Oblong Inc (OBLG) 2010 Q2 法說會逐字稿

Good afternoon, everyone. Welcome to Glowpoint's second quarter 2010 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, www.glowpoint.com. Following the call, the call is being hosted by the Company's Executive officers, CEO and President Joe Laezza, 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.

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 CEO.

Thanks, Ed, and welcome, everyone. Thanks for joining us today. In addition to Ed, we have one of our newest members of the management team, Anil Balani, who is the head of Service Development who has joined us today, and Anil will be available for any questions at the end of our prepared remarks here. The session today will consist of a discussion and presentation providing an update on Glowpoint's business, and related industry trends, The presentation as a reminder, is available for viewing realtime by going to our website at www.glowpoint.com, and clicking the live webcast link.

So let me begin by saying, I'm very pleased with the Company's progress towards becoming a dominant provider of managed services for video communications. Overall, our growth in core revenues for the first six months year-over-year was approximately 8%. And we continue to see traction in our VNOC managed services, which now represents over 16% of our core revenues. And we expect that service to represent in excess of 20% by year-end.

As we continue into the second half of 2010, we also have our sights on sustainable profitability and operating income. In this quarter, we reported an increase in overall operating loss, which includes certain one-time costs, and we do not believe this is indicative of where the business is headed. Ed will discuss that in a lot more detail, in just a few minutes here. The point here is, we are investing where we need. And these investments are expected to realize a return in the form of greater growth and operating income in the coming periods.

I will reiterate that our goal is to build upon a solid momentum we've established, and invest in growth opportunities. And as such, we have added several new people to sales. And also added two new executives to the organization, specifically focused on service development and support systems. Anil Balani, who I mentioned a moment ago, is our Senior Vice President of Service Development and Shane Bouslough, is our Vice President, focused on information systems.

In addition, we also improved our operating liquidity, by securing the credit facility with Silicon Valley bank just this past June. The market projections and amount of activity we see in this space supports our growth goals. Although, as I have mentioned in the past, the timing of the market is never easy to predict. That said, the number and size of opportunities for Glowpoint continues to be very exciting, And the sales pipeline is healthy, and includes many new opportunities that will accelerate Glowpoint's growth to the next level. So for now, I'm going to turn the call back over to Ed, who will review our financial results for the second quarter. Ed?

Thanks. Hello to everybody. I would recommend that you review the management's discussion and analysis information, and associated tables in Item two of 10-Q. We report our operations using the unclassified financial statement format, and our operating expenses are grouped into six categories. These operating expense categories are shown as a percentage of revenues for the last three years. We also provide significant detail into the components of each of these categories for the last two years. This will enable the readers to have a greater visibility into the operating costs of our Company. I will now discuss our financial results for the six and three months ended June 30, 2010.

To better understand Glowpoint's financial information, including it's Form 10-Q as well as future results, we want our investors to understand the shift in the composition of our new revenues and the related core. In the past, our revenues were generated primarily from traditional managed network services, that require underlying carrier network costs and people. Over the last year, Glowpoint has seen the demand for these traditional managed network service plateau, while demand for our managed video service offerings which include VNOC managed services, TEN exchange services, technology hosting and professional services has grown dramatically. These managed video services now comprise 16% of our revenues, versus 10% last year and 0% in 2008. As a result of this, we will continue to deemphasize network, as a part of our service offerings.

Our core revenue streams are separated into monthly subscription and nonsubscription revenues. Our monthly subscription revenues have generated continued, consistent growth from the prior year with 6.9% for the quarter to $5.28 million, and 7.2% for the six months to $10.47 million. The primary component of this increase is our managed video services revenue, which increased 62% for the quarter to $1.2 million, and 74% for the six months to $2.2 million. That significant growth came from managed video services, and it's important. Because as I mentioned earlier, the primary cost component of these services are associated with systems and people, as opposed to our traditional managed network services which require underlying network. We believe the new managed video services will generate significant operating income, because the cost for managed video services are approximately one-third of those of our traditional managed network service.

Nonsubscription revenues, which include conferencing services, events, and professional services increased 9.3% for the quarter to $1.8 million, and 10.1% for the six months to $3.1 million. Our ISDN resale business decreased by 48.2% for the quarter to $0.2 million and 50.4% for the six months to $0.07 million. These non-core revenues are typically low margin, and we expect them to be eliminated over time through attrition, or by the conversion in the core revenue opportunities. Total revenues, including the non-core revenues, increased 4.6% for the quarter to $7.26 million and 4.5% for the six months to $13.96 million.

