attention to finally getting beyond some of the historical challenges, which included completing the restatements and getting our financials current, which was completed by August of 2007; and then we set our sights on moving to the OTC bulletin board, renegotiating the notes and bringing in some working capital.

Throughout these initial phases, we laid the groundwork for growth by repairing and improving our relationships with channel partners, targeting specific verticals, and focusing on higher margin revenue streams like subscription and multi-point bridging.

A great way to see the overall effectiveness of our approach is to take a snapshot of what we looked like at the end of 2005 compared with how we ended 2007.

Even though we were admittedly focused internally for most of the last two years, we grew revenue almost 30% to $22.8 million in 2007 from $17.7 million in 2005.

This is a testament to the relevance of the Glowpoint services and the power of our stable recurring revenue model.

At the same time revenues were increasing, our cost-cutting efforts stabilized our cost of revenues, and with over $5 million more in revenue at the end of 2007 we are essentially at the same cost of revenues as were at the end of December, 2005.

This is a clear indication we have been able to and continue to leverage our infrastructure and resources to drive additional revenue.

With the stabilization of our cost structure, we've seen gross profit increase approximately 176% to $7.6 million from $2.8 million during this 2-year period, and operating expenses have declined 37% to $12.2 million in 2007 from $19.4 million in 2005.

These results didn't happen by accident and clearly didn't happen overnight, but are the result of a methodical approach that consists of focusing on the current challenges, and laying the foundations for where we are going to focus next.

And that next focus is to get to cash flow positive.

And the way for us to get there is to grow revenue, and the right kinds of revenue, at increasingly higher margins.

As with each prior phase, it requires different kinds of resources and in some cases an investment to establish the right tools and capabilities.

As Ed goes through the financial review, he will identify some of the key things we've been doing to reshape the organization from an internally-focused, mostly engineering organization to a more externally-focused sales and marketing organization.

In addition, he'll outline some investments we've making in support of VNOC services, which is already yielding results.

I will provide more color on that after Ed's financial overview.

Thanks, Mike.

Hello, everyone.

As I go through the financial results, I would like everyone to be on the same page as we reference key components of our revenue.

For 2007, Glowpoint had four main revenue streams.

Subscription and related services, which accounted for about 66% of our total revenue in 2007, and is generally tied to contracts of 12 months or more.

Multi-point bridging, which is a usage-based service where we enable customers to have video meetings with three or more locations on the screen at one time.

In 2007, this represented about 14% of our total revenue.

Events and professional services, which is a catch-all for revenue derived from nonrecurring services, like the NFL draft or professional services for integration and custom solutions, represented about 8% of our total revenue in 2007.

These three revenue streams represent what we call our core revenue streams and areas we continually look to grow.

The remaining source of revenue for 2007 was our ISDN resale business.

This represented about 12% of our total revenue for 2007, but is excluded from our core revenue stream because it is a very low-margin business and we are not looking to grow this, and in fact are allowing it to slowly diminish over time.

Combining all these revenue streams, we achieved revenues of $22.8 million for the 2007 year, which represents an overall growth percentage of 16.8%.

Focusing on the core revenue streams as I just described them, we saw revenue growth of 20.6%.

ISDN revenue declined about 5.8%, as anticipated.

Our subscription and related services increased 16.2% to $15.1 million in 2007, and 18.2% to $4 million in the fourth quarter of 2007.

An area we targeted at the beginning of 2007 for growth was our multi-point bridging services.

We were successful here as well, and saw the largest single year growth in multi-point bridging services, which increased 21.1% to $3.2 million in the 2007 year and by 24% to $0.8 million in the fourth quarter of 2007.

We continue to leverage our success in certain key verticals, and have invested in some targeted marketing, including our participation in the Sports Video Group event in December and showcasing our Customer Connect solution at some technology showcases.

This focused approach continues to deliver positive results.

Broadcast continues to be a key growth sector for us, with an impressive 137% growth in revenues to $2.6 million for the 2007 year.

In 2007, we landed some high profile customers in Big Ten TV and NASCAR, and we saw expansion of services by ESPN, NFL, and Comcast.

Though there can be no assurance, we anticipate that the revenue for this sector to continue to grow as many of these new services, which were not in place until the later part of 2007, and we continue to work opportunities with new and existing customers.

