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Operator
Good afternoon, everyone.
Welcome to the Glowpoint, 2008, 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, wwwglowpoint.com following the call.
The call is being hosted by the Company's Executive Officers, Co-CEOs, Joe Laezza and David Robinson, and CFO, Ed Heinen.
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.
- CFO
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 in future periods to differ materially from such statements.
These factors, risks and uncertainties include market acceptance and availability of new video communication 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.
I will now turn the call over to Joe Laezza, our President and Co-CEO.
- Co-CEO
Thanks, Ed.
Hi, everyone.
Welcome and thank you for joining us today.
As mentioned, with me today is David Robinson, our Co-CEO, EVP of Business Development and General Counsel, and Ed Heinen our CFO and EVP of Finance.
David and I will be discussing state of business and other matters while Ed will be providing a review of our 2008 financial results.
Once we conclude our prepared comments we'll open the call up for questions.
Let me start by saying that 2008 was certainly another year of considerable progress for Glowpoint.
Progress and growth, even in the face of an historic and continuing economic recession and progress in our corporate and capital structure, which culminated in our recently announced capital restructuring and financing and management changes.
First I will comment on the corporate changes of the Company.
A little over a week ago, the Company announced management changes that included the voluntary resignation of Mike [Brandifino] as CFO and a board member, and the voluntary resignations of two other board members, [Rich Reese and Aziza Med].
These changes are part of the Company's evolution from a research and product development Company to an operating business in a market that has reached a new level of maturity.
We believe streamlining the management team and right-sizing the board reflects Glowpoint's focus on executing its sales and operating objectives as well as contributing to the goal of becoming profitable in 2009.
Mike will be missed, and we thank him for all he's done at Glowpoint over the years.
That said;, however, make no question about it, the remaining management team at Glowpoint is committed to the strategies and tactics required to take Glowpoint to its next level of success.
Upon Mike's departure, David Robinson and I have been appoint combined responsibilities as Co-CEO.
David will be primarily focused on the capital markets and corporate development activities while I'll remain focused primarily on executing against the plan.
Ed Heinen remains our CFO, and the non-officer of leadership includes our operational, technical, marketing and sales and business development owners, and this is the management team that has and will continue to execute on the growth and profitability plans and ultimately capitalize on this exciting opportunity in front of us.
Next is a brief update regarding the economy and its impact on Glowpoint.
The current economic recession and resulting historic market lows have been very difficult to gauge for any business monitoring its impact.
At this point, one thing is clear, even the most sophisticated and successful economists and investors in the world are second-guessing themselves in these uncharted and unpredictable times, and there are various impacts to every business and every person on this globe.
This said, here at Glowpoint we have and will continue to monitor and assess impacts real-time.
When developing our 2009 business plan focused on achieving our profitability, we carefully analyzed our customer base and pipeline of opportunity and prepared a risk assessment with which we conservatively adjusted our expectations to sales and allowance for doubtful accounts based on the recession conditions and we .are pleased to report that we are tracking well.
The ever changing forward-looking impact represents a cautious optimism as it certainly appears Glowpoint is in a good position, and the video industry in general is poised to significantly benefit from these conditions.
Our goal is to simply capitalize on this; and thus far, we are pleased with the results as globe point continues to achieve consecutive quarters and years of positive growth and associated trends toward profitability.
Now I'll turn it back over to Ed, who will review the 2008 financial result highlights.
After Ed, David will discuss our capital restructuring and other matters, and I will finalize by providing some closing thoughts.
Ed?
- CFO
Thanks, Joe, and hello to everyone who has joined us on the call today.
We will now discuss our financial results for the year and the quarter ending December 31st, 2008.
As we do in most calls, prior to reviewing the financials, I want to remind everyone about the components of our core revenue stream.
This revenue is mostly--- mostly monthly recurring model derived from the products and services that meet our overall strategic goals from a growth, margin and core competency perspective.
We believe that the products and services offer the greatest prospects for high margin sales and growth; and therefore, our sales and marketing efforts are predominantly focused on promoting them.
Services that make up our core revenue are monthly recurring and related services which include managed VNOC service, managed network service, conferencing services, which include multipoint bridging and events and professional services.
