Oblong Inc (OBLG) 2012 Q1 法說會逐字稿

Good afternoon, everyone, and welcome to Glowpoint's first quarter 2012 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 CEO and President, Joe Laezza, and Senior Vice President of Corporate Development and Strategy and interim CFO, Tolga Sakman. There will be a brief question-and-answer period following the Company's prepared remarks.

I would now like to introduce Glowpoint's interim CFO, Tolga Sakman, who will review the Safe Harbor information with you now.

Thank you. This partial discussion of the statements of financial condition and operations of the Company should be read in conjunction with the consolidated financial statements and related notes contained in the Company's quarterly report on Form 10-Q for the quarter ended March 31, 2012, as filed with the Securities and Exchange Commission.

Various remarks about the Company's future expectations, plans, and prospects constitute forward-looking statements for purposes of Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such remarks are valid only as of today, and the Company disclaims any obligation to update this information. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the Company's most recent annual reports 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.

With that, I'll now turn the call over to Joe.

Thanks, Tolga, and welcome, everyone. Thank you for joining us today. For the format, our call will consist of some opening remarks, review of our operating results for the period, update on our marketing and corporate strategy, along with some closing remarks, followed by Q&A.

But before we get started on the formal presentation, I'd like to take a moment to discuss the recent developments with our management team. Last week the Company filed a Form 8-K announcing the departure of John McGovern as CFO from Glowpoint. John's moving on to pursue a new opportunity. I'd like to take a moment to thank him for all he's done here at Glowpoint and wish him well.

With John departing, subsequent to this filing and effective May 11, Tolga Sakman, our head of Corporate Development and Strategy, presenting with me today, has been appointed interim CFO in addition to his current responsibilities.

So that said, let's get started. In Q1 we delivered upon the sixth consecutive quarter of positive adjusted EBITDA. From a revenue perspective, we see a strong sales pipeline for our suite of cloud-managed video services, although elongated sales cycles and soft channel sales has caused slower growth this period. This was anticipated, as we suggested in our previous earnings call a couple of months ago, when we discussed the expectation that Q1 would realize slower growth, both on the top and bottom lines.

We see the sales process being affected by various vendors in the video communication space bringing new endpoint solutions to market, which is causing some delay in the enterprise implementations. And while we saw slower growth in our cloud-managed video service revenues for the period, this is not reflective of the demand for our services. In fact, for Glowpoint, we see a significant opportunity with growing demand for solutions to address things like the bring-your-own-device movement in the enterprise community.

That said, deal activity has increased, and we are well positioned with our cloud-based OpenVideo platform that is the leading network-neutral and vendor-agnostic solution in the market. To that point, we are in the final stages of closing some new significant customer contracts that should positively impact growth levels in the second half of this year. During the life of these particular contracts that we expect to close, each of them separately has the potential to exceed our largest customer from a monthly recurring revenue perspective.

We are progressing with new and existing partnerships, and our high-touch sales model is providing better insight into the opportunities with our partners. In short, the opportunities exist, and we remain committed to invest appropriately to maximize our ability to capitalize on these opportunities.

I will discuss the partnerships and some specific activities in more detail, but for now, I'm going to turn the call back over to Tolga, who will review the operating results for the quarter and provide some updates on the market and our corporate strategy.

Thanks, Joe. In the first quarter, we produced the fifth consecutive quarter of positive net income and the sixth consecutive quarter of positive adjusted EBITDA. We also had positive working capital and positive cash flow.

On the revenue front, cloud-based managed services revenues, reported as managed services combined, were $3.3 million for the quarter, up 5% from the same period last year. These revenues are the largest component of our revenue mix and represent 49% of the total quarterly revenue this period.

Network services revenues were $3.1 million, down 11% from the same period last year. These revenues represent 47% of total quarterly revenue this period. Other revenues, which include our professional services and other one-time event services, were $309,000 for the quarter.

On the operating expenses, in the first quarter, operating expenses were $6.5 million, down 6% when compared to $6.9 million in the same period last year. When excluding sales and marketing costs, operating expenses were down 7% year over year and 5% sequentially.