We have also discussed banking and finance as a new vertical market we would target for growth, primarily because of the launch of our Customer Connect product currently being used at a major bank.

This sector has grown 83% to $1.8 million in the 2007 year.

We continue to the gain traction in the legal sector, and we recently announced winning another large customer who is already driving over $30,000 in monthly multi-point bridging revenue.

We now have over 45 customers in the legal sector, of which more than 20 are among the largest 100 firms in the United States.

Our base monthly subscription revenue increased 20.3% from the fourth quarter of 2007, compared to the fourth quarter of 2006, and by 4.3% from the third quarter of 2007.

Gross margin increased 27.9% to $7.6 million for the 2007 year.

Gross margin as a percentage of revenues was 33.3% in the 2007 year, compared to 30.4% in the 2006 year.

This was primarily due to continuing efforts to eliminate network costs and ongoing activity involving the renegotiation of rates and the migration of service to lower-cost providers, as well as a reduction in depreciation costs.

Excluding the low-margin broadcast customer integration transactions that occurred in the third quarter, our gross margin percentage was actually 30.4% for the 2007 year.

Gross margin increased 41.9% to $1.7 million in the fourth quarter of 2007.

Gross margin as a percentage of sales was 30.9% in the fourth quarter of 2007, compared to 26.2% in the fourth quarter of 2006.

Our loss from operations improved to $4.6 million for the 2007 year from $8.5 million in the 2006 year.

Net cash used by operating activities was $1.9 million for the 2007 year, compared to $4.7 million in the 2006 year.

It is important to highlight that included in the operating expenses for 2007 was approximately $1.2 million in auditing, legal, and consulting expense related to the restatement, audits, restructuring of the senior secured notes, filing the proxy and the S1, tax consultants and our Sarbanes-Oxley compliance project.

We anticipate that expenses for these types of activities will be drastically reduced for 2008.

While our yearly loss from operations was reduced 46%, we want to note that we began to invest in some things that we felt absolutely necessary as we start to become more sales focused in order to support a new line of revenue for 2008 called telepresence VNOC services.

We began to fill empty positions in our sales and marketing organization, as well as upgrades to key equipment, in order to support HD and telepresence.

In addition, we ramped up marketing efforts by attending a number of targeted events in the fourth quarter, and increased visits with our channel partners.

This was part of the reason for the increase in selling, general and administrative expenses to $3.3 million in the fourth quarter of 2007 from $2 million in the fourth quarter of 2006.

Another reason for the disparity between the fourth quarter of 2007 and the fourth quarter of 2006 is that in the fourth quarter of 2006, the company took various steps to eliminate non-essential spending, including a cessation of some sales and marketing efforts, travel, and a freeze on the hiring of needed employees in order to achieve positive operating income.

This effort was successful, with the company being able to eliminate the exercisability of $6.2 million of the Series B Penny Warrants, which would have caused significant dilution in the company's outstanding shares.

We want to make sure investors understand that it would be inappropriate to attempt to compare the expenses from the fourth quarter of 2007 with those of the fourth quarter of 2006.

Our interest and other expenses decreased primarily because in December 2007 we amended the registration rights agreement related to the senior secured notes, which eliminated the $2.8 million derivative liability related to the beneficial conversion feature that had been accrued as of that date.

As a result of the improvements in the net loss from operations, the elimination of the derivative liability related to the senior secured notes, and the $0.8 million gain on the redemption of preferred stock in September 2007, our net loss [attributable] to common stockholders decreased to $4.9 million in the 2007 year from $11.1 million in 2006.

We will not go into detail on the nuances of the derivative liability transactions, but suffice to say that they are complicated transactions that have a noncash impact on our statement of operations, working capital and liabilities.

We have provided a very detailed explanation of the derivative liability in the management's discussion and analysis section of our annual report on Form 10-K, and would be willing to have one-on-one sessions with any investors interested in a more in-depth understanding.

I would like to update everyone on another item this is pretty prominent on our financial statements.

We had allocated a large accrual related to the potential liability for sales taxes and regulatory fees for prior years.

We have been diligently working through the process, and have been able to determine in most cases what, if any, payments are due.

While there are no assurances as to the outcome, our conversations with various states have gone well.