We remain focused on these because they are in line with our corporate strategy; and accordingly they are margin contribution requirements.
Noncore revenue includes our ISDN resale 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.
Our concentration on core revenue streams has again generated continued, consistent year-over-year growth for the year and quarter ending December 31st, 2008.
With monthly recurring and related revenue increasing 13.7% to $17.5 million for the year, and 5% to $4.5 million for the quarter as compared to the same period in 2007.
Revenue for multipoint bridging increased 15.9% to $3.9 million for the year and 9.5% to $1 million for the quarter.
Our event and professional services revenue, which does not have a consistent revenue pattern because of the event driven nature of the business, increased 38.2% to $0.54 million for the year, and we did not have an event revenue to report for the quarter.
Our noncore ISDN resale business decreased by 15.9% to $2.2 million for the year, and by 24% to $0.4 million for the quarter.
This planned reduction in this low-margin business negatively impacts our total revenue growth, but positively impacts gross margin percentage.
The combined total revenue increased 7.7%, to $24.5 million for the year, 9.1% to $6 million for the quarter.
The Company's growth margin increased 35% to $10.2 million for the year and 20.1%, $2.4 million for the quarter.
Gross margin, as a passenger of sales was 41.6% for the year and 40.1% for the quarter, which represents an improvement of 840 basis points for the year and 370 basis points for the quarter.
The lower margin in the fourth quarter was the result of certain costs incurred prior to realizing revenues for large contracts already won.
More specifically, we increased staff and related costs, which are part of costs of goods sold -- cost of goods in the quarter, to support expanded global 7-by-24 support for contracts that began billing in the first quarter of 2009.
These increased costs decreased the gross margin percentage by 40 basis points for the year and 180 basis point for the quarter.
Our gross margin will normalize as we bill these contracts in 2009.
Our operating expenses increased by 10.1% to $13.4 million for the year and 25.1% to $3.3 million for the quarter.
The primary components of the increases for the year and quarter were approximately $0.4 million for increased salaries, benefits and other costs related to the expansion of our services, 7-by-24 global support, the revenues associated with this increased costs will begin billing again in the first quarter of 2009.
Additionally, there were non-recurring expenses of $0.3 million for estate sales tax audit settlement and $0.2 million for increasing allowance for doubtful accounts to reflect the current economic conditions.
The combined revenue increase and margin improvement contributed to reducing loss from operations, by 30.6% to $3.2 million for the year, while for the quarter, these improvements were offset by the increased costs associated with the service expansion, tax settlement and the increase in the allowance for doubtful accounts, which caused the net loss from operations to increase by 32.7% to $1.7 million.
Overall, in summary, our key operating metrics for the year ending December 31st, 2008, continue to reflect solid and consistent performance, with our revenues and margins increasing, and loss from operations decreasing.
In November and December of 2008 and in March of 2009, the Company entered into a series of transactions that resulted in raising $3.6 million of additional working capital, exchanging or repaying all of our outstanding senior secured convertible notes and exchanging all of our Series A preferred stock for a newly created Series A-1 preferred stock.
These transactions were quite beneficial to the Company.
As a result, the Company is now debt-free other than normal trade payables and existing capital lease obligations, and as a single class of preferred stock.
In addition, we have eliminated the volatility and potential liability that had resulted from the derivative liabilities that previously existed.
And more importantly, prior to March, 2009, transactions, our expectations were that we would need $2.3 million to repay our senior secured convertible notes in September 2010, while now we not only do not have any senior secured convertible notes to repay, but we have an extra $0.8 million of cash in the bank.
We ended the 2008 year with $1.2 million of cash and expect to end the first quarter of 2009 with over $1.9 million of cash on hand.
And with that, I'll pass it over to David.
- Co-CEO
Thanks, Ed.
Hello to everyone who's joined us on the call today.
As both Joe and Ed have highlighted, we've made some very nice progress over the last year.
This is particularly exciting when considering our currently capital structure.
As you've heard Glowpoint is now debt-free, except for lease obligations and normal trade payables.
