Oblong Inc (OBLG) 2008 Q1 法說會逐字稿

Good afternoon, everyone.

Welcome to the Glowpoint first quarter 2008 earnings conference call.

Before we begin, I want to remind listeners that this call is being web cast live over the internet and that a web cast replay will also be on the company's website www.glowpoint.com.

following the call.

The call is being hosted by the Glowpoint'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.

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 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 web cast may include non-GAAP financial measures within the meaning of SEC regulation G.

Thanks, Ed.

Hello, everyone.

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

Thank you for joining us today.

What an exciting time to be involved in the video communications space.

You can't seem to go a single day without some news item or mention of telepresence.

Much of this awareness is being driven by the marketing muscle of CISCO who has taken the lead in the drive to conquer this final frontier of communications.

The most encouraging aspect of the introduction telepresence and its growing popularity is the realization by the manufacturers that manage services play a critical role in the success and adoption of telepresence.

Companies like Polycom and CISCO are finally embracing what Glowpoint has represented all along.

This understanding of the role a service provider can play in helping customers deploy and support telepresence is what led to our relationship with Polycom to provide a branded telepresence service offering and signing a new agreement with TADA communications to do the same for CISCO telepresence rooms.

In addition to the former relationships we are increasingly being sought by other carriers and hardware re-sellers.

to participate on bids for telepresence services.

On our last call we introduced our video network operations center service also known as VENOC as a new revenue stream that we felt would be a catalyst to fuel growth in 2008 with the expectation that we would begin driving revenue in the second quarter.

We are happy to report that we have completed our first VENOC deal in the middle of March, and those rooms came online last week, starting the flow of monthly recurring revenue from VENOC services in Q2 as we predicted.

I also mentioned on my call in March that we had agreed in principal with a large international carrier to provide a white label VENOC offering for CISCO telepresence rooms.

We completed the agreement with TADA communications in April and the white labeling program and initial rooms in this engagement are under way and set to go live this week.

The video industry is going through significant changes and this early success in VENOC represents another example of how Glowpoint has been able to adapt and remain relevant regardless of how fast technology changes or who enters the space.

While VENOC and telepresence certainly represent an important new aspect of our business it is important to note that we continue to remain focused on our plan of driving double digit growth in our core revenue and had an an impressive jump in gross margin for the first quarter.

We continue to grow revenue In key verticals of broadcast which grew 63% in Q1 and the banking and finance sector where we saw an increase of 50% compared with the same period last year.

Once Ed completes his comments on the results we announced today I will spend some time focusing on the impact telepresence is having on the industry and its benefits to Glowpoint.

Hello everybody.

On the last call we took some time to explain the various components of our revenue especially what we call our core revenue.

To remind everyone, our core revenue is revenue derived from the products and services that we are overall strategic goals from a growth, margin and core competency perspective.

We believe that these products and services offer the greatest prospects for high margin sales and growth and therefore, our sales and marketing efforts are primarily focused on promoting them.

Services that makeup our core revenue are subscription related services, multipoint bridging, events and professional services and VENOC.

We are focusing on these because they are in line with our corporate strategy and accordingly meet our margin contribution requirements non core revenue includes our ISDN re-sale business and the integration projects which include integrating various hardware components or procuring hardware components for our customers which we do from time to time in support of some high profile customers.

By focusing on our core revenue streams we once again yield year over year double digit growth in the first quarter of 2008 with subscription related revenue increasing 18.2% to $4.1 million over the first quarter of 2007.

Revenue from multipoint bridging achieved a new high of $1 million in quarterly revenue which is up 16.1% despite some earlier seasonality caused by Easter falling in March this year.

Our event and professional service revenue also grew in the first quarter of 2008 as compared with last year due to a new event based customer using Glowpoint to produce a sales kick off at 16 remote locations and a professional services engagement for customization of our scheduling package from one of our telepresence partners.

As a result special events and professional services increased 68.2% to $.3 million from $.2 million in the year ago period.