We believe all our estimates and assumptions are reasonable, and will be sustained upon audit, but actual liabilities and credits may differ significantly as we complete discussions with the various states.

For the 2007 year, we reduced the accrual for sales taxes and regulatory fees, based on filings of voluntary disclosure agreements, correspondence with various states, and our reassessments based on the passage of time, to reflect $95,000 for lower estimates of our liability.

On a final note, we ended the year with $2.3 million in cash and feel, barring any unforeseen cash outlay or collection issues, that we have the required capital to achieve positive cash flow.

We are encouraged by the relationship with Polycom and other telepresence providers, and the opportunities they are bringing us into, and as a result we will begin tracking and reporting monthly recurring and related revenue associated with telepresence VNOC services beginning in the first quarter of 2008, and we anticipate VNOC's revenue to be a major contributor to overall growth in 2008 and beyond.

With that, I'll pass it back to Mike, who will provide some final remarks before opening up the call for questions.

Thanks, Ed.

Yes, we are all encouraged by the activity related to telepresence VNOC services so far this year, and it is definitely anticipated to be a key contributor to overall growth.

If you recall, I announced on our third quarter call that we had signed an agreement to provide a branded managed service offering for Polycom.

We are anticipating that VNOC opportunities have the potential to drive three types of revenue.

The primary source of revenue will be monthly recurring subscription fees related to our management and support of telepresence rooms.

We also expect one-time customization and professional services fees for creating customer-specific solutions and services.

We also expect that some percentage of VNOC opportunities will drive network revenue, whether it is the actual network to support telepresence calls, or network services to interconnect a customer's network with Glowpoint to enable remote management of their rooms.

You may also recall that I said I didn't expect any revenue related to VNOC services until the second quarter; but I am happy to say that we started driving some initial customization revenue related to VNOC services in February.

In this case, we were asked to customize our web scheduling package to integrate with Lotus Notes.

We also landed our first VNOC deal last week for two telepresence rooms.

While the initial revenue is modest, it is earlier than expected and certainly confirms our thoughts about opportunity.

In fact, we are extremely pleased with the relationship and the opportunities we are starting to get involved with, and we look to add key relationships that will help us drive many more opportunities.

I've clearly stated on a number of occasions that we are the perfect partner because of our ability to support any video solution, whether it is a telepresence room or a traditional video conferencing system.

Further evidence that supports our position is some more good news about Glowpoint's involvement in telepresence.

Glowpoint has agreed in principle to a deal where we will be providing a branded telepresence service for Cisco telepresence rooms for a large multinational network provider.

The provider will be selling Cisco telepresence rooms and the branded VNOC services through its own sales force and distribution partners around the globe.

Included with the deal will be an initial customer with locations in India, the U.S., and other cities around the world.

With this new relationship, Glowpoint is now providing branded managed services for two of the four primary telepresence solutions.

In addition, we are involved in a number of opportunities with Tandberg.

We are actively seeking other formal arrangements in an attempt to give us the chance to be involved in as high a percentage of opportunities as possible.

These recent developments in the early success in landing VNOC business clearly justifies the investment we made in the fourth quarter, and early this quarter, in preparing to support VNOC services on a global basis, and firmly positions Glowpoint to benefit from the adoption of telepresence.

We are seeing an interesting trend as it relates to telepresence opportunities, in that while customers may start with three or four telepresence rooms, many of the conversations have spilled over into how Glowpoint can support the non-telepresence rooms as well.

While it is too early to develop a consistent ratio, we have been involved in opportunities where for every one telepresence room a customer was thinking of installing, they were also planning 10 non-telepresence rooms.

If this trend continues, we believe our telepresence opportunities could quickly expand into larger opportunities for us to drive additional services and revenue.

VNOC services are certainly an exciting new revenue source for us, but we have not lost focus on some of our other key growth areas.

In 2008, we will continue to look to drive our subscription services in multi-point bridging revenue.

We have seen six consecutive quarters of growth in subscription and related revenue, which is a good indication of the stability of our customer base.

In 2007, over 50% of our new contracts were multi-year deals, helping to ensure a stable revenue base from which we can grow.

Another important part is of our revenue is our event revenue.

We will once again support the NFL draft in April and the NBA draft in June.

