Oblong Inc (OBLG) 2010 Q3 法說會逐字稿

Good afternoon everyone and welcome to Glowpoint's conference call. I want to remind listeners that this call is being webcast live and the replay will 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'll be a question-and-answer period. I would like to introduce Ed Heinen, who will review the Safe Harbor information with you now.

The statements of financial conditions and operations of the company should be read in conjunction with the consolidated financial statements and related notes contained in the company's annual report on form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on March 31, 2010. Various remarks about the company's future expectations, plans, and prospects constitute forward-looking statements for the [no audio] under the Private Securities Private Securities Litigation Reform Act of 1995.

Only as of today and the company disclaims any obligation to update this information. Actual results may differ materially from these indicated by these forward-looking statements as a result of various important factors, including those discussed in the company's most recent annual report on form 10-K filed with the Securities and Exchange Commission. In addition, 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. Thank you so much for joining us today.

So, along with Ed, we have Anil Balani, our SVP of Product Development, who's joining us today, and will be available for questions during our Q&A session. Today's session will consist of a discussion and presentation. I'd like to remind everyone, once again, that the presentation is available for viewing realtime, by going to our website, www.glowpoint.com, and clicking on the live webcast link.

So, let's get started. First, I'll discuss our results and the trends we are experiencing. In Q3, our total revenue grew by 11% year-over-year. Recurring subscription-related revenues continued to grow during this period, and revenues associated with conferencing services usage have accelerated further, which added to growth trends. We're seeing the correlation between the adoption and usage of video services, and growth in managed services, and expect that trend to continue. The revenues from these services grew 14%, when compared to the same compared last year. VNOC managed services now make up for 19% of overall revenues in the quarter, and continues to trend upward.

While we continue to invest in growth and operating efficiencies, which has had short-term impact on our overall operating income, there was an improvement in Q3 that was realized on a sequential quarterly basis. On a non-GAAP basis, using adjusted EBITDA, and excluding charges associated with severance, we actually achieved positive results of $91,000, which is an improvement of over $300,000, from Q2 to Q3. Ed'll spend some time and describe this in further detail in just a few minutes. We expect this trend to continue and look forward to generating sustainable profitability in the coming quarters. To accelerate this process, we implemented certain cost cutting measures last quarter, and finalized this plan in the beginning of Q4. These cuts have positioned the company to realize an accelerated path of profitability, driven by the growth in our managed services.

Allow me to reiterate here, our goal is to build upon the solid momentum we've established, and invest in growth opportunities. The market projections and amount of activity that we see in the space, support our growth goals. The number and size of opportunities for Glowpoint continue to be very exciting. The sales pipeline is healthy and includes many new opportunities, that will, in fact, accelerate our growth to the next level.

In the recent months, we've accomplished a great deal. We continue to expand our global partnerships and announce exciting relationships with companies like Equinix, BroadSoft, and Acme Packet. We also launched further automated services driving more opportunity to attach to the UC technology base and service provider communities. In addition, we improved our cash structure further. But, before I get to those items in more detail, I'll turn the call over to Ed, who will review the financial results for the third quarter. Ed?

Thank you very much, Joe. And, hello to everyone. I want to remind everyone that we are using forward-looking statements that contain certain non-GAAP measures, and would recommend that you review the management discussion and analysis information, in Item two, of the 10-Q, which will be filed tomorrow since the SEC is closed today on Veteran's Day.

We'll now discuss our financial results for the three and nine months, ending September 30, 2010. To better understand Glowpoint's financial information included in this form 10-Q, as well as future results, we want our investors to understand that the composition of our revenues and operating costs, we identify our revenues in total, made up of two primary categories: recurring subscriptions services and usage and event-based services. Our revenues continue to grow.

Total revenues for the three and nine months, ended September 30, 2010, increased by 11% to $6.9 million, and by 8.6% to $20.5 million, respectively, as compared to the same periods in 2009. Recurring subscription revenues for the three and nine months, ended September 2010, increased 6.5% to $5.4 million, and 7% to $15.8 million, respectively. Usage and event-based revenues for three and nine months, ended September 2010, increased 29.8% to $1.6 million, and 14.3% to $4.7 million, respectively. The primary driver of growth in recurring subscription revenues is our VNOC managed services, which continues to grow, and now makes up over 19% of our overall revenues in the third quarter, versus 11% in the same quarter last year.

