Oblong Inc (OBLG) 2009 Q2 法說會逐字稿

Good afternoon, everyone.

Welcome to Glowpoint's second quarter 2009 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 at www.Glowpoint.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 session period following the company's prepared remarks.

I would now like to introduce, excuse me, 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 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 operation 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 over the call to Joe Laezza, our President and Co-CEO.

Thanks, Ed.

So welcome everyone.

Thank you very much for joining us today.

As mentioned with me today are David and Ed.

David and I will be presenting an overview and discussion regarding the state of Glowpoint's business and current industry trends along with some other matters of importance while Ed will provide a review of our second quarter 2009 financial results.

After our prepared comments, we'll open up the call for Q&A.

Well, we'll start with some very good news.

For the second quarter of 2009, Glowpoint has for the first time in its history achieved positive operating income.

So that bears repeating.

Glowpoint had income from operations for the second quarter.

The other good news for the second quarter includes record quarterly revenue and gross margins, and we also achieved both year-over-year and quarter over quarter improvements in other significant areas of our P&L.

These results are evident of our focus to capitalize on the burgeoning market of video communications, while executing our plan and becoming cash flow positive.

We're very pleased with this progress.

Although we also recognize there is much more to do at this stage of the evolution of Glowpoint's business, some challenges remain and with the unpredictable and slowly recovering economic conditions, there may be some impact on future results.

Despite these challenges, the number and size of opportunities continues to be very exciting.

The sales pipeline includes many opportunities that could accelerate Glowpoint's growth to the next level and the economy and buying habits of the business community appears to be showing signs of recovery.

We feel good about our prospects, and assuming we stay on pace and current economic conditions do not deteriorate further, continue to believe that Glowpoint has the necessary traction and capital resources to achieve and maintain financial independence.

We also announced some other exciting news just yesterday, a transaction that resulted in reducing our fully diluted share count by nearly 22 million shares and the elimination of dividends on our preferred stock until 2013.

David will discuss that transaction with more specificity later in the call.

I will now turn the call back over to Ed, who will provide a review of the second quarter financial results and highlights.

Upon the conclusion of Ed's comments, David will comment, after which I will provide some closing thoughts.

Ed.

Thanks, and hello to everyone.

We'll now discuss our financial results for the quarter ending June 30th, 2009.

As we do on most calls, prior to reviewing the financials, I want to remind everyone about the components of our core revenue stream.

This revenue is a 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 these 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.

Our core revenue is comprised of managed VNOC services, managed network and B2B exchange services, conferencing services which include multi-point bridging as well as event and professional services.

We remain focused on these because they are in line with our corporate strategy and accordingly meet our margin contribution requirements.

Non-core revenue includes our ISDN resale business and certain projects which involve the integration of various hardware components or procurement of hardware components for our customers that 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 quarter ending June 30th, 2009, with monthly recurring and related revenue increasing 15% to $4.94 million for the quarter as compared to the same period in 2008.

Revenue from multi-point bridging increased 11.6% from the prior year period to $1.2 million.

These amounts, however, were nominal increases compared to the first quarter of 2009.

Our ISDN resale business continues to decrease as expected and as desired, declining 43.5% to $0.36 million for the year-over-year quarter and no change from the first quarter of 2009.

This remains a planned reduction in revenue consistent with our strategic focus and higher margin recurring revenue business opportunities.

The combined total revenue increased 7% to a record quarterly revenue of $6.95 million for the year-over-year quarter and 7.8% sequentially.

The company's gross margin increased nearly 30% to a record $3.52 million for the quarter from $2.72 million in the same period a year ago and sequentially 16.3% from the first quarter.

Gross margin as a percentage of sales was over 50% for the first time in the company's history, reaching a record 50.7% for the quarter as compared to 41.8% a year ago and 47% in the first quarter.

On our last call, we mentioned that we incurred various costs prior to realizing the associated revenue for large contracts already won.

That expense continues into the second quarter of 2009 without the benefit of a full quarter of revenue.