As we generate accelerated growth in managed video services, we would expect our operating costs to decline as a percentage of sales. Although in this quarter our network and infrastructure costs increased as a result of one-time costs incurred in consolidating our network, we expect the network infrastructure to continue it's decline, as both a percentage of revenues, and actual costs in the future. While global management services, which includes all cost for delivering and servicing our managed services increased from 2008, we ultimately expect these costs to decline as a percentage of revenues in coming quarters. The reason for our optimism, is that over the last two years, we have doubled our personnel in this area to enhance our services, and provide 24/7 staffing, and opened our new support center in Pennsylvania.

We believe that with our current staffing, we could add revenues and realize significant increases to operating income. In sales and marketing, we increased salaries, benefits and other costs related to the hiring of additional sales-related personnel. We have committed to investing in growth to capitalize on new revenue opportunities. General and administrative expenses decreased for the year, while increasing for the quarter primarily related to severance costs. In the prior year financial statements, we recorded significant charges and income, as we adjusted our sales tax and regulatory fee accrual, to recognize changes in estimates, audits and tax law.

In the 2009 period, this resulted in income, which reduced our operating expenses in dollars, and as a percentage of revenues. In 2010, we have not had to record any adjustments to our accrual. As for our cash position, we ended the quarter with $1.9 million of cash, and the undrawn $5 million credit facility with Silicon Valley Bank. With this level of cash and the credit facility, I feel we are well capitalized to support the vision that Joe has articulated. This confidence allowed us to use a significant amount of cash to reduce our accounts payable in this quarter, to accelerate over $300,000 of payments for sales and taxes and regulatory fees incurred prior to 2007, and to make investments in property and equipment.

While the current economic challenges are still negatively impacting our collections of accounts receivable, they have been improving since June, and this will generate cash as our AR aging improves to prior levels. With the cash on hand, the $5 million Silicon Valley Bank credit facility, and our cash flow projections, we believe that we are in a good position to make smart investments in our business, and realize incremental value, as we continue this progress. And with that, I'll pass the discussion back to Joe.

Thanks a lot, Ed. So before closing it, opening the call up for questions, I'd like to discuss Glowpoint's second half 2010 focus, and the industry dynamics in general. As I've mentioned, Glowpoint has a unique and solid foundation to build upon. The proliferation of video is upon us, and the lines between enterprise immersive video experience, and consumer video are beginning to blur. The dynamics of our industry are rapidly changing, represented by continued consolidation and strategic alignment, even as the voice telecom community begins to jump in the game.

This time of transition in the industry puts Glowpoint in a very unique position to capitalize on a market that is much, much larger than it's been in the past. As we continue to structure our services for this new generation of video, as part of unified communications, we are investing in a service road map that builds upon our open and agnostic heritage. Our services are recognized and consumed by the business community today, and they are key drivers for our adoption of managed service offerings. They include things, like return on investments, which is achieved through productivity gains resulting in faster decision-making, and reduction in travel costs as businesses use video.

Total cost of ownership benefits of using a hosted cloud-based solution versus a premise-based investment. Significant improvement in quality of experience, and the capabilities, through expanded reach and interoperability amongst all of the different technologies in the market today. Ease of connectivity through business to business with our cloud-based solutions, and environmental or green benefits of using video as an alternative to the carbon emissions generated by travel. Based on these drivers and Glowpoint's unique position as an agnostic, independent managed service provider, we launched a strategic investment plan in the second quarter of 2010, intended to secure and capture a dominant position in the expanding UC market.

We believe Glowpoint continues to have an opportunity to serve a pivotal role in the broader communications ecosystem to provide an open video platform, as a cloud-based service. We are now executing on five core strategic initiatives to capture this market opportunity and to optimize our position. First is enhancements to our go-to-market capability. By doing things like investing in marketing, and adding more business development and sales resources. Second is building upon our strategic partnerships with companies such as Polycom, Tata Communications, AVI-SPL, Avaya -- and Avaya.

Also focusing on service providers to enhance our sell-through capabilities, as well as developing specific services to support their growing offerings in the managed services space. And of course, operating efficiencies, through automation and innovation of our delivery models as they exist today. And finally, further development and innovation of our services, to allow open access and offerings, for not just the enterprise, but also the SMB communities as video goes down market.