In the third quarter, we discontinued the primary component of our previously reported non-core business. These ISDN resale services no longer fit into our overall strategic plan, and, in September 2010, we entered into an agreement with an independent telecommunications service provider to transfer the customer contacts for these services. Going forward, the company will receive a 15% monthly recurring referral fee for those revenues. The transfer will be completed in the fourth quarter of 2010.

The company accordingly classified these ISDN related revenues and expenses, as discontinued operations in our filing for this quarter, and we have restated our prior results in conformity with GAAP. Revenues from the ISDN resale services, reported as discontinued operations, for the three and nine months, ended September 2010, were $174,000 and $563,000, respectively. Net income from ISDN resale services, again, reported as discontinued operations, for the three and nine months ended September 2010, were $68,000 and $180,000, respectively.

Our operating costs are provided in summary, as total operating expenses. And, we begun with this filing providing certain non-GAAP results, as adjusted EBITDA, which is derived by using net income or loss, before depreciation, amortization, interest expense, interest income, sales taxes, and regulatory fee expense or benefit, the loss on the extinguishment of debt, changes in the fair value of derivative financial instruments and stock-base compensation. Operating loss for the three and nine month periods, was $0.8 million and $2.28 million, respectively. These losses include certain charges that we have excluded as part of our non-GAAP measurement of adjusted EBITDA. Adjusted EBITDA, for the three and nine month periods were losses of $307,000 and $852,000, which includes charges associated with severance of $398,000 and $523,000, respectively.

We saw an improvement on a sequential quarter-over-quarter basis in the adjusted EBITDA, from a loss of $352,000 in the second quarter, to a loss of $307,000 in third quarter. If we had not incurred severance costs in the second and third quarter, we would have had adjusted EBITDA income of $91,000 in the third quarter, and a $307,000 sequential improvement in adjusted EBITDA from the second quarter. We expect these improvements to continue into Q4 and beyond, driven by revenue growth and decreased, or leveling off, of operating costs. Our operating costs associated with network and infrastructure, which includes all external costs exclusive of depreciation and amortization related to the Glowpoint network and hosting facilities for our cloud based infrastructure, have begun to improve as planned. And, we expect to see further improvements in these costs going forward. The investments in global managed services and sales and marketing are expected to improve operating leverage.

General and administrative expenses decreased for the year, while increasing for quarter, primarily related to the above-mentioned severance costs. As a point of reference, when viewing the year-over-year results, in prior year financial statements, we recorded significant charges and income, as we adjusted our sales taxes and regulatory fee accruals to recognize this changes in estimates, audits, and tax law. In the 2009 periods, this result in income, which reduced operating expenses in both dollars, and as a percentage of revenues. In 2010, we have not had to record any adjustments to these accruals.

As for our cash position, we ended the quarter with $1.5 million of cash. With the cash on hand, the $5 million Silicon Valley Bank credit facility that we entered into in the second quarter, along with the savings being realized by the cost cutting program that Joe mentioned earlier, we believe that we are in a good position to have sufficient resources to make smart investments in our business, and will realize incremental value as we continue this progress.

At the end of September, we entered into a transaction that raised $1 million of growth capital. We exchanged our shares of convertible A2 preferred stock for 2.6 million shares of common stock, and exchanged shares of our convertible A2 preferred stock for shares of our non-convertible Series B preferred stock. We believe that this transaction, which was similar to the transaction we did in March 2010, is positive for our shareholders. This transaction, like the capital raised in March 2010, translates into significant capital structure improvements.

From both transactions, we received $4 million of equity capital and our fully diluted common stock outstanding, has been reduced to 103.7 million shares, from 118.2 million shares at December 31, 2009. Also, we reduced the aggregate liquidation preference, due to the holders of the Series A-2 and Series B preferred stock, to 18.2 million, from 33.8 million, at the December 31, 2009. We believe this represents further positive progress and simplifying and improving capital structure, while the Company continues to improve its operating results, through growth and sustainable profitability. With that, I'll pass it back to Joe.

Thank you, Ed.

So, before closing, I'd like to discuss Glowpoint's strategic focus, and the industry in general. Video communications and its place in the unified communications space continued to mature. The past few months, we've seen many developments associated with product development and partnerships among our industry. And, just to mention a few, Avaya most recently launched its Flare Experience, with a heavy emphasis on video capabilities in this new tablet technology. Cisco most recently announced Umi, a new personal telepresence technology and service for home users. Polycom continued to position itself as an independent provider of UC technologies, and has announce several strategic partnerships and initiatives, along with many management changes.