For example, we expanded our VNOC global support capabilities and incurred the related payroll and other cost associated with this and, more importantly, are directly related to contracts with numerous marquee customers now part of our monthly recurring revenue mix.

The primary component of these increased costs was a 38% increase in our total payroll to 95 employees at June 30th, 2009, from 69 last year.

Our operating expenses increased 9.2% to $3.5 million for the quarter as compared to $3.2 million in the same period a year ago and decreased by $0.5 million from the first quarter which reflects two consecutive quarters of decreasing operating expenses.

Operating expenses as a percentage of revenue for the quarter ended June 30th, 2009, were 52.9% as compared to 66.3% in the last quarter and 56.9% last year.

I should note that we do not necessarily expect that trend to continue, but instead level off and potentially grow slightly.

We anticipate some one time cost in the third quarter associated with Sarbanes Oxley audit and reinvestments in growth and product development.

We had operating income of $38,000 in the second quarter.

This is the first time that Glowpoint has generated operating income since the company was created in the second quarter of 2000.

On our last call, you heard about the implementation of emerging issues task force issue number 07-5, determining whether an instrument or embedded feature is indexed to an entity's own stock which became effective on January 1st, 2009, and required us to account for a derivative liability for our warrant.

This new accounting pronouncement adversely affected last quarter but helped us with this quarter's 10-Q, because our stock price closed below the prior quarter's stock closing price.

Because of this our net income for the second quarter was $406,000.

The warrant exchange transaction mentioned by Joe, which will be elaborated upon by David eliminated the need to account for derivative liability for the $0.40 warrant.

This removed a very volatile component of our financial statement was caused by our implementation of EITF 07-5.

No longer will an increase in our common stock price cause a significant expense in our financial statement or a decrease in the common stock price clause income.

As of August 7th, we will record our final entry for the derivative liabilities related to the $0.40 warrant.

Because our common stock price was $0.45 on that date, as compared to $0.37 as of June 30th, 2009, we will record an expense of approximately $1.05 million in the other income expense section of the financial statement for the increase in the fair value of the derivative financial instrument.

Then the derivative liability of $4.6 million shown on the balance sheet on that date will be transferred into equity.

Therefore, as of August 7th, 2009, the only remaining derivative liability on our books will be for the warrants which expire in March 2010 and currently have a de minimus derivative liability.

All of this is non-cash.

So while it will distort our performance in the third quarter, it does not impact the health of our business or our prospects which continue -- we continue to believe are quite good.

I'll conclude with our cash position at June 30th.

You'll see that we finished the quarter with $0.9 million cash on hand, down $1.1 million from the prior quarter.

This reduction in cash was the result of our having a greater visibility of projected cash being generated from our operations and the cash needs for capital improvements and expansion.

Our projections gave us confidence to pay vendors in a manner more consistent with their terms.

You'll see that we used cash to reduce payables, accrued expenses, and sales taxes by $0.9 million from the prior quarter and we purchased $0.3 million of property and equipment.

While challenges obviously remain, we continue to believe that we have sufficient cash to fund our operations through cash flow breakeven.

With that, I'll pass it on to David.

Thank you, Ed.

And hello to everyone who joined us on the call today.

I'll begin by discussing the transaction we disclosed yesterday, which we think is very favorable for our shareholders.

The transaction included exchanging warrants for common stock and eliminating all dividends on our preferred stock until January 1st, 2013.

As you may recall dividends were scheduled to begin this November 2009, payable in kind for the first year with the issuance of additional preferred stock.

This would have resulted in increased dilution of millions of shares to our common stockholders.

In November 2010, all dividends would then be paid at the holder's election, either, again, in kind with additional stock or in cash.

So either there would be millions of more shares of dilution or cash that could be growing the business would instead be used to make dividend payments.

All of that has now been eliminated until 2013.

The gross value of the eliminated dividends is more than $5.2 million, perhaps as much as $5.7 million with annual compounding.