Overall revenue was impacted by the intended decline or low margin ISDN re-sale revenue and the fact that we had a $.4 million one time integration project in the first quarter of 2007.

Non core revenue decreased 47.1% to $.6 million from $1.2 million in the year ago period.

You will notice we have clearly broken those components out in our management discussion analysis in our form 10-Q to make is it easy for investors to see how these core and non core revenues change from quarter to quarter.

Total revenue increased 6% to $6 million from $5.7 million in the first quarter of 2007.

While the decrease in non core revenue impacts our overall revenue growth, it had the desired positive affect on our gross margin.

We have shown continuous improvements in gross margin over the last two years but we experienced a higher than usual jump in the first quarter of 2008.

Gross margin increased 51.7% to $2.6 million from $1.7 million in the first quarter of 2007.

Gross margin as a percentage of sales was 44.1% compared to 30.8% in the first quarter of 2007.

The gross margin in the first quarter represented a 750 sequential basis point improvement compared to the 36.6% gross margin in the fourth quarter of 2007.

A combination of some high margin events and professional services revenue, the lack of low margin integration projects, the reduction of network costs are ongoing activity involving the renegotiation of rates and the migration of service to lower cost providers and the continued decline of ISDN revenue resulted in a 14.4% decrease in our cost of revenues leading to 1,330 basis point improvement in our gross margin compared to last year's first quarter.

As part of our long-term strategic goal of achieving consistent profitability and driving shareholder value, management remains focused on increasing our ability to leverage our fixed infrastructure and resources by reducing the cost of revenues while at the same time growing the right type of revenue.

It should be noted that this type of margin improvement should not be expected on a regular basis although we do anticipate that we should be able to keep quarterly gross margins at or above 40% as we continue to drive new revenue that exceeds 50% gross margin whenever possible.

The margin improvement and increased revenue contributed in helping to decrease the loss from operations by 63.9% to $.4 million from $1 million in the first quarter of 2007.

In the first quarter of 2008 , we achieved positive adjusted EBITDA as defined in our senior secured notes agreement.

Therefore, the interest rate on the unpaid principal of the senior secured note did not increase by the 200 basis points.

Adjusted EBITDA differs from traditional EBITDA in that we are able to include non-cash charges related to deferred compensation, the increase in the fair value of the derivative financial instrument and the amortization of deferred financing costs While we are extremely pleased to have met this requirement for the first quarter of 2008 we believe it is important to inform investors that the adjusted EBITDA goals are not to be used as guidance for future performance and failure to achieve these goals in future quarters would cause the interest rate on the senior secured note to increase by 2% in the first quarter after we failed to meet the adjusted EBITDA requirements.

We have had a couple of updates in our negotiations with various states as it relates to our ongoing efforts related to sales, taxes and regulatory fees for the period ending March 31st we reduced the accrual for sales taxes and regulatory fees by $71,000 to reflect revised estimates.

We ended the quarter with $2 million in cash and feel barring any unforeseen cash out lays, collection issues or VENOC equipment purchases that we have the required capital that to achieve positive cash flow.

We are encouraged by the relationship with telepresence providers and the opportunities they are bringing us into and beginning in Q2 2008 we anticipate that VENOC revenue to be a major contributor.

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

Thanks, Ed.

I said in my opening statements that our industry is going through some significant changes and I want to provide some more details on what I mean and the potential impact on Glowpoint.

There is a perfect storm brewing for the video industry.

The components creating this perfect storm are the entrance of a power house company into the space, the rising cost of fuel, the globalization of businesses, the slowing economy, global warming and a change in the demographics of the work force where the culture is comfortable with and is expected to use video communications.

The results of all these factors coming to play at once is an increasing awareness and interest in video communications and in particular telepresence.

However along with increased opportunities this perfect storm has created some short-term turmoil and a call to action in the industry.

The traditional manufacturers have been forced to scramble to combat the development and marketing muscle of CISCO.