All of the senior secured convertible notes have either been repaid or exchanged for our perpetual preferred stock.
We no longer have a maturity date looming on the horizon that could call into question our viability.
Instead, customers and partners can see Glowpoint's staying power and can confidently enter into long-term relationships to solve all of their video communications needs.
Besides being debt-free, we've simplified our capital structure.
In addition our outstanding common stock, we only have outstanding options, warrants, and a single class of convertible preferred stock.
Gone are the convertible notes, gone are the provisions that gave rise to derivative liability accounting.
The balance sheet is now quite straight forward.
In order to help you understand the potential delusion from these common stock equivalents, the warrant options and convertible preferred shares, we've included a net in the management discussion and analysis section of the 10-K.
It's around page 34 or so.
This note describes the calculations of fully diluted shares potentially outstanding based on certain assumptions and hypothetical stock prices.
As discussed in that note, warrants and options to acquire millions of shares have exercise prices that are well out of the money or expire over the next year, so they'll probably never be exercised.
The other warrants and options do have exercise prices of less than a dollar; but if the exercise price was paid in cash, the Company would receive over $20 million in proceeds.
.
We believe a more likely scenario would be that the option and warrant holders would acquire their shares of common stock via a cashless exercise.
Cashless exercise will result in significantly less delusion, less shares of common stock outstanding.
To help illustrate this point, we've included a table in the 10-K that shows the number of shares outstanding based on the assumption that the options and warrants are exercised in a cashless transaction at various notional common stock prices.
I should note that this disclosure in the 10-K is for informational purposes only and should not be deemed an indication of any performance level whatsoever.
We've mentioned customers, partners and the industry generally, viewing Glowpoint differently.
This is because of our significantly improved balance sheet that I discussed, but also because of the demand for our managed video service offering.
Our managed video service offering is gaining more and more traction, which, in turn, is creating numerous sales and partnering opportunities for Glowpoint around the world.
These partner opportunities in particular are a critical component of our go-to market strategy and to our continued momentum on our drive to achieve profitability.
I'd also like to elaborate a bit on Glowpoint's position in the market and the market maturity referenced by Joe.
Glowpoint service offering is being accepted in the market and is now recognized as one of the top managed service providers for video.
The demand for Glowpoint's managed video services and solutions has grown significantly.
A great example is our VNOC services.
We turned up our first VNOC service customer in the second quarter of 2008.
In less than a year, we are now supporting or are in the process of activating over 100 telepresence rooms and more than another 500 non-telepresence rooms.
The revenues from this increased VNOC demand as exceed our plan to date and have grown to more than $450,000 of new monthly recurring revenue.
Lastly I'll comment a bit on the current macro-economic environment.
While it's obviously presenting great challenges to all of us, we think it is also presenting a great opportunity for Glowpoint.
Businesses around the world are looking to cut costs without losing productivity.
Travel expenses are among the first to be scrutinized.
Video communications are fast becoming an accepted alternative to always meeting in person.
It's face to face communication without the cost, lost time and hassle of air travel.
We believe that once people begin using video, it will forever become part of their business practice.
Video is quickly becoming a mission critical tool.
Everything we've discussed this afternoon validates Glowpoint's place in the market.
It is taking root, and it is now all about executing.
With that I'll turn it back over to Joe who will provide some closing comments and open the call for
- Co-CEO
Thanks, David.
Thanks, Ed.
So before closing, I'd like to briefly touch on our marketing sales strategies.
As we mentioned throughout the call today, it's all about executing and capitalizing now.
We have positioned our products and services to achieve this specifically focused on video operation services, also known as VNOC, conferencing services and network and business to business services.
This allows us to address the specific demands in the market today and positions the Company's offerings for long-term relevance.
Our sales distribution model continues to expand and remains focused on a direct and indirect strategy.
Our indirect strategy has particularly been evolving with more global wholesale partnerships, like the recently announced AVI/SPL agreement.
Our indirect channel sales continue to perform and grow, with 10% in sales coming from those channels in 2006, 40% in 2007, and in 2008, 60% of our new business closed came from our channels.
Glowpoint will continue to drive these relationships and resulting sales productivity into 2009, and view these as a key part of the going forward growth strategy.