As for the warrant exchange, we issued one share of common stock in exchange for every 2.25 warrants surrendered that had an exercise price of $0.40.

This translates into effectively a cashless exercise at $0.72.

As a result, warrants to acquire approximately 39.090 million shares of common stock were exchanged for approximately 17.4 million shares of common stock, eliminating a maximum potential dilution of about 21.7 million shares of common stock, and avoiding that dilution was very important.

Also important was eliminating the overhang on our stock.

With about 47.5 million shares of common stock outstanding and these warrants to acquire over 39 million shares in the money at $0.40, the market would just keep pulling back towards that exercise price.

The overhang is now gone and in the process we hope the stock price is free to rise.

There has been a lot of news coverage about warrant repurchases in connection with the TARP funding.

As you may know, financial institutions were issued warrants to the federal government or they issued warrants to the federal government when accepting TARP funds.

The publicly held banks the agreement provided an ability for those banks to repurchase TARP warrants at the fair market value.

It's generally accepted that the value of those warrants is determined using a Black-Scholes value.

Just a few weeks ago, Goldman Sachs made headlines by paying back the full Black-Scholes value of their warrants, which had a price tag of $1.1 billion.

But looking at the full Black-Scholes value of the warrants that we just exchanged yesterday, for Glowpoint with our stock price at $0.46 as it was on Monday, the Black-Scholes value of the exchange warrants was approximately $15.6 million.

Adding this amount to the more than $5.2 million, perhaps as much as $5.7 million of preferred stock dividends avoided, means that the total value of the consideration given is more than $21 million.

So to conclude our comments about this transaction that we closed yesterday, we're very pleased with the vote of confidence that the holders of these warrants and preferred stock have given the company by accepting about 17.4 million shares of common stock in exchange for warrants and foregoing preferred stock dividends with a total potential value of more than $21 million.

We believe their interest now, who aren't holders and preferred stockholders, is more clearly aligned with our rank and file common stockholders than before and will be for the foreseeable future.

Our total outstanding capital stock now consists of about 65 million shares of common stock, about 4,509 shares of convertible preferred stock which converts on a 10,000 for one basis.

So that's another 45.090 million shares of common stock an a fully diluted basis.

We have options to employees outstanding and also warrants.

The remaining warrants include warrants to acquire about 1.7 million shares at an average exercise price of $2.56, and those expire next week.

We also have warrants to acquire about 1.6 million shares with an exercise price of $1.61.

Those expire in March of 2010.

And, lastly, we have warrants to acquire about 1.824 million shares with an exercise price of $0.40.

And those expire in November of 2013.

Prior to the exchange, we also amended all of the warrants to eliminate the provisions that required accounting for a derivative liability.

We hope this issue is, again, behind us.

Though it was never going to require a cash payment, nor bear any relation to the health of the business, it could materially confuse or distort our performance and require a lot of explaining.

Time that is better spent on other things.

We hope that this matter is done for good.

With regard to our business performance, you've heard the record results.

Operating income for the first time in its history, record revenue, record gross margin, and record margin percentage.

And the demand for our services continues to increase.

Glowpoint continues to be recognized more and more among industry analysts and key partners.

I'll just read one reference in a recent Frost & Sullivan report about the conferencing services market.

In this report, Frost & Sullivan identifies key CSPs, which are conferencing services providers, and those key CSPs are defined as -- or identified as AT&T, BT Conferencing, Global Crossing, Glowpoint and Verizon Business.

The report concludes that these key CSPs will continue to dominate the market.

It's great to be recognized with such multi-billion dollar companies.

I would also note that Frost & Sullivan's report basically described the market services the way that Glowpoint does.

From VNOC services which is a term that Glowpoint coined to the components thereof.

This report is very exciting to see.

Glowpoint is defining the industry and leading the way to meet market demand.

On our last call, I also outlined our agenda vis-a-vis financial analysts and investor relations.

When the time is right, we'll be sure to invest the funds and retain an IR firm.

That may happen as soon as later this quarter.

We've noted some caution about conditions that may impact the operating results in the coming quarter.