So as I mentioned earlier, the transformation of the video communications industry and it's part in the UC industry continues to rapidly develop. Just to name a few developments to date, in December of 2009 Logitech acquired LifeSize, April 2010, Cisco and TANDBERG merger was consummated. In May, Google actually announced the purchase of a California-based global IP solutions company for about five times revenues, which they plan to use for realtime audio and video communications.

In June, HP and Vidyo announced an agreement to expand HP Halo portfolio, And also in June, LifeSize communications collaborated with LG Electronics to introduce video conferencing capabilities on home television sets. In July, Global Crossing just recently announced a partnership with Teliris, one of the telepresence manufacturers in the industry. And in August just recently, there is an announcement for Avaya and HP, whereas HP will be incorporating some of Avaya's technology into their services. And just this week Polycom announced a brand-new strategic relationship with Microsoft.

All these activities, consolidation, and partnerships all validate our strategy in video communications as part of the UC industry. Glowpoint itself, has also been very actively involved with our own strategic alliances where we have developed multi-faceted relationships with companies such as Polycom, Tata Communications, AVI-SPL, and expect to announce many more in the near future.

So just to recap today's call and presentation, we announced revenue growth driven by further adoption and rapid growth in our managed services and related revenues. We identified that the investments and trends relating to our operating income are headed in the right direction, with expectations to see the benefits of these investments in the near future. We discussed improved operating liquidity to capitalize on focused business growth and efficiencies. We continue to see a strong pipeline of opportunities supporting our enhanced go-to-market strategy. And we recognize Glowpoint's path to a strong position in video industry very, very clearly.

As I've mentioned in the past, it continues to be all about discipline and execution. Glowpoint is expanding and supporting more and more customers in thousands of video systems and environments around the globe. If we look at the growth in our service delivery globally, we find the business is expanding both from a revenue and amount of service delivered across all the different theatres in the world. And finally, we are committed and focused on operating momentum, and capitalizing on the Glowpoint position and brand, to build an industry leader into the next year and beyond. Thank you very much. And at this point, I would like to open it -- up the call for questions.

Thank you.

(Operator instructions).

Our first question is from [Anthony Roselia] with Morgan Stanley Smith Barney. Please go ahead with your question.

Hi, guys. Good quarter, and I just had a quick question. I know you mentioned the Polycom relationship with Microsoft. I was just wondering if you guys were involved with that.

Yes, I'll take that answer. Hi, Anthony.

Hi.

So Glowpoint is not directly involved in that strategy today. But what I can tell you is that through our involvement in anticipated continued development in our services, and working closely with Polycom, we are in fact, using some of their technologies in our cloud-based offering. And we do anticipate to take advantage of this strategic relationship that they just established and ultimately benefit from it in the future.

Okay. Great. Thanks.

Our next question is from [Jim Wookey] with [Wookey] Investment Management. Please go ahead with your question.

Hey, Joe in your prepared commentary you mentioned Avaya, and that seems to be a new name relative to the other names you mentioned. Could you shed a little color on that relationship today?

Yes, sure, Jim. Thanks for joining. So Glowpoint is engaged with Avaya as a partner. They are a Channel partner of Glowpoint, and we are delivering some services for them.

We have not publicly announced any of the details, relative to the strategic nature of that relationship. But we we expect to potentially, do some more and potentially make more of it public. Right now I really can't disclose much of the details. I apologize. But they are a partner. And we do rely upon them and we are very -- we are very excited about the prospects of the future with them, so.

Okay. A follow-up. Back in, oh, I guess when you released Q4 results, you gave sort of a snapshot outlook for 2010, and you guided to a 20% core growth or a growth in your core. To date, it seems like we are right around the 8%, first and second quarter. Do you feel like that number needs to come down, or do you see Q3 and Q4 that would have to ramp somewhere north of 30% in order to hit that 20% for the year?

Yes, so a couple of clarifications, Jim. First of all, and I know a lot of that stuff is up for interpretation, right. So what we talk about -- when we talked about the 20% was a growth rate and it measures -- you want to --

2010 fourth quarter versus the 2009 fourth quarter.

Yes. It measures the quarter over quarter growth rates. So, yes, like I mentioned, so I did allude to it a bit, and here's what I'll say. We are in fact, focused on aggressive goals, still. We are not pulling back on those goals. And we are striving toward achieving that. And from a visibility perspective we see the trends going in the right direction. So for all intents and purposes, the short answer is yes, we are still striving toward that.