Net income for the quarter was $172,000, an increase of over $140,000 compared to the same period last year. When excluding sales and marketing costs, net income increased 22% year over year and was flat sequentially.

Adjusted EBITDA for the quarter was $717,000, representing an increase of $293,000 from the same period last year. When excluding sales and marketing costs, adjusted EBITDA increased 27% year over year and remained flat sequentially.

Net cash provided by operating activities was $365,000 for the first quarter compared to a cash burn in the same period last year. We ended the quarter with a cash balance of a bit over $2 million.

So our operating results were sound for the quarter. On a year-over-year basis, combined managed service revenue grew 5%. The monthly recurring component of our cloud-managed video services grew 19%, and when excluding sales and marketing costs, expenses improved by 7%, net income improved by 22%, and adjusted EBITDA grew by 27%. Our EPS improved by $0.01, and cash from operations increased by just under $0.5 million.

These operating results provide a strong foundation to continue to take an aggressive approach to secure additional business to get the top line moving. The video managed services market is validated by increased awareness and interest along with a strong sales pipeline, as you heard Joe mention. I believe Glowpoint is well positioned. We have the flexibility to pursue the right strategy, and we have access to the appropriate resources required to secure our next stage of growth.

Based on the investments being made to some of our new business opportunities in the pipeline, we anticipated Q1 to be a bit slower on the growth and profitability front and feel sequential momentum is poised to materialize in the second part of this year. With that said, I'd like to reiterate the state of the market which complements our corporate strategy.

The telepresence and videoconferencing industry continues to evolve as vendors are increasing the position of their products as part of the larger unified communications ecosystem. Parallel to that, the consolidation in the equipment vendor market continues in Q1, with Avaya's acquisition of endpoint and infrastructure vendor, RadVision. With our existing relationship with Avaya and many years of expertise and investment in RadVision technology, we believe we are uniquely positioned to help Avaya differentiate itself from the rest of the pack with things like federation, B2B, call control, and multiparty conferencing from the cloud right out of the box. This is just one of the opportunities we believe to exist as a result of consolidation in the market.

We see some of the positioning around becoming a software and cloud provider from the likes of Polycom creating confusion in the marketplace in general, elongating the sales cycles for their own offerings. This has resulted in some softening in that channel for us, but as Polycom's mobility-related products begin to take hold in the enterprise, we are well positioned to help enterprises take advantage of the bring-your-own-device, or BYOD movements.

As we stated in our Q4 and fiscal year 2011 earnings call, 2012 is the year of B2B visual communications at Glowpoint from a service development perspective. In that vein, at the Enterprise Connect show we announced the multi-product called Video Trunk Offering, which enables enterprises to securely, easily, and cost effectively conduct B2B calls with other enterprises via the largest exchange in the world, regardless of their video vendor, signaling protocol, and network service provider. This is a unique solution in the market, and we are seeing a tremendous interest from enterprises who, to this date, had been locked into a single service provider's exchange for B2B calls.

We also recently announced new service offering features focused on the mobile community with Skype and Google access, and we have begun to enhance our OpenVideo platform with a mobile strategy that allows enterprises a simple approach to accommodate the bring-your-own-device movement. We expect to announce further exciting developments around our service offerings and go-to-market strategies in the coming weeks and months.

And with that, I will turn the call over back to Joe.

Thanks again, Tolga. So before closing, I'd like to provide some final comments and an update specific to our core initiatives relating to our go-to-market strategy. As previously discussed, our core initiatives for 2012 consist of enhancing our go-to-market strategy with our strategic partners, developing and introducing new services with an emphasis on business communications, and we will continue to enhance our operating efficiencies for automation of our service delivery platforms.

You heard Tolga discuss the development activities, so I'd like to spend a few minutes on our go-to-market strategy. Our go-to-market strategy is progressing well. Glowpoint is partnered with the right communities in the UC -- unified communications -- space, and we are organized properly to capitalize on the rapidly evolving demand for secure cloud-managed video services.