Historically revenue is not too different in the third quarter than that of the prior second quarter, and as Ed outlined earlier, we know that there may be some increased expenses in this quarter.

Comparatively year-over-year, however, we expect to see growth and we believe the company is positioned for strong and profitable future results.

We think 2010 looks to be a potential breakout year.

For the first time in its history, Glowpoint is poised to be financially self-sufficient.

Also on our last call, I issued an invitation.

After noting that we continued to see that video communications are becoming an acceptable alternative to always meeting in person, meeting face-to-face without the cost, lost time or hassle of air travel and our belief that video will forever become part of business practices once it's used.

And after noting that I encouraged everyone on the call to use video and see how it would transform the way they do business.

So I reiterate the invitation on this call.

If you're planning a business trip in the near future, please contact us and see about using video, either as a precursor to your meeting or perhaps as a complete replacement.

You've invested in Glowpoint and video communications.

If you're not using it, see for yourself what it's all about.

With that I'll turn it back over to Joe, who will provide some closing comments and we'll open the call up for Q&A.

Thanks a lot, Dave.

So before closing, I would like to briefly touch on our sales and marketing progress.

From a marketing perspective, the positioning of our products and services continue to create awareness and excitement.

This is typically the hardest part of establishing a strong offering with high demand.

And I am pleased with the progress we've made on this front.

Not only are we recognized among the industry stronger than ever before, but the endorsements and validation of our services continue to make headlines and are increasingly followed by the industry analysts.

In that recent Frost & Sullivan report that David referenced, Glowpoint was identified in the ranks of the large carrier community, companies like AT&T, BT, Verizon, Global Crossing.

And it's worth noting we're the only non-carrier in the group.

And that was identified in the same report as a unique advantage to capitalize and go on our market share that is projected to grow beyond $2 billion by 2013.

Development of unique bundled solutions with our partners has and will continue to rapidly develop as the positioning in the market speeds up amongst the service providers.

In Q2, we announced new partnerships and initiatives with Polycom, AVISPL, and Affinity Videonet, supporting our TEN alliance program.

For those of you hearing it for the first time, TEN stands for telepresence interExchange network and it's Glowpoint's B2B exchange platform.

Polycom has launched a campaign endorsing Glowpoint's B2B exchange as a solution which is certified with their technologies and has promoted that solution at industry trade shows such as INFOCOM in the past quarter.

The B2B exchange demand is and continues to be on the forefront of our service and product offerings, and we will be unveiling the world's first global B2B video directory in the near future with many other unique offerings for the community of businesses connected to the exchange.

Favorable market conditions continue.

And as I alluded to earlier, the economy and its effect on the buying behavior in the video space appears to be moving beyond the evaluation period and into the more consistent buying period.

An example of this is in the past three to four months, there have been a significant amount of large request for proposals, also known as RFPs.

With enterprises evaluating the options to implement aggressive video programs and awards for these proposals are beginning or approaching.

For Glowpoint, the important measurement has been our involvement and solicitation to respond to these typically very large opportunities.

And the good news is that we are squarely in the game and responding.

We have a pipeline of qualified sales opportunities in excess of $2 million in multi-recurring revenues and over $30 million in contract value.

Our sales distribution model and go to market strategy continues to mature with the focus of nurturing the strategic relationships with our new wholesale partners and continued response to the high demand for Glowpoint enablement with the new interested service providers globally.

We look forward to the coming quarters and feel the opportunities to continue to grow the business is there.

We have a number of exciting developments in the works and expect to be in a position to make announcements in the coming months related to key events with existing strategic relationships and possibly even some new partnerships.

So to recap what we announced and discussed today, we announced positive operating income for the first time in the company's history.

Record revenues and record gross margins and strong growth.

We expect the growth in revenue to continue and position for positive results beyond 2009 and into 2010.

We further simplified our capital structure.

We continue to maintain a strong position in the market and continue to be recognized and validated.

We have a strong pipeline of opportunities and a number of exciting developments anticipated to be announced in the coming months.