Because their global presence, financial resources and access into many companies at executive levels gives them the ability to see telepresence solutions around the world.

This has put the incumbents in the space on the defensive and trying to figure out ways to stem the tide and counter CISCO's aggressive intrusion into video.

The fact that many carriers use CISCO products in their networks and often re-sell network equipment enables them to put significant pressure on the carriers to create services that are designed specifically to support the telepresence -- the CISCO telepresence solution.

The good news for Glowpoint is it positions the carriers without a solution to support non-CISCO telepresence and traditional videoconferencing with Polycom and [Tambor] making up over 80% of the installed base of video systems around the world, carriers need to have answers for customers not willing to go down the CISCO path.

It also appears as if the introduction of new players and telepresence into the mix is confusing customers because customers need to weigh the pros and cons of going with a telepresence solution or one that leverages their existing investment into traditional video conferencing.

The result of this confusion seems to be a sudden increase in the request for proposals and a significant amount of time spent evaluating interoperability of various solutions.

Finally, telepresence requires a significant amount of band width to operate and due to the fully integrated nature of the numerous components of the telepresence room it is difficult for companies to support on their own.

Add to this the complication of trying to figure out how to perform business to business telepresence calls and we are seeing more and more customers throwing up their hands and demanding their vendors provide managed service solution that takes care of it all for them.

So the question becomes, how does Glowpoint fit into this perfect storm and is the turmoil good or bad for Glowpoint?

With customer supported in 1200 cities and 35 countries around the world Glowpoint has more experience supporting IP video than anyone else in the industry.

Glowpoint is the only service provider with the unique combination of IP network engineering, video engineering, application development and telecommunications operational support already in place and years of experience in developing and supporting service solutions.

Much of the intellectual property developed to support the traditional media conferencing services was designed to be flexible and scalable and is easily been adapted to support the demands of telepresence.

As a result we are increasingly looked to as the preferred partner for manufacturers, researchers and carriers when they are responding to proposals for telepresence and added services.

In addition to the agreements already in place, Glowpoint recently signed a wholesale agreement with Intercall and established relationships with the various carriers and informal relationships with a number of CISCO, Polycom and Tambor resellers to co-bid on telepresence opportunities.

This has led to Glowpoint being included in a growing number of proposals in recent months.

As an example, recently a major investment firm issued a request for proposal to support 16 telepresence rooms.

The day it was issued Glowpoint received requests from four different partner sources to bid with them and as a result we are included in at least four proposals this company received.

Our neutral position, expertise across all platforms, and our unique capabilities makes us a logical choice to partner with and surely increases our odds of winning more business.

Our managed services solutions haven't gone unnoticed as part of their strategy to drive carriers to be CISCO-centric, CISCO was compelled to create their own Glowpoint-like services with the intent of making it easy for carriers to promote their.

telepresence solution.

You may have seen announcements recently from AT&T and BT saying they would be selling the CISCO remote managed services.

We would expect more carriers to jump on the bandwagon and Nortel has also jumped into the video services game and announced they will be supporting Polycom and Tambor telepresence rooms..

When these announcements hit we received many inquiries from investors concerned that Glowpoint is somehow going to miss out on opportunities as a result of competition.

Now I think some folks are missing the big picture and should recognize that where there is competition, there is demand.

Glowpoint feels very comfortable that we can compete effectively based on our experience and capabilities and we are positioned well to meet the growing demand for managed services.

This is very evident in the activity levels and pipeline with the number of opportunities we are involved in has increased as more companies need to include our services in their bids so they can compete.

We view the entrance of these newcomers into the video services space as an opportunity to expand the market, although one of the obvious concerns we have is whether Glowpoint can compete head to head with some of the larger companies.

We know we can compete effectively from a service and capabilities perspective -- but to be certain that our size isn't a factor, we have taken major strides, especially in recent months, to strengthen our position and opportunities against larger companies by moving up the sales chain.