So to recap today's call, we have posted continued consecutive growth and margin increase in 2008.
We have made further progress toward profitability and narrowed our loss.
We have eliminated the Company's debt and now have a much improved balance sheet, with strong support from our investors.
We have an established product offering that is being validated by the maturing market for managed video services, and we have grown our global distribution capabilities with new and increased productivity in our indirect channels.
I'd like to leave everyone with one concluding observation.
I'm joining today from a remote location, since I'm actually down in Florida at an event called VoiceCon.
This is an industry conference that has evolved from just a voice-focused event to a full unified communications gathering, and video is the hottest topic.
All of the big players, [Cisco, AVAYA, Polycon, Tanburg, Siemen's, AT&T, BT.] et cetera, are prominent down here, and unveiling new telepresence and video solutions.
Aside from the technology itself, the most validating factor is the focus on managed services and business to business communications or video, as THE critical component to successful unified communications.
I personally have met with several executives and product folks not only with the manufacturers, but enterprises as well, and the validation is unquestionable.
The critical components to successful unified communications and more specifically, video and telepresence is definitely managed services and network services that offer secure business to business capabilities.
This is what we do, and a key differentiator for Glowpoint is that we have both these capabilities inherent in our already proven offering being used today and this is exactly why we are considered THE go-to company for both businesses and the big players in the industry to fill this need.
Thank you.
Moderator, please open up the call for questions.
Operator
(Operator Instructions).
Your first question comes from the line of Jack Gilbert Please proceed.
- Analyst
Hello.
Is this Joe.?
- Co-CEO
It's Joe and Dave and Ed.
- Analyst
Okay.
Well, both Joe and David, this is Jack Gilbert.
- Co-CEO
Hi Jack
- Analyst
I'd like to know what -- I guess I just don't understand the numbers, because when I see the total revenue growth for the year, it's up 3, 4, 5 million, and then you say VNOC that we didn't have until a year ago is 400,000, which is 3 or 4 million.
Why did we only grow for the whole year at, 4 or $5 million?
It just doesn't seem -- the numbers just don't add up to me.
- Co-CEO
Well, before I turn it over to Ed, please remember that VNOC was a new service offering.
The first customer was launched in the second of 2008.
So that was revenue that was being added toward the end of the year.
So those --
- Analyst
Not for the full year?
- Co-CEO
You got it.
- Analyst
Okay.
Do you then -- do you have projections on sales and earnings for the first quarter or for the whole year?
What would you like to see?
What would you -- you started the conversation that you were pleased with the year.
There's not a shareholder out here that, I think, is pleased for the year.
We would like to know what -- what would you be pleased for for the percentage of sales and hopefully being profitable the first or second quarter.
- Co-CEO
Yes.
Hi, Jack.
This is Joe Laezza So first and foremost, I think you heard us reference something called monthly recurring revenue, and I know you know what that is.
- Analyst
Yes.
- Co-CEO
In the past we referred to it as subscription.
It's one and the same.
So at the end of the day, I think it's worth pointing out that this success that we're realizing in services focused on our managed capabilities for these VNOC engagements are, in fact, compounded, and they're monthly recurring in nature, right.
so there's a run rate that comes with it all.
- Analyst
Yes.
What run rate would you like to be at -- for you to be really happy and if everything went to your best-- wildest imaginations, where would you like to be run rate in December -- a year from now in December?
- Co-CEO
No.
I understand.
I mean, the bottom line is that the primary goal in 2009 is to become profitable, Jack.
In terms of what we're projecting, we haven't provided any guidance from a go-forward perspective in the past.
We'd prefer not to continue to support that posture.
But at the end of the day, the goal in 2009 is, in fact, to be profitable as a business.
As far as run rate is concerned I'm not sure we're prepared to start sharing any information like that, but I'm sure Q1 we'll start providing some idea of where we are based on some of the winds.
- Analyst
Okay.
I've got one more question, since you brought up Q1, and the Q1 is over today: will you guys at least be coming out with numbers soon and not wait until the exact very last day, last hour, and be able to talk to us before then on how the quarter is going and what you're expecting?