And so finally some closing thoughts.

Glowpoint has established in the past that there are consistent trends in the conditions supporting video communications in general.

And we continue to be recognized as a leader and go-to company.

We continue to properly position the company's services and products, nurture and establish strategic relationships and reinforce the operation and preparation for efficient growth, all while growing and narrowing cash burn in the face of poor, yet recovering, economic conditions.

Our priorities will remain focused on driving profitable growth and increased shareholder value.

Thank you.

Moderator, please open the call up now for some questions.

Sure.

(Operator Instructions).

Please stand by for your first question.

And our first question comes from the line of Anthony Marchese with Monarch Capital.

Please proceed.

Hi.

Good afternoon.

Excellent job by the way on the presentation.

I'm new to the story.

I have a question regarding competition and that is, how many direct competitors do you have?

Where do you stand?

I realize you mentioned a bunch of these names that were mentioned in the industry report.

But how many of those are truly people that you see -- you go up against on a -- I don't want to say on a day-to-day basis, but on a constant basis?

Yes, hi, Anthony.

Thanks for joining us.

It's a good question.

The landscape has changed with the advent of HD and Telepresence and Cisco entering into the market.

Naturally that stimulated some new competition for Glowpoint.

We welcome it.

We think it's a positive effect on the demand for our services and the awareness just continues.

So that being said, I would recognize AT&T and BT as fairly new relative to running into and being competitive.

And traditionally, Glowpoint's competition consisting of more of the AV integration community that offered managed services.

So companies like York Telecom, Iformata, BCS Global and the like.

So if we were to describe the entire picture, there's probably six to seven competitors.

But, again, obviously Glowpoint is being considered amongst some of the global and top service providers out there, so.

Right.

That being the case, these competitors obviously on the surface seem by definition significantly larger than you, not necessarily in your product area but significantly larger companies, which begs the question is this an industry that's in its infancy in terms of its development?

And if so, is Glowpoint the company that can remain independent in order to grow significantly, or will, in your opinion, you need to at some point perhaps be acquired or make acquisitions in order to get to the promised land?

Yes, yes.

It's a great observation and question.

At the end of the day, from a relevance perspective, I'll call it, as opposed to competitive perspective, Glowpoint's established a very good position in the market such that the larger providers solicit Glowpoint to ultimately enable their services.

And so I would submit that.

We are positioned to remain relevant independently.

However, that doesn't preclude the company becoming attractive and becoming part of something bigger.

Okay.

Final question for you, and, again, that's related to acquisition, I'm not familiar with this industry, but typically do companies in your space go by, in terms of acquisitions, is it multiples of revenue, EBITDA?

How do -- and, again, it may vary depending on how much -- obviously how strongly someone wants the company.

But in general what are the metrics that are being used, if any, in this industry?

This is Dave.

We haven't seen any acquisitions in our space, per se.

But you're right to focus on EBITDA, multiple revenues, multiple profitability.

I think it has yet to be determined what those are.

Clearly we remain very bullish and in a burgeoning industry you would expect the multiples to be higher.

And also it depends on how you view our service.

If we get into the application service fabric, certainly different multiples apply than if it was the hardware business or the network business or anything like that.

So depending on how you slice it dictates the multiples, but obviously we're believers.

We've invested and think we should be valued accordingly.

Great.

Thank you very much.

And the next question comes from the line of [Jim Wookie] with [WM].

Please proceed.

Hey, David and Joe.

Nice quarter.

Good presentation.

I had a question regarding TEN and talking about the viral growth potential that you see in that area.

Could you show a little more color in terms of how do you plan on launching that in the marketplace?

I see the relationship with Polycom, AVI.

Are we doing anything in terms of maybe partnering with a carrier or carriers?

And could you shed a little light on that front.

Yes, yes.

Hi, Jim.

This is Joe, and thanks for the compliment.

Yes, TEN and the B2B exchange, the business to business and the demand for it, as I mentioned, is clearly at the forefront of our offerings.