Our white label relationships with manufacturers and carriers positions Glowpoint as an under the cover solution and interjects us right at the beginning of the sales process when customers are making their equipment, network and services decisions.

Since we were actually brought into these opportunities as the underlying provider of a white label service it is our partner's name that is seen and not Glowpoint's leveling the playing field for us.

We will look to create more relationships and use this approach where ever we feel the need for air cover against some of the larger players.

As it relates to enabling businesses to perform business to business telepresence and providing an immediate answer to this challenge.

Glowpoint stand ahead of anyone providing a practical working solution today.

From the very first day we turned up customers on Glowpoint we knew that helping businesses use video to communicate outside of their organization was an inevitable requirement.

As a result, our service was designed to support business to business video calls and our customers have enjoyed this feature of our service since 2001.

The fact that we already appear with networks around the world and already have solutions built to handle intercompany video positions Glowpoint as a logical choice of companies looking to provide this type of capability in the telepresence space.

In fact, as we prepared for the support of Polycom's telepresence solution we designed and implemented a solution to enable calls between our telepresence room which is on the Glowpoint network and Polycom's rooms which are on a private network.

So, while CISCO and some careers have announced they are working on this capability and plan to offer a solution in the future we already have working installations where business to business telepresence is being used.

Hopefully it is clear that we have our hands on the pulse of what is happening in the industry and as a result Glowpoint is firmly entrenched in the telepresence wave.

Naturally the question on most people's mind is how big is that wave?

Industry analysts like IBC and Frost and Sullivan predict the market size for telepresence managed services will grow to 3 to $4 billion over the next three years.

This estimate includes both network and remote managed services.

We invested in the first quarter by buying some equipment and training our people to support the Polycom telesolution and it is already paying off with our first Polycom telepresence customer already online.

As we enter Q2 we needed to make some investments in order to prepare for supporting the CISCO telepresence solution and here too we are seeing immediate results as our first CISCO telepresence customers are online this week.

We have made these investments in telepresence cautiously with the full knowledge they have delayed in cash positive in the number of months.

However, it is critical that Glowpoint adapt and stay on top of these changes in technology as the industry changes.

In order to provide some indication of the scale and growth potential for VENOC let me provide a glimpse of 11 deals we have been involved with in just the last two months.

In these 11 deals, the average recurring revenue across the 1 1 opportunities is $47,000 a month in monthly recurring or an equivalent of $564,000 of annualized revenue.

The opportunities range from $20,000 per month to the largest which is valued at $128,000 per month, which by itself would equate to an additional $ 1.5million in annualized revenue.

In all, just these 11 opportunities represent over $523,000 in new monthly recurring revenue which annualized equate to over $6.2 million.

We want to make it clear we are not saying we will land all of these nor are we stating that this is all that's in our pipeline this is a snapshot of deals we were pulled in into in just the last two months as it relates to the telepresence VENOC So, clearly we are taking advantage of the perfect storm swirling around the video industry..

We have new relationships created in the last few months that are yielding results.

Our pipeline of opportunities has grown and include deals with Polycom, CISCO and Tambor telepresence solutions.

We anticipate continued year overyear double digit growth in our core and ever increasing contribution from our VENOC revenue as we proceed the next few quarters.

Over the years Glowpoint's technology and business have proven to be resilient and flexible in adapting to changes in the industry and I feel we have proved that again with telepresence and have taken the steps required to be a critical piece of the puzzle for the foreseeable future.

Thank you.

Moderator, please open it up for questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of [Peter Checkavoni] of [Better Receipt] and Company.

Please proceed.

Mike, how are you doing?

One thing -- I don't know if anybody else had an issue with this.

I just received the earnings release from emailed from Heyden.

(inaudible)

We just got word that it did.

For some reason it got a little while for them to get through the tables in the press release and get it out.

One thing I want to talk about you mention the joint venture with CISCO for TADA

It is not with CISCO but it's with TADA to provide services for CISCO telepresence rooms.

Okay.

That was never in the release.

