Oblong Inc (OBLG) 2012 Q2 法說會逐字稿

Good afternoon, everyone. Welcome to Glowpoint's second 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 www.glowpoint.com following the call. The call is being hosted by the Company's CEO and President Joe Laezza and acting CFO and SVP of Corporate Development, Tolga Sakman. There will be a brief question-and-answer period following the Company's prepared remarks.

(Operator Instructions)

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

Thank you. This partial discussion of the statements of financial condition and operations of the Company should be read in conjunction with the condensed consolidated financial statements and related notes contained in the Company's quarterly report on Form 10-Q for the quarter ended June 30, 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 the 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 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.

Thanks, Tolga. Welcome, everyone. Thanks for joining us today.

Some quick update as far as the format of our call. Today's call consists of some opening remarks, review of our operating results for the period, a discussion regarding the recently announced agreement to acquire Affinity VideoNet, and finally, some closing remarks which will be followed by Q&A. So that aside, let's get started.

In Q2, we delivered upon a seventh consecutive quarter of positive adjusted EBITDA and continue to see an increase in positive EPS. From a revenue perspective, we did not achieve the growth results desired in Q2, although this is not indicative of the demand and sales pipeline for our suite of cloud and managed services. The elongated sales cycles in soft channel sales we discussed a few months ago as we started Q2 has in fact caused the residual slower growth this period as anticipated.

Although our managed service monthly recurring contracted revenue increased year-over-year at approximately 15% despite slow sales bookings leading up to and through the Q2 period. Seasonality associated with usage held back some of this growth as well, and as a result, our combined managed service revenues grew at 5% overall year-over-year for both the quarter and six-month periods.

Currently in Q3, we do see sales bookings beginning to pick up, and we are activating some of the large deals referenced in our past call. As a result, we expect to see the start of growth trending positively heading into the final quarter of this year.

There's no question that Glowpoint is in an advantageous position in a market that is maturing rapidly. The market for cloud services supporting video continues to be one of the most discussed with big, forward-looking potential. We remain committed to capturing majority share of this market and growing our business aggressively, and as such, have invested in service development in our sales organization. In addition, we are adjusting go-to-market strategies and are focused on building scale in sales and our operation.

Just yesterday, we announced that Glowpoint has entered into a definitive agreement to acquire privately held Affinity VideoNet. This development is a really exciting milestone for us and further validates our commitment to growth and aggressive go-to-market strategy. We will discuss these developments in further detail in just a few minutes.

But, for now, I am going to turn the call back over to Tolga for a review of Q2 results along with some additional details regarding yesterday's announcement.

Thank you, Joe.

In the second quarter, we produced the sixth consecutive quarter of positive net income and the seventh consecutive quarter of positive adjusted EBITDA. We also had positive working capital and positive cash flow from operations for the reported six-month period.

Cloud-based managed services revenues, reported as managed services combined, grew 5% year-over-year for both the quarter and six-month period to $3.2 million and $6.5 million, respectively. These revenues was represent a 47% of our total revenue mix in the quarter.

Network services were down 10% year-over-year for both the quarter and six-month period to $3 million and $6.2 million, respectively. These revenues represent 45% of the total quarterly revenue this period. Other revenues which include our professional services and other one-time event services were $566,000 and $875,000 for the quarter and six-month periods, respectively.

Operating expenses were down 6% year-over-year and for both the quarter and six-month period to $6.5 million and $13.1 million, respectively. When excluding sales and marketing costs, operating expenses were down 7% year-over-year for both the quarter and six-month period.

Net income was $248,000 and $420,000 for the quarter and six-month periods, respectively. This is an increase of $231,000 and $371,000 when compared to the same quarter, six-month periods last year. When including sales and marketing costs, net income increased 23% year-over-year for the quarter and a 22% year-over-year for the six-month period.

Adjusted EBITDA was $850,000 for the quarter and $1.6 million for the six-month period representing an increase of $449,000 and $742,000 from the same respective periods last year. When excluding sales and marketing costs, adjusted EBITDA increased 33% year-over-year for the quarter and 30% year-over-year for the six-month period. Net cash used in operating activities was $68,000 for the quarter and net cash provided by operating activities was $297,000 for the six-month period compared to a cash burn in both periods last year.