The service provider and telecom community as a whole, such as Tata Communications, AT&T, BT, Verizon, continues to become more active in developing network services supporting video applications. Rumors that the next generation iPad will be enabled with video. RIM's new BlackBerry PlayBook tablet device will have video capabilities. This is just to mention a few.

As I've mentioned in the past, the proliferation of video is upon us, and the validation of this continues to be quite overwhelming. The line between enterprise immersive video experience and consumer video is blurring. This time of transition in the industry puts Glowpoint in a unique position to capitalize on a market that is much bigger than it's been in the past. As mentioned earlier, we're making significant progress in fulfilling our promise to deliver and capitalize on this new expanding ecosystem for video, as part of the unified communications mix. Our commitment to develop services that provide value to the business communities is on track.

In our last earnings call just a few months ago, I outlined our strategic investment plan, intended to secure and capture a dominant position in the expanding UC market. Now, I'd like to take an opportunity to provide an update on that plan, by discussing our four -- five core strategic initiatives to achieve this.

First, we'll talk about the development and innovation of our services, and the focus is to allow for open access. Our open video strategy has made great strides in the past months, as we've announced new service components well ahead of schedule, such as our automated monitoring and notification service, called Notify. This is designed to enable service providers and integrators to attach technology sales to Glowpoint-hosted application services. Open video is the overall strategy and name we are using for our service development and go-to-market efforts. In the coming months, you will see and hear more about this strategy.

We believe there is only one standard that'll prevail in the world of video communications, and that's an open standard. This represents our overall strategy to bring simple and seamless communications to the business world, via a cloud-based platform. Open video is the evolution of Glowpoint's service portfolio, and includes the ability to connect, by providing simple plug-in capabilities and options, collaboration, via our cloud-based hosted infrastructure and service, and management, which provides a suite of managed services, that includes certain self-use and high touch white glove support.

Next, we're focused on building upon our strategic partnerships with an emphasis and focus on service providers. This past quarter we announced three new exciting partnerships: Equinix, BroadSoft, and Acme Packet. Equinix is a provider of global data center services that provides a neutral connection point for virtually every carrier around the globe. Our relationship with Equinix is twofold. One, we house our technology and hosted cloud services in their data centers. And, next, we are connected to their newly-developed and announced ethernet exchange program, and our co-marketing services, such that we now have the ability to provide these services to their huge connected community of service providers in a more seamless plug-and-play manner.

Next is BroadSoft. BroadSoft is a leader in hosted IP communications technology. And, they recently announced a new offering called Broad Cloud Video, which provides Glowpoint the opportunity to deliver hosted self-use conferencing services to the BroadSoft community of over 450 telecom service providers around the globe. This is a key opportunity for the Glowpoint to team up with BroadSoft and allows us to benefit from BroadSoft enablement of a large service provider customer base and ecosystem, with services for video, as part of IP communication services.

And, finally, Acme Packet. Teaming up with Acme, the largest provider of session border controlling technologies for IP communications peering, allows us to apply their technology to our open video platform, and enable their customer base of service providers with video services, as a plug-and-play solution for their service portfolios.

In summary, these three partnerships provide Glowpoint a solid foundation to deliver for the service provider community with access via Equinix, technology via Acme, and distribution via BroadSoft. And, of course, we've made some recent announcements with Polycom as a strategic partner, as we continue to deliver on global business needs together. Tata and AVI-SPL continue to be very active as well, and we see a great amount of cohesive development in our joint go-to-market strategies with them. We do expect further developments and announcements in the coming month, as well.

Next, we are focused on our operating efficiencies, through automation and innovation of our delivery models. As mentioned, we announced further automated services and expect to continue to provide more of these services in the coming months and years. In addition, we've endeavored upon a development of certain operational tools that will make our managed service operations very efficient, and capable of delivering highly scalable and global support.

And, finally, our enhancements to our go-to-market capabilities. Here, we've expanded our marketing business development sales resources to better align with strategic partners and programs. This is paying off, and we've seen an increase in pipeline and wins, over the past quarter, that is expected to be the genesis for growth into the final quarter of next year. We will be making further adjustments to the business development efforts to support some of the newer exciting strategic partnerships we've established.

So, 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've made significant progress towards sustainable profitability. We are delivering on our strategic plans and continue to see a strong pipeline of opportunities supporting our enhanced go-to-market strategy. We continue to recognize Glowpoint's path to a strong position in the video industry very clearly. Finally, we're committed and focused on operating momentum and capitalizing on the position and brand that Glowpoint has built as an industry leader, into the next year and beyond.

Thank you very much. Moderator, you may open the call for questions.