Was that in a release -- a formal release?

It was not in a release and just because we are actually a white label for them so they are going to begin marketing their services and we will be involved in some of that but the existence of the contract is not a problem to talk about.

I want to commend you on what has happened so far, Mike and one thing -- I mean your presentation was excellent.

I think it really put into focus what Glowpoint has accomplished in the last year.

I want to commend you and the team, but one thing I will say obviously the stock price doesn't reflect what we are doing.

I think that can be fair to say.

It is a tough market in general.

I don't know if we have conveyed to the street over the last six to nine months what we have done.

I think this conference call is great but I know Heyden-- we hired Heyden six months ago.

To me it doesn't feel like they have been pounding the table enough or out on the street promoting us enough.

That is my feeling as a shared holder and investor.

Maybe that is by design.

I don't know.

I don't know if you can share any light on that at all.

Sure.

Sure.

Thanks for your comments, Peter.

One thing that it is hard for people to recognize is what is happening behind the scenes and we have been out visiting folks and I spent a number of time -- whenever I go on business trips doing kind of road shows with folks and a good indication for me that we are being followed more is to look at who attends our conference calls and the last call there were about 42 people on the call half of which were folks that Heyden introduced us to.

New people following us and looking at us.

I'm looking at the list now and those same people are on the call again and some more.

We are absolutely getting the attention and people are starting to watch what we are doing.

In addition what we have done and you may have seen I was interviewed in an article recently and we had some coverage in MJ Biz and we actually have some folks here today doing a white paper on telepresence.

We are shifting some money to PR related things and we are trying to get us more recognized and talk as well so we can get some recognition for what we are doing.

Part of the challenge and I talk about this many, many times I'm not willing to risk a relationship with a customer or a new partner to force a press release on them.

Sure.

So that's been our dilemma, We're little old Glowpoint but doing a lot in work with big companies.

So we are trying to address it but I will say that even looking at today's call a good chunk of the people on the call are new to Glowpoint and following us over the last couple months or so.

I think it is frustrating as shareholders that have been in the stock for a while to know that you are in a white hot space given what is happening on a macro basis but it's almost like we are one of the best kept secrets in the space.

That's all I have.

Again, great job by you and your team.

Continue going in the right direction.

Thank you.

(OPERATOR INSTRUCTIONS) Your next question comes from the line of Raul Martineque of Plainfield Asset Management.

Hi Mike, how are you.

Thanks for the presentation.

How are you doing, Raul.

Good.

Could you comment if you are seeing any weakness on the part of the corporations given the recession because I'm looking at their CapEx budgets and cutting back on potentially on large dollar purchases like (inaudible).

I will tell you , if there is any weakness we are seeing it is in may be delaying the decision, but we are seeing really an interestingly high amount request for proposals and what we're seeing-- we have customers who have come to us and show us their cost savings plan and we are in it as a way to help them save money.

Video is definitely seeming to be counter to normal IT spending.

Now, for Glowpoint , the interesting thing is where they may be spending money on telepresence and video they may not be willing to invest in upgrading their network to support that which create more of an opportunity for them to use our network as well as our managed services.

So far at least as it relates to the pipeline we are not seeing an impact in opportunities, but I would say that maybe in the first quarter we have seen it taking longer for people to make decisions.

Deals don't seem to be going away.

It is just taking a

Okay ,

At this time, Mr.

Brandofino, there no calls.

I would like to now turn the call back over to you.

Thank you.

Again, thank you everybody for attending and for those new names on the list I appreciate you listening in and hearing the Glowpoint story.

We are extremely excited about what is going on in the video space and what is going on in Glowpoint.

We know that we had to do investments in the VENOC space but we needed to do so in order to grab some ground, if you will, and it has been working.

We look forward to talking to you in future quarters and reporting on the progress of VENOC services and the rest of our business.

Thank you.

Ladies and gentlemen, that concludes the presentation.

Thank you for your participation, and you may now disconnect.

Have a wonderful day.