Our key partnerships, such as Polycom, Tata Communications, and others are actively developing further. In that regard, there are a number of active programs in pursuit with these partners and are driving an expanded pipeline of opportunities.

For example, with both Tata and Polycom relationships, we've expanded beyond providing our cloud-managed video services for just immersive telepresence. Both have rolled out, or are in the process of rolling out, our cloud services to support all video endpoint form factors. This increases the market opportunity these partners have with our solutions.

Further, with Tata, we expanded the relationship further by connecting our OpenVideo cloud to Tata's Global Meeting Alliance community, as announced at the recent Enterprise Connect event.

Additionally, we are seeing progress with two new breeds of partners for Glowpoint. First, the IT systems integrators, who provide solutions for enterprises' entire collaboration estate, not just video. A good example of this is our relationship with Nexus IS, who has recently won a few new marquee customers with our cloud monitoring and management solutions as part of an enterprise-wide collaboration project.

Next I'd like to point out progress we are making with new partners who have embedded our solutions in their core offerings, such as Stryker Communications. Stryker is embedding our cloud video services into their integrated operating rooms for clinical educational purposes.

We expect to continue to develop these partnerships and add new ones and expect to see the benefits from these engagements in the coming quarters. We will have some new and exciting developments regarding expanded partnerships to increase our geographic coverage to be announced in the coming weeks.

From a high-touch sales perspective, we remain committed to investing in growth and, as such, have begun to grow our sales organization. We will continue to invest in sales and are establishing a larger footprint of sales reps and account managers with regions to better serve our customers within regions. The expectation is that we will grow our regionally located teams with quota-bearing reps and account support resources.

Today, we have regional teams consisting of territory directors and account management support resources as well as two specific strategic partnership teams. And we've begun and will continue to expand these teams. These investments will provide Glowpoint with the coverage required to address the demand for cloud services supporting the needs of the enterprise communities.

So before closing and to recap today's call, growth opportunities exist and are anticipated to materialize in the second quarter of this year. Sound operating results provide the flexibility to continue investments in our go-to-market strategy. Our service offerings in development are evolving rapidly to address B2B and mobility.

Our high-touch sales approach is providing improved enterprise touchpoints and greater visibility into opportunities. New and existing partnerships are evolving with new go-to-market channels. We are in the final stages of securing some exciting, new, significant customer contracts. And we anticipate announcing new and exciting partnerships in the coming weeks and months. And finally, we will continue our strong focus on profitable growth and remain committed to maintaining our operating momentum.

With that, this concludes the formal presentation portion of the conference call, and I'll ask the moderator to please open the call for questions.

(Operator Instructions.) Chris Sigala, B. Riley.

Just curious. You guys issued guidance last quarter. I was curious how you're looking at those targets and if they're still attainable, given some of the softness we're seeing here in Q1.

So we are not adjusting guidance at this time, and as we discussed in Q1, we expect the growth levels to materialize in the second half of this year. And at this stage, we're maintaining that position.

Okay. And then maybe you can talk a little bit about how you're looking at the model now. What specific touchpoints in the model should we expect to see some leverage with better flow-through to the bottom line, going through the rest of the year?

The growth projections that -- you referred to the guidance -- as Joe stated, it remains the same. So the growth will obviously come from the managed services business. Joe mentioned some new contracts that we are expecting to onboard with in the coming weeks and months. So again, the forecast for growth is on the managed services side. On the monthly recurring revenue side, you saw that the growth rate and the recurring revenue portion is actually much higher than the overall. So that's where the target is.

The usage attach rates that we see -- we talked about this in the past -- it's north of 20% to 25%, and we are seeing that increase as well. So the more managed rooms that we add, the more monthly recurring revenue, and the more usage attached to it that comes.

Okay. And then just any thoughts on a timeframe for when that 20% EBITDA margin target is attainable by?

Yes, Chris. Thanks for asking that. It's a great question. At the end of the day, we put it out there as a long-term target, and that's how we're maintaining our approach there. The guidance we put out at the beginning of this year suggested we would get in the range of 14% to 16% of total revenues. What I would encourage is to keep an eye on the sequential growth. And from an annualized perspective where we're at, I think we could rapidly get there so long as we get the top line moving.