One of the challenges this revenue stream causes is a temporary jump up in revenue in the quarter that the event occurs.

For example, we had the NFL training camps in the third quarter of last year, but no such event in the fourth quarter.

This gives the impression that revenue has gone down or is flat quarter-to-quarter.

We will do our best to break out these revenue sources so you can clearly see what constitutes recurring and what constitutes one-time events each quarter.

So for 2008, we will look for VNOC revenues to ramp up as we proceed through the rest of the year.

We will look for continued growth from our core revenue streams, especially subscription and multi-point bridging.

And as I've indicated before, I don't think it's unreasonable for us to see our core revenue grow by 30% in 2008.

When major manufacturers and global network carriers look around to find a partner and select Glowpoint, that says something about what we have to offer, and it reaffirms that we are a key player in the industry.

This is an exciting time for the Glowpoint team.

Increased awareness of video communications, as a result of Cisco entering the space; global economic and environmental concerns; and the unique demands of telepresence have combined to create the perfect storm of opportunity for Glowpoint.

To give you an idea of the potential for growth in the video industry, Cisco released a white paper that outlines their vision of how telepresence will grow.

By 2010, they anticipate over $1 billion in revenue from equipment sales, and believe the network and managed services revenue created by telepresence will be over $4 billion by 2010.

Video network and managed services is what we do.

If Cisco is fractionally correct in their predictions, given our relationships, our channel partners and existing customer base, it is clear that it isn't a question of whether Glowpoint can grow, it's how much and how fast.

We are thrilled with the opportunities this perfect storm is creating, and will strive to turn them into revenue as quickly as we can, with a short-term goal of finally achieving cash flow positive this year.

Thank you.

We'll now open it up for questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Nick Gogerty with Fertile Mind Capital.

Please proceed.

Hi, Mike.

Sounds like you guys are making progress in the quarter and doing very well.

Telepresence does sound like it's going to be explosive growth, with the recent announcement with Halo rooms, HP's offering, and the Marriott Hotel.

I wonder if you would speak to anything about that, and what kind of growth you expect to see in bridging revenues, which should be explosive as well, and any hints about growth and indications there?

Okay.

Well, first of all, the HP Halo announcement is one of those ones that I think you're going to start seeing more and more.

Everybody wants to get in the game.

Clearly the opportunity to have public rooms is a great opportunity, and we think it's going to catch on.

We are in fact involved in opportunities like that for public rooms.

I can't disclose what rooms in what hotels, but I will say that we are involved.

So the involvement of HP and Cisco, and the announcements that they are making, are great for us and great for the industry, because they create opportunities.

They also -- the costs of these telepresence rooms are very expensive, and so what happens is customers may look for telepresence rooms as the initial option, and then look around and say well, can we get this kind of quality without going full telepresence?

And the answer is yes, if you use Glowpoint.

We absolutely we're excited about that.

From bridging - a bridging perspective, yes we are seeing growth.

We announced earlier this month that we are seeing about a 25% growth already in the first two months of the year.

We hit another record month in bridging revenue in February, I believe; the most revenue that we've had so far.

So we are seeing that and it does drive - more adoption drives more use of these types of services, and we will continue to try and drive growth in that space.

Great, thanks.

Just one other point.

Your VNOC service sounds like a very, very interesting layer to add on top of this.

I see you filed some IP on it.

Would you care to comment on the expectations in VNOC for the year going forward and the nature of the IP?

Sorry, yes, you should ask that question.

So, you know, our thought is that we could start driving anywhere from 3 to $4 million in annualized revenue.

How much actually hits this year is a little difficult to tell, because we're not yet sure of the sales cycle on this, and how long it's going to take, but what we would see or anticipate is more and more, obviously, deals coming in.

The interesting thing about these deals is, you know, the one we just landed is a nice small one.

It's two rooms, and that's going to drive somewhere around $5,000 in month-to-month recurring, but what we're seeing are deals where there are 5, 15, 20 telepresence rooms.

Those are, you know, 30, 40, $50,000 a month monthly recurring deals.

So if we start landing more of those earlier in the year, it could drive more revenue.

Suffice it to say though that we anticipate a good amount of growth out of that, in the neighborhood of 3 to $4 million annualized.

