Oblong Inc (OBLG) 2009 Q4 法說會逐字稿

Good afternoon, everyone. Welcome to Glowpoint's fourth quarter and fiscal year 2009 results conference call. Before we begin, I want to remind listeners that this call is being webcast live over the Internet and that the webcast replay will also be available on the Company's website, www.glowpoint.com, following the call.

The call is being co-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 Safe Harbor information with you now.

Thank you very much and welcome, everybody. The statements contained herein other than historical information are or may be deemed to be forward-looking statements and involve factors, risks and uncertainties that may cause actual results in future periods to differ materially from such statements. These factors, risks and uncertainties include market acceptance and availability of new video 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.

Thanks, Ed, and welcome, everyone, and thanks for joining us today.

As mentioned with me today are David Robinson, our co-CEO and General Counsel, and Ed, who just reviewed the Safe Harbor, who is our CFO.

So consistent with past calls, David and I will present an overview and discussion regarding the state of Glowpoint's business and related industry trends, along with other matters of importance, while Ed will provide a review of our fourth quarter and fiscal year 2009 financial results.

Today's session will also include a presentation during certain parts of our discussion and is available for viewing real-time by going to our website -- and that is www.glowpoint.com -- and clicking the link for the live webcast.

Today we are pleased to host our session with a considerable amount of progress to report. We closed out 2009 with further growth in our core revenues and recognized significant traction with our VNOC managed services, which actually grew from when we launched this offering in the fourth quarter of 2008 from less than $400,000 to a reported $2.9 million in 2009.

These services now represent over 11% of our overall core revenues and growing.

We also reported a sharp improvement on overall operating losses. Building on the momentum we gained in the last two reported quarters of positive cash from operations, our goal is to build upon this solid momentum and invest in growth opportunities.

And as a result, we have begun to invest in sales and marketing.

In February, we hired a new sales leader, along with additional account management and sales professionals. We expect to continue invest in growth strategies and I'll discuss some of this in more detail later in the call.

In addition, just this week we closed on Equity Capital for growth plans, along with resulting balance sheet restructuring that is significant. David and Ed will discuss this in more details in just a few minutes.

The number and size of opportunities for Glowpoint 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 business continue to show signs of a recovery.

The real question that continues to be unclear is exactly when that pent-up demand will translate into consistent decision making to buy now versus sometime in the future. And this is evident in the many requests for proposals, information and quotes that continue to be in process.

Our goal is to grow the revenues to get us to a quarterly run rate of $8 million by the end of this year with expected ramp in volumes more consistent in 2011, 2012 and beyond. The market projections and amount of activity we see in this space supports these goals although the timing of the market is never easy to predict. Achieving these aggressive growth targets will heavily depend upon this and the execution of our sales plans and strategies to deliver our services through our strategic alliances that are in place or plant.

As we have indicated in the past, the primary focus has and continues to be the execution of our plan and the results achieved over the last three quarters continues to support this focus. As we continue to structure our business for this new generation of video communications and transformation of the market, we recognize there is much more to do.

We remain optimistic and excited for the prospect of managed services supporting video communications, and the key to capitalizing on this wave of demand is to ensure that any of our future investments in the business be applied toward growth and innovation and not cash burn. Our growth and innovation will be specifically targeted at maintaining Glowpoint's position as the dominant provider of managed services in the video communications market as part of the unified communications mix.

On that front, some of the most exciting developments are the transformation of the video communications industry and its part in the UC industry. Over the past six months, further transformation and the significant events supporting video applications have developed.

Just this week, the Cisco acquisition of Tandberg received regulatory approval. And, most recently, Polycom has been discussed as a target for acquisition and possible consolidation with one of the big three UC providers -- Siemens. All of this consolidation activity validates our strategy and video communications as part of the UC industry.

We will discuss this and other matters related to Glowpoint services and positioning into the future later in the presentation. But before we get to that, I am going to turn the call back over to Ed who will provide a review of the substantial results achieved in the fourth quarter and fiscal year. And upon the conclusion of Ed's comments, David will comment after which I will provide some closing thoughts. Ed.

Thanks, Joe, and hello to everyone. We will now discuss our financial results for the year ending December 31, 2009.

Beginning with the filing of these financial statements, we have decided to report our operations using the unclassified financial statement format, which we believe provides greater visibility of our operating cost components.

Over the last year, Glowpoint has continued to see greater demand for our managed video service offerings which includes, among other things, VNOC managed services, 10 exchange services, conferencing and event-based services, technology hosting and management, and professional service. As a result of this and the positioning of our offerings that we delivered across any network, we will continue to de-emphasize network as a part of our offerings, and expect less network-related sales and the associated cost for these services going forward.