So adding to the leverage question, at the end of the day, part of the reason we like to present the actual numbers for our income and adjusted EBITDA relative to exclude sales and marketing costs, if you heard Tolga presenting it that way earlier, is to demonstrate the fact that we do see a lot of leverage in the model and a good amount of scale. And as we add to the top line, we should, in fact, see a very nice effect on our operating margins.

Okay, good. That's very helpful. And just finally, what was the headcount at the end of the quarter there?

105.

Okay, great. Thanks a lot, guys.

Ted Tourneau, private investor.

I'd like to know, do the service offerings from Video have any effect upon Glowpoint whatsoever?

So Video, we consider Video as part of the -- I'd say it's a blend of equipment vendor/service provider. As you may be familiar, they have a platform that's based on the SVC protocol. It's an MCU less, different architecture, technically speaking. And their solutions are sold as enterprise grade or from the cloud. More often than not, I would say they're not a competitor. We have other managed service providers offering their product as a service. But more often than not, we don't like to talk about our competition, but we don't really run into Video as a major competitor out there.

Okay, thank you.

Eric Stephens, Wren Capital.

Gentlemen, can you describe your preferred stock outstanding and what the obligations are attached to that?

Sure. Joe, do you want to take this?

Yes. The total number is 25,788,000 shares as of today of common outstanding, and the obligations are typical of common stock. So if you're referring to or asking about any preferred stock or options, what I could tell you is that there is a very, very small amount of preferred stock out there.

From a common stock equivalent perspective, it doesn't equate to more than, I believe, a couple of hundred thousand shares. And that's been some work that's been done on the cap structure over time here. So the capital structure is pretty traditional at this point. It's primarily common stock and employee stock options. There's no warrants to be discussed at this point. So I'm not sure if the question is from a preference perspective. Is that what you were trying to suggest?

Well, that, and in addition to that, I read, I think, in one of your filings that you're going to have to start paying dividends in January of 2013. Is that correct?

Yes. Thank you. Right. So you're referring to a preferred B-1, which I don't refer to as part of our common stock, because it is non-convertible. And the value of the paper, if you will, is $10 million. It sits on our balance sheet, if you will. And the terms on that is there is a dividend holiday, such that there's not been dividends accruing, but they begin to accrue in January in the amount of 4%.

4% on $10 million?

Yes, right.

Okay. Can you tell us what your plans are with respect to making acquisitions?

Sure. So as Head of Corporate Development, I'll take that. This is Tolga. The market itself -- we've talked about this in the past -- it's a very fragmented market which creates some confusion in the marketplace but also presents an opportunity for us to make acquisitions, and we have stated in the past that we were actively looking for acquisition candidates. And obviously, I cannot go into any of the details on the confidentiality side, but we maintain our position that we are actively pursuing strategic acquisitions for a number of reasons.

All right. Thank you, gentlemen.

(Operator Instructions.) Jack Gilbert, private investor.

Can you talk a little more about -- you mentioned Stryker and Sabre were the two contracts that you've talked about in the last quarter. Could you give us a little update on what you think the size and when they should start to produce revenue? And in connection with that, you mentioned the two new contracts that could be some of your biggest contracts ever. Could you tell us what the size of the Sabre and Stryker in relation to some of the newer contracts that you hope to get in the next few weeks?

Thanks for the question. It actually covers off on a couple of questions that came in online, so we could kill two birds with one stone here, if you will. So I'm going to try to break up the question and answer it in the --

Yes, I know it's kind of confusing. I wasn't sure if you were talking about which one, or the two. Were there two new ones?

Yes, and I'll specifically clarify that, hopefully. There is, Jack -- I'll preface this with -- there is, obviously, some restrictions based on what I can discuss, based on commercial agreements that are negotiated and all, but I'll do my best to make it as clear as possible.