And then so as we continue to build that momentum, you know, that - since we have a recurring revenue model, which is a beautiful thing, it just keeps adding on.

So we are anticipating growth in '08 related to that, and then once we have a full year of that on in '07 then - I mean in '09, we'll get the full benefit of the ones that were landed here.

The other thing that needs to be considered is there are other services - or revenue related to the VNOC service.

I mentioned one already.

We derived revenue early this quarter, in the first quarter, based on customizing some of our web scheduling package to work with Lotus Notes.

The other component is network.

We don't know what percentage of these customers are going to want the Glowpoint network as well, or network connectivity.

And you're talking about bigger bandwidth.

You're talking about instead of $499 a month, which we charge for one video system, maybe 3 or $4000 a month.

So we're very excited about it.

Great.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Joe [Plumbough] with Smith Barney.

Please proceed.

Hello, Joe.

Joe?

And Joe just dropped from the queue.

Your next question comes from the line of Graham Taylor.

Please proceed.

Hello, Graham.

Hi, how are you doing?

All right.

Good.

I'm a private investor in Glowpoint.

I have a quick question.

You gave guidance in the financial statements and financial reports on revenue growth for 2008.

Do you have some guidance on margins and G&A expenses as well?

We really -- we haven't.

From a G&A expense perspective, what we indicated - the big chunk of expense that we talked about, the $1.2 million that is related to the audit and some of things that we went through, you can expect those to go away and decline.

But we're getting pretty much to the bottom of being able to cut more and still operate the business, so operating expenses will decline a little bit more, and I think they'll start leveling out.

From a gross margin perspective, we're constantly trying to grow that.

Each new opportunity is north of 55% gross margin.

We are battling some old revenue that is low margin, and so how fast we can grow, you know, the gross margin is a little bit difficult to predict because it depends on how fast some of that low margin goes away and the new margin comes on.

But suffice it to say that we do anticipate gross margin growing beyond what we've done so far.

Great.

Thanks very much.

(OPERATOR INSTRUCTIONS) Your next question comes from the like of Jack Gilbert.

Please proceed.

How are you?

All right.

That was a good report.

I have a couple - just a question I've asked over and over.

We talked last conference call about a bank and a bank relationship, and I was hoping that this quarter we would get some kind of announcement on the tape on who it was and how big and et cetera; now today, you just mentioned that we have an agreement with Cisco and a partner in India.

Are we ever going to be able to talk about these things so that our stock price would maybe appreciate a little?

I would love that.

Let me clarify that.

First of all, we don't have an agreement with Cisco.

We have an agreement with a global network provider who sells Cisco.

Okay.

And I will tell you that it is so frustrating to us, but we are still unfortunately little old Glowpoint and it's very difficult to get some of these partners to talk about us and allow us to talk about them.

The banking application, by the way, is expanding.

They just added another four or five branches, so that's going well.

And we do hope to be able to get some news out about that in the coming months.

We did get some good positive signs from them that things are moving well with that, and we're going to continue to work on it.

One of our challenges has been, and as Ed mentioned in his part, we did start investing, and we brought on a marketing guy, after a long time of not having anyone in marketing; marketing was essentially me and Joe, our COO.

We did engage an IR firm late last year, and we're starting to get out there and do road shows and talk to folks about what we're doing and get the word out.

So it just takes time to kind of get that that stuff up and get us back into the mix of articles being written.

You kind of have to be on that constantly, and we are doing that.

We have definitely shifted to that more external focus, and the fact that we hired someone in marketing I think should be an indication of that.

Okay.

Thank you.

(OPERATOR INSTRUCTIONS) And at this time I show no further questions.

I would now like to turn it over to Mr.

Michael Brandofino for any closing remarks.

Thank you.

I really appreciate everybody coming on, and I appreciate those investors who have stuck with us throughout this process.

But we are extremely excited about where we are.

We feel the wind is behind us now; we have momentum.

We have all the right pieces in place.

We have people in the industry recognizing us.

So we're just going to keep focusing on trying to drive new revenue, trying to get more news out there about us, and continuing the trends that we've shown over the last two years, and continue to really drive, ultimately, to cash flow positive.

Thank you, everybody.

We appreciate your support.

Thank you for participating in today's conference.

This concludes this presentation.

You may now disconnect, and have a great day.