- Co-CEO
I'm sorry, Jack.
This is Dave.
Part of the reason for today's filing, as you may recall, is we just did a financing around a week and a half ago.
- Analyst
Right.
I know why you're late this year, and I totally -- you've never been this late before, so I'm assuming that it had to do with that.
- Co-CEO
Yes.
- Analyst
The first quarter we're not going to have that, I'm hoping.
We should have numbers out a lot earlier, and so you can see that --
- Co-CEO
We'll do our best to report numbers in a timely fashion.
- Analyst
Okay.
- Co-CEO
We do have 45 days past the end of the close.
- Analyst
I don't want it on the 44th day or the 45th day.
- Co-CEO
I hear what you're saying, Jack.
I would note that the way that Glowpoint does it billing -- and I think this has been explained on past calls as well.
There are two components to Glowpoint's billing, there's the monthly recurring revenue which we bill in advance, on the first of the month.
The second component is a usage-based billing a legacy ISDN resale business.
We don't get those usage reports until the 22nd of the month.
So to actually get that in, re-rate it and bill, it's not as though we have it in the early part of the month.
- Analyst
I did not know that.
I absolutely did not know we didn't get it until the 22nd.
- Co-CEO
Well, we only get it -- yes, that's right.
- Analyst
Okay.
- Co-CEO
It's the usage-based billing is late in the month.
- Analyst
Okay.
- Co-CEO
And that's just the nature of our business.
A lot of other companies in their businesses, they may be able to do a pre-close and accurately project the numbers and then just do the cleanup.
That's not how the Glowpoint business works.
- Analyst
Okay.
Thank you very much.
Operator
(Operator Instructions).
Your next question comes from the line of Sam Schwartz, please proceed.
- Analyst
Congratulations to the new CEOs.
- Co-CEO
Thank you, Sam.
- Analyst
I guess the real question here, guys, is -- this continues to go on and on.
People want to know -- investors want to know.
We've been very patient, at best -- to know when are you going to be cash-flow positive.
I think that's their real question here.
There's been a lot of restructuring.
There's a lot of -- particularly in this era of recession and people are mindful of compensation.
They're mindful of bonuses.
All that has inured to a number of administrations at Glowpoint, and that's the question right now.
When are you going to be self-sustaining, and this is probably a unique window in this industry.
And when is it going to happen?
Why can't we get some color on where this is all going?
- Co-CEO
I'll take that, Sam.
This is Dave.
While there can be no assurance that we'll meet our sales numbers and contain the costs that we have in our 2009 plan, especially in these challenging economic conditions, our goal is to get to and maintain profitability in 2009.
The visibility that we've had so for this year, it's -- it's been tracking well, as we mentioned.
We're not providing any specific guidance.
We haven't done that in the past.
But we will reiterate that our timing is to get there this year and to remain there.
We think there's plenty of opportunity and we have the sufficient funds to allow the Company to achieve the goal at this point.
The other thing that we as a management team are attempting to do is be the team that under-promises and over-delivers.
We don't want to be in a position -- and I think some past shareholders have been concerned about perhaps promises that were made that weren't met.
We want to take the opposite approach.
So again, the goal is under-promise, over-deliver; and for 2009, we do believe we can get to and maintain profitability.
- Analyst
Well, that doesn't answer the question.
I mean, you used glowing statements in your press release today, like burgeoning.
On what basis?
I think it's misleading.
I think, if you're now through the first quarter, you certainly should know what you did the first two months of this quarter.
Where is this Company going?
All right.
And you've announced some what appear to be impressive contractual relationships -- i.e.
, a very large consulting company, which I assume is most likely McKenzie, a very large -- I think you mentioned Polycom and Tanberg, and you mentioned Tada/Cisco.
I mean, if, indeed, you've got these relationships going and you don't have a lot of attrition or churn, as we used to call it, you should be there.
And if not, why aren't you there?
And why aren't you taking remedial action as to cutting your executive salaries as some companies are now doing to achieve cash flow positive and profitability?
I know these are hard questions and not what people like to hear, but they need to be asked and
- Co-CEO
That's fine.