So let's start with Stryker. Stryker is a commercial agreement that Glowpoint has established, and as I've mentioned a couple times here, it's a means to sell through right to Stryker. That partnership also can be considered customer. It has a lot of promise, based on the application being unique in that we will be powering an offering where they deploy it into operating rooms to support clinical education. We do expect to start seeing the benefits of that, as I mentioned, in the second part of this year. If I were to target specific results to start to materialize, it would be in Q3.

Sabre is an agreement that we're in the process of evolving, and the reason I say that is Sabre is a lot of opportunity for Glowpoint. The idea is Glowpoint and Sabre go to market together, and Sabre also uses Glowpoint as a customer so that it's multifaceted. At the end of the day, the early stages are very, very promising, and I would fully expect to start seeing the benefit of that engagement later this quarter, perhaps in June, certainly in Q3 as well.

I am not referring to some of the opportunities when I talk about some significant contracts and contributions to the business specific to Sabre and Stryker. And again, I can't tie those to --

Those are different ones, not these two. I just wanted to clarify that.

Yes.

Okay, and then one more thing. You mentioned -- I'm not sure which one of you mentioned -- that the number of videoconferencing rooms, the more they increase, the more our revenue eventually will increase. Because I saw the number of rooms increased 47%.

Yes, absolutely, Jack. Thanks for asking that. At the end of the day, the phenomenon there is that early on, our managed services were being attached more and more to immersive telepresence rooms. So if you recall, we have been talking about expanding our offerings to address more form factors. What we mean by that is beyond immersive telepresence, supporting all the way down the, what we call emergent curve, to HD conference rooms, room systems, desktop devices, ultimately laptop and computer software-like devices, all the way to mobility.

So as we move down the emergent curve, the revenue per unit, naturally, is going to move down a bit. The telepresence market, if you look at it from the perspective of the size of it on a pie chart for installed devices, it's a very small piece of the market. So the idea is the network effect. We ultimately want to collect as many devices as possible and make them part of our cloud platform, which will ultimately drive up monthly recurring revenue and have an effect on the attach rates of usage.

Thank you very much.

So there's a few questions that came in online I'd like to address. I think we answered a couple. All right, so one that's unique that comes in, I'm not sure from who, but how will we get revenue from Skype relationship?

So that's a good question, and I believe it's a misnomer, right? At the end of the day, Glowpoint is not ever going to collect revenue from Skype users. The idea of introducing features to permit Skype users to participate in secure business meetings ultimately allows for Glowpoint to solve mobility challenges enterprises deal with today in a unique way such that they can have mixed environments, have a Polycom system, for example, a Cisco system, for example, immersive telepresence, HD endpoint, and connecting users on perhaps their iPads running Skype -- seamlessly. They show up in a lobby, they ultimately begin their business session, and it's done in a secure way.

I personally have been demonstrating this to some of our customers, and I'm very excited by how it's received, because at the end of the day, it is a real challenge that most enterprises have to solve. Everyone inevitably has an iPad. It's free. You could download the app. You could register it with Glowpoint's OpenVideo cloud, and you'd participate in meetings.

Ultimately, who we bill are the owners of the codes for that meeting, and the more usage on those codes, the more revenue we drive. So it's ultimately a network effect in that we expect a significant amount of users to ultimately become part of our platform such that they can participate in business meetings.

Okay. I think, looking online here, I think we've covered off on most of the questions. There is one question I guess we should probably talk about, and it's our strategy to get more exposure for Glowpoint in the investment community. And we've continued to evaluate our IR options, and we are beginning to do more IR with Glowpoint. We're now listed on a national exchange. We have the platform to ultimately attract more investors into the business. We've been more active in non-deal road show type of activities and so on. And we'll continue to do that, and it will become more aggressive as this year progresses. Tolga and I have, in fact, begun to ratchet it up, and so stay tuned for more on that. But we recognize that there probably could be more visibility in our public equity.

Operator, is there any other questions in the queue, phone queue?

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

Okay. Well, thank you, everyone. On behalf of the entire management team here at Glowpoint, I look forward to the coming quarters and would like to, again, thank everyone for your participation today on the call. We do appreciate your continued support.

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