We ended the quarter with a cash balance slightly under $1.7 million. In the second quarter, further investments were made into new office capital improvements as well as additional development resulting in use of cash in the quarter period.

Our operating results were again sound this quarter. On a year-over-year basis for the six-month period, the combined managed services revenue grew 5%. Monthly recurring components of our cloud managed video services grew 15%. And, when excluding sales and marketing costs, operating revenue -- operating expenses improved by 7%, net income improved by 22%, and adjusted EBITDA grew by 30%. EPS improved by $0.02 and cash from operations increased by $520,000.

Continued sound operating results have provided Glowpoint with a good foundation to take an aggressive approach to position ourselves as a market share leader. The market for cloud and managed services for video communications continues to heat up, and we 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.

As mentioned, we announced the definitive agreement to acquire Affinity VideoNet yesterday. This is a key milestone in Glowpoint's history. Affinity provides managed conferencing services with hosted cloud infrastructure and has built upon a heritage of brokering public videoconference room systems to establish itself as a leader and go-to provider for professional service firms such as executive recruiting and legal. When we close this acquisition, it will add revenues and customers to our business in a segment of the market that Affinity has penetrated well.

Affinity currently has approximately 30 employees and is based in Denver, Colorado. The business is comprised of a group of very talented and dedicated individuals who will deliver an invaluable, high-touch service to Affinity's global customer base. The business on a stand-alone basis is profitable and is to be fully integrated into Glowpoint's OpenVideo service platform, we expect accretive contribution to our operating results along with considerable value creation.

The purchase agreement to acquire Affinity is for a combination of cash, stock, and seller's notes. The purchase price will be comprised of $7.75 million in cash to be paid at closing, a $2.75 million, two-year sellers notes, and the issuance of 2.65 million shares of common stock, representing slightly less than 10% of Glowpoint's diluted shares outstanding.

The transaction is subject to completion of the term loan which will fund the cash portion of the acquisition. We expect the acquisition to close this quarter and expect to see 2013 revenues for the combined business in the range of $40 million and adjusted EBITDA margins up to 20%. Considering this, combined with our new business opportunities in the pipeline, we are bullish on the sequential momentum that is poised to materialize in the coming quarters.

That said, I am going to turn the call back over to Joe.

Thanks, Tolga. So, before closing, I would like to some perspective and comments on the market -- our market that is -- and provide an update specific to core initiatives around our go- to-market strategy.

As you heard me mention a few minutes ago, the market for cloud services supporting video continues to be one of the most discussed with big forward-looking potential. Video calling and conferencing is following the same paradigm as audio. For example, every year 100 billion minutes are spent on audio conference calls while only approximately 200 million are spent on video conference calls.

In addition, today, 95% of those audio conference calls are in the cloud. Meaning they are hosted and delivered by a platform from a service provider as opposed to enterprises buying their own bridge on premise to facilitate it on their own. Same goes for call control, also known as PBX, where the desired deployment today for voice is in the cloud for dial tone.

Video communications is following that same evolution. Going from on-prem to cloud-based call control and conferencing. The tipping point and massive shift is upon us and will continue to evolve rapidly. This is key to driving the shift toward high demand for services to enable that video dial tone and provide the platform to facilitate business-grade video meetings.

It is here, and Glowpoint is in the right spot. In fact, Glowpoint has been driving the video -- the vision of video dial tone and service in the cloud well ahead of its time. This has a resulted in unique advantages.

We have the expertise. We have been addressing interoperability challenges. We're been managing video communication environments for enterprises. And, most importantly, we have been making video meetings happen. That is what we do.

In fact, that is the sole purpose and what we believe. And, that is that video communications is the best tool for business meetings. It is simply more productive and leads to better business decision-making.