When we reference the burgeoning industry, I the think that's going hand in hand with what Joe was referencing earlier.
Joe is at a conference right now.
The level of excitement about video communications.
It's part -- and unified communications is the burgeoning industry.
Glowpoint sits in the middle of the managed service offering.
That's what we're doing, that's what we're excited about.
That's the burgeoning industry that we're talking to.
And, Joe, I don't know if you want to add anything as to the excitement around this burgeoning industry.
- Co-CEO
Yes.
I think I would add more along the lines of responding, Jack, to the hard question reference.
I don't think there's any question that the team is committed to achieving profitability this year, adding to what David is talking about.
At the end of the day we're going do whatever it takes.
Right?
So that's the goal.
In terms of the contributing factors and some of these very exciting agreements that Glowpoint is engaged with, they absolutely will be the drivers.
So if you just do the math, in terms of attrition and churn as we call it, in the industry, as you've mentioned.
So long as the Company doesn't go backwards, we're making progress.
I think we did indicate very clear that progress is being made.
I wish we could sit here and give you a date, but we've already indicated we won't provide guidance, but, this Company right now -- I'll leave you with this thought -- is in a position to achieve its goal, and we continue to say our goal is to be profitable, and we are committed to doing whatever it takes, even if it does mean hard decisions and hard questions being answered like salary reductions.
At the end of the day that's what we're doing.
We will not take our eye off the ball in that regard.
The better achievement and profitability would be to grow the revenue at a rapid pace by taking advantage of the excitement and these relationships that have been established, and that's where the focus is, and I see a great opportunity to do that.
I'm ultimately right in the mix of it, personally, the last couple days, and we need this validation to make an industry reel, to ultimately drive and mature and allow the video industry to grow up once and for all.
And I think many of the folks on this call would attest to that, and all the ingredients are certainly in place at this point, aside from the fact that real big players are now involved in it, like the Ciscos of the world.
So the bottom line is, we hear your point and understand it very clearly, and we're committed to getting it done.
Operator
And gentlemen you have no further questions at this time.
Actually, you do have a question from the line of [Bill Starr].
Please proceed.
- Analyst
Yes.
I was just wondering are you going to be involved with the NFL draft this year, and number two, is there a chance to get an analyst opinion on the Company?
And the third question is Michael Brandon, used to say that Glowpoint was the glue to the video telapresence future.
Does that still hold true with your vision?
Thank you.
- Co-CEO
Yes.
So yes, I'm happy to announce that we will, in fact, be supporting the draft again this year.
We continue that relationship with ESPN, and the draft coming up, the operations teams are in full effect preparing for it.
An agreement has been inked.
So we're on our way to supporting it this year.
Once again, in the broadcast base, Glowpoint still sees it as a significant opportunity to continue to drive unique applications of video and maintain that vision.
That is one of our strategic solutions, if you will, that we'll continue to pursue.
In terms of being the glue, I didn't use the terms in referencing some of the things that the industry is involved in, unified communications and all the pieces of that puzzle.
It certainly goes toward supporting that concept 100%.
Being the glue that ultimately drives a community that allows for video to become viral and widely adopted, Glowpoint is absolutely the glue And, ensuring that not only the players in the market that provide unified communications solutions determine how to put it all together and ultimately achieve the full portfolio of services that are a requirement now, a check box, if you will, looking at Glowpoint as that glue in that equation and a piece of the puzzle, if you will.
But customers -- this is the real validating factor.
Enterprises ultimately demanding for a partner to achieve their video communication strategy, and being the piece of the puzzle or glue, if you will, to achieving that and holding it all together, because there are, in fact, a lot of moving parts to achieve all this.
So the short answer is absolutely, and we're still very excited about our involvement in the broadcast base .
Operator
Gentlemen there are no further questions at this time.
- CFO
Okay.
Well, with that, on behalf of the management team, we look forward to the coming quarters.
We'd like again to thank everyone for your participation on the call today, and we look forward to your continued support.
Thank you very much.
Operator
Ladies and gentlemen, thank you for your participation in today's conference.
This concludes the presentation.
You may now disconnect.
Have a great day.