Okay. Excellent. A follow-up on one of Ed's comments. He talked about your cash flow projections, you're very comfortable or confident with those. Can you share a little bit on that front, what you see on the cash flow projection side?

Yes, I mean, what -- with the cash flow projections. I'm not going to be able to share any of the specific numbers. But when I look at what cash we have now, what we are generating, and what our cash needs are for fixed assets, we have sufficient cash to fund all that right now. I don't need to go back to raise any additional capital to meet the requirements that I show at the present time.

Okay. But you haven't built out any models going forward?

We do have models and stuff. And the Silicon Valley bank credit facility that we have, has more than sufficient room in it for anything we might need, if I have to go in there. But again it's our purposes the cash we have now, plus any potential availability in the facility is more than enough for us to fund what we think we need for the next year or so.

Excellent. I guess that was it, guys. Thanks.

Thank you, Jim.

Thanks again, Jim.

(Operator Instructions).

Yes, so moderator, at this point we'd like to answer one of the questions we see that came in via the webcast. And I'm going to ask Anil to answer it, and that question is, is the Company's technology applicable to anything that Skype or Apple is doing? So I am going to ask Anil to provide some commentary.

And as Joe had mentioned earlier as part of our open video strategy, we are looking to make accessible both Skype users, as well as what Apple is doing today as part of our platform.

Thanks, Anil.

We have a question from the line of Mike Snowe, a private investor. Please go ahead with your question.

Yes. What exactly are you doing to enhance shareholder value in terms of the following, reducing the number of shares, getting the stock listed on a reputable exchange, and compensating executives based on more on an incentivized basis, rather than -- and based on -- paying them based more on performance?

Yes. Hi, Mike, thanks. So I'll take part of that and I'll ask Ed to chime in here too. So you know, we are very cognizant of the current capital structure. So I'm going to answer the first part of your question. And as you have been following, we have been ultimately making a lot of progress in that regard. And so just last -- when we got together last time five months ago, we talked about all the progress that was made where there was an actual reduction in total outstanding shares. And as far as, diluted value as you're implying there, we recognize it, and think at the end of the day, we will continue to execute, and produce results and expect and hope that that would drive additional shareholder value, generally speaking.

That being said, just to talk real quick and I'm going to let Ed share some more detail on the capital structure. As far as the executive compensation is concerned, so all that information obviously is available in our proxy. And we don't hide any of it, but we are very cognizant of the fact that there is profitability metrics that we measure. And ultimately growth on both sides, top line and bottom line. And I feel that at this point we are doing the right things to incentivize the management team to remain focused on the right things. But generally if you wanted more detail on what the compensation was, obviously, you could find that in the proxy like I mentioned. But let me turn it over to Ed, so he can talk a little bit about the cash structure.

Hi, Mike. One -- what we had back at December 2009, we had about 118 million fully diluted shares out there. If we converted all the notes, the warrants, the options that we have, to the various capital transactions we did in the first six months of this year, we dropped 118 million now down to about 106 million is the number of shares. So we have knocked out about 10% to 15% of the shares that are outstanding there, which we feel pretty comfortable about. It's made a little bit more value for the shareholders there. And also as for like the bonuses for management, we have only had a minor bonus that went to one employee for the last couple of years, because we haven't met the metrics that we needed for bonuses. So management didn't get any bonuses over the last two years. Thank you for your --

What about -- what about getting the stock listed on a reputable exchange, so that it will attract institutional interests, et cetera and hopefully drive up the share price eventually?

Yes, it's definitely what our goal is and as part of the shareholder meeting that we had earlier this year, we did get the authorization to do a reverse stock split, which we will be looking into in the future. And that's part of what our plan is to try to go ahead, and get the share price up, and get us listed on another exchange.

Yes, and just to add a little more color on that, so we are evaluating those requirements, obviously. What those requirements are and what we would commit to here, is suggest that we are not interested in effecting any of those changes, other than to benefit us to be relisted on a national exchange. And so we are very focused on that. And from a timing perspective we would not be effecting any of those changes, without a definitive reason why to achieve those kind of effects so.

So what sort of time frame are you looking at to do that?