Our mission is to make video meetings simple and become the de facto standard for bringing people together to conduct business. How we are fulfilling that vision and achieving our mission is by making video the replacement for audio with our OpenVideo platform and suite of cloud and managed services that permit any device to connect across any network simply and reliably.

As mentioned, we remain committed to capturing majority share of this market and growing our business aggressively. And as such, we have invested in service development in our sales organization. We made some adjustments to the organization recently and have divided the channel and sales account management focus.

Now, Steve Vobbe heads up sales and account management, and Mary Friel, who is one of our channel business development heads, heads up channels for Glowpoint. In addition, we are investing in some inside sales functions to cross-sell into existing accounts and complement our channel strategy. Furthermore, we are focused on building scale, and the announcement yesterday regarding the definitive agreement to acquire Affinity further validates our commitment to growth.

In the coming weeks, we will be announcing a number of developments with our service portfolio which enhance and complement the user, buyer, and channel partner experiences. We are very excited about these new service offerings and positioning and expect this to put Glowpoint in a very strong position to capture share of the market as it evolves. Stay tuned and watch in the coming weeks for these exciting announcements and positioning of our services.

So that said, before closing and to recap today's call, we produced another quarter of sound operating results despite slower growth levels. The Affinity acquisition is expected to close this quarter. The market for video communications and conferencing in the cloud continues to be validated.

Glowpoint is in a great position and is committed to capturing market share leadership. Stay tuned for exciting product and service positioning and announcements in the coming weeks. And finally, we will continue our strong focus on profitable growth and remain committed to maintaining our operating momentum.

That concludes the formal presentation portion of the call. I will ask the moderator to please open it up for questions at this point.

(Operator Instructions)

Okay, we will take the first question off the webcast here. It looks like it is with regards to guidance. The question, is Glowpoint adjusting guidance? And, some other things. I guess the question is guidance. So, here is the response.

Current guidance for the year is not being adjusted at this time. Again, it was for the year. This is Q2 so that would be one factor. But, more importantly, in consideration and in light of the impending acquisition close, it is likely we will revisit guidance for the year once we understand the impact to our 2012 results. If there is additional information we are looking to provide for 2013, we will do that as well. But again, right now, there is no additional guidance other than what has been publicized.

We have a question over the phone from the line of Michael Needleman.

Gentlemen I came on late so pardon me. I didn't have a chance to listen to the dialogue. But, could you tell me what is your current yearly guidance? In terms of revenue?

Yes, the Company put out guidance early on in the year, in Q1, that consisted of a range for 2012, and we used percentages. We did not put out numbers. And, we said our cloud managed video service would be up 21% to 23% in 2012 over 2011. Our network services would be down 4% to 6%. Our professional services would be up approximately 26%, and adjusted EBITDA would be in the range of 14% to 16% of total revenues from a margin perspective.

Just in terms of clients. How many clients in the second quarter? That just was reported that you have now? Customers?

We don't report the actual metrics relative to customers. The metrics we put out there is relative to rooms, conferences produced, minutes on our OpenVideo platform, and so on. But, I can tell you that the number of customers is approximately 620 customers around the globe at this point.

In terms of the deal that was announced, when do you foresee closing that deal?

We expect it to close within Q3.

I'm sorry, in Q3?

Within Q3 -- within this quarter, correct.

Just so that I have a feel because I haven't read the entire script, how much revenue did that company do?

We have not disclosed their actual financial results, and in light of the fact that we are not closed yet, we were not planning to do so. We obviously will be required to disclose projections on a look-back basis once it closes, and that is planned to be done. But, the guidance we put out is ultimately the combined entity, and it is for 2013. So, further details on that will, in fact, be provided. What we did say is that they are a profitable business though. We have not discussed their financials. There are certain restrictions in our merger agreement at this point.

Okay. Pardon me for asking it again, but the revenue growth that you saw in the second quarter, apples-to-apples, versus last sequentially and then in the second quarter of last year, could you just give me a rundown of what that is? I don't have the printout yet. So, pardon me if you talked about that. I don't see that anywhere. Did you discuss that in your commentary?