And that does translate into both a direct and indirect strategy.

And why I'm prefacing this with that statement is the carrier community very much plays into that.

So at the end of the day to answer the question directly, we are, in fact, at this point working with carriers to effectively enable their IP network offerings, such that their customers that use their services to connect video would have the ability to become part of the global community that TEN represents today, and essentially be able to do secure high quality business to business calling for video.

So a lot of progress has been made.

And naturally Polycom is motivated for Glowpoint to make progress there as well considering the ecosystem that the carrier community represents for them.

So I think in the coming months, there should be more around that to be announced.

And that's some of the things that I talked about relative to excitement in the future.

David.

And I would just add, Jim, the vital nature of this is really going to be driven by the end user customers.

Everything that Joe just mentioned is absolutely accurate.

But it's also going to be the end user customers that when they sign up to TEN, they're going to be asking their customer, their vendors, their partners whether or not they're also connected to TEN.

So think of it as that old commercial of, I told two friends and they told two friends and they told two friends.

When you subscribe somebody who is using video as a mission critical or business application, and they start reaching out to their vendors and their customers saying, hook up to TEN, it does have the opportunity to spread virally and the end points grow dramatically.

Excellent.

Could you touch a little bit on the video, one last thing, on the video directory and how that plays into all this?

Yes, absolutely.

So as with the entire space at this point relative to video, there -- it is a hot space, and as a result, there's a lot of jockeying for position.

And I would suggest there's a massive land grab at this point.

And that has stimulated some great opportunity for customers like Glowpoint, and the carrier communities are all lining up and ultimately evaluating what they have and how they play.

Well, one of the things that becomes very important here is the ability to provide high quality secure B2B interaction for telepresence and other video communication systems.

Without it, the industry will likely not tip and ultimately take off as it's predicted to do.

So that being said with something that that's important, there is competition.

And so there are other exchanges that ultimately are out there being contemplated or built.

Well, what Glowpoint feels we're in a very unique position with is, A, this isn't a white board idea.

Glowpoint's exchange is established and has been used and has a significant amount of businesses already connected to an excess of 650, a significant amount of video end points in telepresence rooms in excess of 6,000.

But that's not where it ends.

We think that the application service and the features associated with the solution are going to become more and more increasingly important.

So one of the things that we're going to be unveiling here is a global directory, such that one can go similar to LinkedIn and find other businesses and ultimately request to do a B2B call, and when that request is accepted, they should have the ability to ad hoc communicate with each other through our privacy policy servers.

So our directory will be the first of its kind.

And will ultimately provide for the real, we think, features and services that will enable this viral nature that will make it easy to use and ultimately take off, so.

Excellent.

Good stuff, guys.

Keep up the good work.

(Operator Instructions).

And our next question comes from the line of Jack Gilbert, individual investor.

Please proceed.

Yes.

This is Jack Gilbert.

Joe, I was writing down and I was talking or listening about the sales pipeline.

And you mentioned $2 million and $30 million.

Can you go through that one more time because I want to be sure I wrote this down correctly.

Yes.

No problem, Jack.

How are you?

Thanks for joining.

So when I talk about $2 million, I'm talking about a monthly recurring value.

$30 million represents a potential contract value.

So if you do the math, obviously not all of this business is only 12-month terms.

And some of it is multi-year, etc., etc.

So the $30 million represents the terms in which businesses are interested in signing up with our services and we value that in our systems and sales pipeline.

And the $2 million represents the value of the monthly recurring nature of the business.

I love the monthly recurring business.

So do we.

Okay.

Thank you.

No problem.

I just wanted to make sure I had that correctly.

And there are no further questions in queue at this time.

Okay.

Great.

Well, on behalf of the management team, we look forward to the coming quarters.

And we would like to thank everyone, again, for your participation on the call today.

We really appreciate your continued support.

And until next call, have a great day.

Thank you for your participation in today's conference call.

This concludes the presentation.

You may now disconnect and everyone have a wonderful day.