Yes, I'm sorry, Mike, it's really not -- unfortunately it's somewhat unpredictable, the volatility in the market and everything else that affects this. And ultimately being in the right position and a position of strength, frankly, to go and effect these changes. And ultimately drive the listing on a national exchanges is unfortunately not something we could predict at this point. But we are hoping sooner rather than later, just as everyone else is at this point. So we have another question that came in on the webcast that we'd like to answer and that question is, Can a Anil Balani please comment on the video in the cloud potential, and let me turn that over to Anil.

As part of our cloud offering, we support a hosted infrastructure, as well as a management infrastructure. We will be supporting, and do support today, a private and public cloud. As part of the services on that are core to our offering today include B2B, inter-company calling, include mobility access as well as -- as well as -- as well as access to enhanced video applications. This also includes match-up of traditional applications with video today. We do support both reservationist as well as schedule calling.

So Anil, how about the impact on the SMB marketplace, as video makes its way downstream, and how video in the cloud will be positioned to benefit from that?

So today we want to make video a mainstream part of communications. we see the SMB market having audio communications as part of their -- a de facto mode of communication. Video is simply an enhanced audio communications. We are making video as simple as audio .

Would you like to take another question from the phone?

Are there any other questions?

Yes, we have a question from the line of Michael Cayman, private investor.

Just for clarification purposes are you committed to a reverse stock split as the only option on getting listed on an exchange, or do you think that perhaps just your normal growth of business could allow that to happen?

We are not committed either way. And if normal growth of business would allow that to happen naturally that would be something we would pursue.

Okay. Thank you.

We have a follow-up question from Jim Wookey with Wookey Investment Management. Please go ahead.

Hi, guys. I just pulled up the Q4 release, and it wasn't anything to do with the fourth quarter. It specifically stated the Company anticipates that 2010 core revenue growth rate will exceed 20% 2010. And I just wanted to clarify, are we still sticking with that number for total 2010 revenue growth on the core side?

Yes, so again, growth rate interpreted different ways, right, so the growth rate implies the quarter-over-quarter. So apologize if that wasn't clear.

Okay. So we are not saying, we are going to grow the business by 20%?

It's a growth rate measurement, right. So we are multi-recurring revenue. We have a compounded rate that we grow. And so we are at a run rate at certain periods. So by the fourth quarter of this year, we are striving toward pretty aggressive numbers. And expect and are driving toward that 20%, if we compare it to Q4 last year. Heading into 2011, Jim, so that's what that means, right?

Okay. You also mentioned that -- something along the lines of additional competition from the voice players? Can you shed a little color on that that you're seeing?

Yes, so I apologize if you interpreted it as competition actually. I think I represented it -- or attempted to as opportunity. And so what I mean by, suggesting that the IP voice telecom providers are jumping in the game at this point, is that there's an opportunity to attach our services to a larger, go to -- service provider ecosystem. So as, all the IP telephony technologies mature, and attach and introduce video, the managed services is a natural attachment to that. And as part of our strategy, and you heard me point this out as one of the things we are focused on, we will be focusing on the service provider community, such that Glowpoint can deliver through, the sell-through model for those providers.

And who would be an example, just some names in that space that we could potentially attach to?

Well, there is over, I believe, 140 different regional and global telecom providers in the world.

Okay.

Of the 140, there is I think five that are classified as Tier 1 global. And then a smaller group obviously for Tier 2. And then many Tier 3 and Tier 4. Know that someone of Tier 3 and four are incumbents within their country. So Vietnam tel, for example, they are called the Viettel, is the incumbent. And I believe they are about a $9 billion market cap, and they provide telephony services in region. So as video proliferates, and all of these providers ultimately need to answer the question, as to how they are going to deliver video, we think Glowpoint has an opportunity to help them.

Okay, so a name like that, and a name like Avaya, a name like whoever, that's the AT&Ts, the Verizons on the Tier 1 level?

Yes, so Avaya -- be careful, they are a technology provider. I am talking on the service provider side. That's why I do -- classify them a bit differently. But, yes, AT&Ts, the Tata's by the way are Tier 1, BT and Verizon. And then you have XO Communications, which would be probably classified as Tier 2, and other regional providers and then some local providers, of course.

Excellent. Thanks, guys.

Thanks, Jim.

I have no further questions in queue.

All right. Well, at this point I want to thank everyone once again for joining us today. And on behalf of the management team here we look forward to the coming quarters. And we'd like to, once again, thank you for your participation in the call today. We appreciate your continued support. Thanks.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.