The revenues for our managed video services increased to $2.9 million in 2009 and $4.4 million in 2008, representing in excess of 11% of our annual core revenues now, and 14% of the fourth quarter revenues. And this business is growing. The primary cost component of the managed service offering is associated with systems and host infrastructure, along with the process and people as opposed to the underlying carrier network cost associated with our traditional managed network and video conferencing services.

In 2009, our operating costs associated with VNOC managed service increased as a result of delivering upon large contracts one, expanding our network operations center resource to support 20 4/7 global service coverage and staff accordingly for management and delivery of pipeline business opportunities. As we analyzed the repositioning of our business and the resulting operating cost changes, we concluded that these operating costs needs to be more identifiable to the reader and better match our current and future business operations.

We believe that this new financial statement format will provide greater visibility into our operations as we transform from the dependency on the resale of network and facilities to a managed video and hosted cloud-based service provider for video communication applications. We have also reclassified prior year amounts to conform to the current year presentation to help readers understand our business expenses and associated trends.

This new financial statement format had no impact on revenues, income or loss from operations for the net loss for any period presented. I would strongly recommend that you review the consolidated statement of operations in item 6 and item 7 of the 10-K where we illustrate five years of data, both in dollars and percentages in a new format.

Here you will find continuing improvement in our operations over the last five years as we generate significant growth in managed video services and lower growth in network sales and reductions in our ISDN business. We would expect network and infrastructure costs to remain relatively constant and only slight growth in global managed service costs, since we are now fully staffed for 24/7 operations and have core infrastructure and support services resources to deliver on new growth.

Now let's move on to our reported financial data. Our core revenue streams have again generated continued consistent growth with monthly recurring subscription and related revenue, increasing 13.8% from the prior year to $19.9 million. Revenue from conferencing services increased 13.1% from the prior year to $4.4 million. Our managed video services revenue, which is a component of recurring subscription revenues, increased to $2.9 million in 2009 from $0.4 million in 2008.

We have continued to eliminate our non-core ISDN resale business which has now decreased 42.8% from the prior year to $1.3 million. This remains a planned reduction in revenue, consistent with our strategic focus. Net, net the combined total revenues increased 8.2% from the prior year to $26.5 million.

As for operating expenses the first key topic is reduction and sales taxes and regulatory fees on the balance sheet and the income in the statement of operations.

In the fourth quarter based on the results of the voluntary disclosure problems, programs settled with the largest jurisdiction in the Company's history, historical experience in collecting and remitting these taxes, the Company has adjusted the accrued sales taxes and regulatory fee liability to $1.08 million. This amount reflects certain settlements with taxing authorities and amounts that we believe are probable and can be reasonably estimated.

These adjustments resulted in income of $3.3 million in 2009, of which $2.5 million was shown as a reduction of operating expenses and $0.8 million was included in interest income. Overall in the settlement process, we expect the remaining payments to result in payments of $0.7 million in this year and $0.2 million in 2011. By the end of 2010, our sales tax liability will be around $0.4 million versus $4.5 million at December 31, 2008.

Overall, our operating expenses, excluding that above-mentioned gain from the reversible sales taxes and regulatory fee accrual were 105.6% of revenues versus 113.8% in 2008. As discussed, the operating costs now include network [and] infrastructure, global managed services, sales and marketing as well as general and administrative, depreciation and amortization, and sales tax and regulatory fees.

I would recommend that you read the Management's Discussion and Analysis section of the 10K where we have provided significant detail into all of the various cost components of each of these categories. This will enable the readers to have greater visibility into our operations.

The $0.1 million increase in operating expenses versus last year, excluding the gains from the reversal of the sales tax and regulatory fees accrual was comprised primarily of the increase in global managed service cost, which was primarily driven by $1.5 million of costs directly associated to the increased staffing levels and associated costs mentioned a few minutes ago in support of our global 24/7 service.

This increase was almost entirely offset by realized savings and network and infrastructure due to cost savings programs and reductions in ISDN business, and reductions in our sales, general, administrative expenses.

Looking forward, we see our operating costs only growing at a rate of approximately 15% as a percentage of new managed video service revenues. If we combine that with the fact that we are breaking the point as a business, we see good positive operating income contributions on a go-forward basis.

With that, I will pass it over to David.

Thanks, Ed. Hello, everyone. I will begin by noting some exciting news about what is not in our financial statements.