Thank you. At this time we'll be taking questions. (Operator Instructions) Our first question is coming from the line of Michael Cayman, a private investor.

Can you give me your thoughts, please, on being acquired or merging with another company?

Hi, Michael. Thanks for joining us today. This is Joe.

I can't provide any specific thoughts on that, other than our focus is to, once again, capitalize on the opportunity we have in front of us. There is certainly a good amount of opportunity out there. A lot of consolidation in the space. But that doesn't necessarily suggest that Glowpoint is a target.

That being said, we're focused on the results and building upon the momentum we've established and we'll take it from there.

Thank you.

Thank you. (Operator Instructions) Excuse me, gentlemen, there seems to be no questions or comments at this time.

Okay. There's a couple of questions here that came in on the webcast. So I think we could take an opportunity to answer some of those.

The first one here looks like it comes from Howard Myerson. Hello, Howard. How are you? And that question is a two-part question on Notify. And the question is, "What is the addressable market? And what is the monthly revenue opportunity for the service product like Notify?" So I'll start off and then ask Anil to chime in a bit.

Notify was developed as a automated tool, obviously, as I mentioned before, to provide the ability to attach to technology cells. And as far as the addressable market is concerned, I don't have the exact numbers relative to video units shipped, but what I can tell you is, there's a number that's out there that there's in excess of a million embedded base, installed in the enterprise community and business community. That certainly represents part of the target market for Glowpoint.

And as far as a percentage of attachments, we've modeled some things. I'd prefer not to share exactly what those models look like. But, based on demand and responding to demand, we do see an opportunity to potentially attach to maintenance agreements for these technologies. And as everyone knows, or if you don't know, maintenance is a requirement when you buy any technology out there. And if we did have a 25% attach rate success, that could represent a pretty productive and significant opportunity for Glowpoint. As far as how the service works, I'll turn it over to Anil to explain some technical attributes.

And just to add on, the addressable market, you just look at the remote monitoring and management, based on (inaudible) research, we're looking at $995 million market.

Now, on the Notify service enables Glowpoint to go more downmarket and expand beyond just monitoring video conferencing units, but also monitoring data switches and routers. And expand the portfolio for services.

Okay? Another question is, if we could comment on the revenue opportunities with BroadSoft and Acme Packet-like companies. And I'll start that off and ask Anil to add to that.

So, we're very excited about these new relationships. Obviously, as we've mention in the past, as part of our go-to-market strategy, we see video ultimately making its way downmarket, and the means in which we would achieve sales downmarket, we see through the service provider community. So, these relationships are very strategic in nature, in support of that goal.

What I can tell you is that the service provider community typically takes six to nine months to mature in any market. Our experience at this point is that the video DNA isn't necessarily there. That's what creates a nice and good opportunity for the Glowpoint, from a speed-to-market perspective, because there's certainly a lot of positioning and interest in delivering upon video as part of IP communications services.

We expect to, as I mentioned at the end there, to ultimately complement and use these three partnerships to achieve that go-to-market strategy. And Acme Packet, they all have a unique play in this. Acme is the means in which the technology we can provide plug-and-play. Equinix provides access, based on the accessibility of their data centers, and the fact that most of the carries around the globe are connected through them. And finally, BroadSoft is a brilliant opportunity for us from a distribution perspective and we're very excited about that.

So as far as the amount of revenue, I'm not prepared to actually talk about the modeling associated with that. But I will turn it over to Anil, who can provide a little more color around the strategic nature of these relationships.

Thank you, Joe.

We see video as an augmentation to VOIP devices. BroadSoft enables us to access the (inaudible) markets, as well as the medium-to-large enterprises. We see a growing demand of customers asking for video as part of their communications. We see many of the phones that are coming out in the marketplace are supporting video.

Cisco has and will be announcing that all phones, that will be deployed are video enabled. And this allows us the capability to provide video communications as an overlay to voice.

Thank you, Anil. I see another interesting question, I think.

You would probably enjoy answering here. And it's, "What is the play? And what part does Glowpoint play in the hand held video market, like FaceTime?"

We see residential technology, such as Skype, FaceTime, Google Talk, being used by business users. In fact, 35% of Skype users use Skype for business purposes. We do not expect to charge residential users, but we need to accommodate commercial and residential technologies as part of our business.

Okay. Since there's no more questions, I just want to, on behalf of myself and the management team here at Glowpoint, say that we look forward to the coming quarters and would like to again thank everyone for your participation on the call today.

We appreciate your continued support. Thank you.

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