You will note that for the first time in years, the going concern language is no longer there. This is attributable to a number of factors including the new $3 million equity financing. But also because of the improved health of the business, the current results we are reporting today and our cash flow projections.

The removal of the going concern is another material step forward in Glowpoint's great progress. Speaking of the $3 million in new equity financing and the transactions we announced yesterday, let me walk you through some of the specifics of what we believe is a very good deal for shareholders.

First, the creation and sale of the Series B preferred stock. This security was modeled on the Preferred Stock that Goldman Sachs issued to Warren Buffett a couple of years ago. Our Series B preferred stock is senior to all other classes, but it is not convertible into common. So the security is not dilutive.

Instead, it is entitled to a liquidation preference equal to the amount invested in this transaction which was $100,000 per share. And it is entitled to 4% accumulative dividends starting in January 2013. Between now and January 2013, however, nothing accrues and nothing is paid.

In January 2014, the dividend rate then increases. And it is redeemable. The Company may redeem each share of Series B preferred stock at the Company's election at any time simply by paying the stated value together with all accrued but unpaid dividends.

In the deal, we sold 30 shares of Series B preferred stock for $3 million. We also exchanged shares of our Series A-2 to preferred stock for additional shares of Series B preferred and for shares of common stock. The details include issuing 50 shares of Series B preferred, which had a liquidation preference of $5 million, and we issued that in exchange for 1,333 1/3 shares of Series A-2 preferred stock which happen to have a liquidation preference of $10 million.

Also in that exchange transaction we issued 15.45 million shares of common to 1,545 shares and change of Series A-2 preferred stock. That had a liquidation preference of $11.6 million and it reflects the issuance of common stock at $0.75 per share.

All of this translates into a significant capital structure improvement. We now have 80.3 million shares of common and another 16.3 million shares of common, issuable upon conversion of the Series A-2 preferred. So what was about 110 million shares of common stock is now about 30 -- I'm sorry, now about 97 million shares of common stock.

Also in the process, we have reduced the aggregate liquidation preference. What was an aggregate liquidation preference of about $34 million is now about $20.2 million. And in the process, we have raised $3 million of new equity to fund growth.

With the removal of the going concern, with the reversal of the sales tax accruals, and with the transaction we announced yesterday, we believe the Company is now very well-positioned from a fundamental business perspective and capital markets perspective. The prospects of tapping the credit market have for the first time in many years improved dramatically, potentially providing additional financial flexibility to finance growth while minimizing shareholder dilution.

You'll hear where we believe the market is going. It's very compelling. Glowpoint is in the unique position of being the only carrier-grade managed video service provider in the unified communications industry. We think our cloud-based services and hosted infrastructure are uniquely positioned to take advantage of the managed video services market as projected to be more than $3.5 billion by 2013.

Another thing to consider in this market is possible business combinations, adding inorganic revenue growth and adding other pieces of the puzzle to what we are building. While we have nothing to report and may never have anything to report, we believe that Glowpoint is a great platform for such transactions.

We are the only pure play in the managed video services industry. We remain the only managed service provider with carrier D&A and a solid foundation to build upon, to implement our systems and processes to add even more scale after digesting an acquisition. And we are a public company so we have a currency that may be attractive to a target.

All of the possibilities are very exciting. We can't predict what will happen but rest assured that we will do everything we can to maximize shareholder value.

I will now turn it back over to Joe and then we'll conclude and open the call up for Q&A. Joe?

Thanks, Dave. So before closing I will touch on Glowpoint's 2010 focus and strategy along with some additional industry-related news.

As discussed earlier, there's a lot of consolidation in the video market driving the transformation process. I mentioned Cisco's regulatory approval of acquisition of Tandberg.

In the process, there was a condition that was driven by the regulating bodies of Cisco eliminating the interoperability and TIP standard they were driving. TIP is something that they call telepresence interoperability protocol, and it was a Cisco-governed standard that they were driving forward.

The governing bodies asked them to remove this to create a level playing field in its acquisition of Tandberg. This interoperability development is a positive one for Glowpoint in that we no longer need to worry about maintaining a service cloud and the infrastructure that resides inside that cloud that supports different standards.

We could focus on building our plug-and-play environment in a ubiquitous fashion and achieve this in a much more cost-effective and universal manner. Our goal is to establish our service offering as a plug-and-play solution which supports businesses and video users of any size from any technology anywhere in the world.

In fact, that is what unified communications is all about. So let's explore this consolidation a bit further.

If we look at the history of the video conferencing and telepresence market, we find it was quite small when compared to the unified communications market. And video in general was not a mission-critical tool for businesses.

As a result, the buying practice of most businesses were driven by low usage, nice to have application and supported with premise-based infrastructure and support model.

As the market began to transform over the past year, the telepresence -- and telepresence became more visible which was driven by many factors including the economy, safety, health and green technology initiatives, the video and telepresence market begins to merge with the unified communications space. This is now driving a much bigger market, more mission-critical applications and hosted infrastructure/outsourced managed service support models into the future.

As projected into 2013 the market merges into one, making up a much larger ecosystem, ubiquitous video communications and more hosted infrastructure and managed service buying behaviors to support these applications. The end result is the rapid growth curve into 2013.

The entire industry is predicted to exceed $8.6 billion of which $3.5 billion is in services and more specific to Glowpoint exceeds $1.5 billion. Bottom line is, we feel Glowpoint and our service offerings are in the right place at the right time. We expect heavier volumes will come when the collaboration of video makes it downmarket and Glowpoint's plug-and-play solutions are easy to consume.

From a go to market perspective, the effort in 2009 positioning our products and services to focus on video operations services, also known as VNOC, conferencing services, and our 10 B2B exchange services continues to create awareness and excitement. As mentioned earlier, we have begun to invest in growth and focus on execution of our sales strategy with the hiring of sales leadership as well as other business development resources, along with account management and sales professionals.

We expect to continue to invest in growth by adding market resources and more sales structure to the process. Our approach supports a primary indirect strategy which allows the sales force to interact with our strategic partners through different programs of enablement.

The new management is working hard at structuring the team to provide coverage, not only in the United States, but also addressing demand in the Asia-Pacific, Middle East, and Central and Latin American regions. We will discuss this strategy in progress in more detail as it develops and, of course, on our next call.

As for our overall 2010 initiatives supporting the sales effort, we are focused on continued development of our service offerings with the primary focus on making the services available in the cloud and part of the unified communications fabric. This effort is ongoing and will ultimately position Glowpoint for the current and future demands we feel are relevant which once again are being simple, secure, and accessible from any device anywhere in the world for businesses of any size.

So far, development includes cloud-based infrastructure access for telepresence users. Ubiquitous [tent] exchange for business-to-business use of telepresence and video. Web-based applications and tools for control of video environments and user communities. VNOC-based automated applications, integrated sit-based protocols into our cloud infrastructure.

We will also continue to expand strategic relationships with additional global unified communications providers, and broaden acceptance of B2B video [calling] capabilities with integration to multiple global carrier networks. We look forward to the coming quarters and feel the opportunities to continue to grow the business are strong -- and strongly positioned Glowpoint until the future is there.

So to recap today's call and presentation, we announced record revenues and growth driven by rapid growth in our VNOC managed services and related revenues. We discussed the great progress in capitalizing the business for growth. We identified the trends in solid balance sheet results heading into 2010. We continue to see a strong pipeline of opportunities and are investing in sales and product. We are striving toward much higher growth levels for 2010 and beyond. We see Glowpoint's path to a strong position in the future of video industry very clearly and will be focused on this to further capitalize on the opportunity in front of us.

It continues to be all about execution. Glowpoint is supporting hundreds of customers around the globe, thousands of video endpoints and systems, has solid operating momentum, capital to invest in growth, and the position and brand that is recognized and expected to deliver superiority. We must execute, innovate and capitalize into the next year and beyond, and are excited and feel every shareholder should share in that excitement.

Once again, we are committed to position Glowpoint as the dominant provider of managed services in the video communications market as part of the unified communications mix. Thank you and, Moderator, you can open up the call now for questions.

(Operator Instructions). There are no questions in the queue at this time.

Okay. We -- .

I'm sorry. There is one question that just came in. [Mark Hanflik] of [Miles Investment].

Just a quick question with regards to there was no mention of the churn rate in 2009. Wondering what that may have been and what we are looking at moving forward into 2010?

The churn rate for 2009 has been higher than we have been expecting over the last couple of years due to the state of the economy. And our initial projection in 2010 are that it will be dropping back down again.

And just to elaborate, it is approximately 1.5% in our model.

Moving -- that's what you are looking at for 2010?

Correct.

Very good. Thank you.

There are no further questions at this time.

Excellent. Well, on behalf of the management team here at Glowpoint, we look forward to the coming quarters and we would like to thank, again, everyone for your participation on the call today and we sincerely appreciate your continued support. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.