Hi, Michael. This is Tolga. Yes, we did. So, the way that we report our numbers, as you are familiar, we have three different components. Managed video services combined was up 5% year-over-year. Network services were down 10% year-over-year. And, the professional services were up 4% year-over-year.

Can you tell me a little bit about your relationship currently now with Polycom? And, what you are experiencing there as far as resale? Or, what you're seeing there in their channel?

Sure. So, Polycom has been a very important partner of ours. We sell through Polycom. We sell with Polycom. We also sell to Polycom. It's a multi-faceted relationship. And, we consider that relationship to be extremely healthy.

Thank you very much.

Thank you.

Our next question comes from the line of Jack Gilbert.

Yes, hello. My question is just about answered. But, I still would like to get a little more color on going from 5% increase -- you said for the year now, you are expecting in the range of revenue guidance of 21% to 23%. Is that correct?

Jack, actually what we said was the actual results were 5%, and we said that we are not revising guidance at this stage. And then, the question came up what was guidance, and we provided that. So, we will have to go back and revise what 2012 will look like, especially in light of some of the activities around this impending acquisition. If that acquisition were not happening, it is likely we would be talking a bit more about guidance.

So, we are in the second quarter though, and we have been talking about the second half of the year looking as though that is where most of our growth was going to be. So, we are still in that position at this point. Rightfully so, you are pointing out 5% year-to-date. The guidance -- 21% to 23%. At this point, we are not revising that.

Okay. Just to be sure, you did not want to give guidance -- you are not going to at this time for next year? You are going to wait until the next quarter?

Well, we did put something out in connection with our announcement.

You put for EBITDA 20%, but you didn't mention revenue. I'm talking about revenue growth.

No, we did. We said that we are anticipating in the range of $40 million.

Okay. But, I don't know how big the other company is so that doesn't tell me anything.

I understand. That's not disclosed yet. Yes.

Okay, thank you.

Our next question comes from the line of James [Wookey].

Hello. Can you give us an update on what is going on in the Sabre front? And, also on Stryker Corporation?

Sure. Both are in construction. I would use that characterization, at this point, in the product rollout stage. They are both rolling out new service and products associated with the partnership with Glowpoint. Glowpoint being a component of it, and we are very excited about that and remain excited.

So, there has been a lot of activities, a lot of planning, a lot of operational things. We do anticipate to start seeing the benefit as it relates to our operating results here post-Q2, obviously. Because in Q2 there really wasn't much of an impact.

But, a lot of activities under construction. They are rolling out. Sabre has publicly announced recently that they are going live in September with the new platform. And, Stryker has also, with a number of divisions, been active in opportunities with us. So, as it goes, the pipeline is developing. And still remain very excited about that and expect to start seeing the benefits of it.

Do you expect to see revenues in current quarter?

Like I said, September is when they're rolling out. So, yes. At least on the Sabre front.

Perfect. Thank you.

(Operator Instructions)

It looks like there's another question online that we will respond to. That is, with all the consolidation going on in the industry, where does that leave Glowpoint? And, appreciate that question, actually. I will let Tolga speak up a little, too, on this one.

We believe it leaves Glowpoint in a very advantageous and good position. We now are continuing to build on strengthening our position as the largest pure play, cloud-based video service provider delivering to global enterprises. As I mentioned earlier, we are focused on scale and building some velocity in the sales process, as well as scale in our operation. The complementary benefits that we believe exist with the Affinity acquisition will certainly give us some advantage there.

As far as consolidation providing Glowpoint a strong position to participate in M&A activities, for example, is another reason why I believe it leaves us in a very good position in doing some consolidation of our own. We are very excited to achieve this one milestone. Again, it is not closed yet. But, this is a big step in that direction, and the market still remains a bit fragmented as it relates to video services on the managed service front especially. Glowpoint has been at this for some time. I do believe we can begin to really benefit from this and the consolidation ultimately participating in it in our own way. So, Tolga did you want to -- ?

Sure. I have some views and strong views on this point. The industry itself historically has been very much on-premise-based. And, people have been investing a lot into expensive infrastructure equipment. I think, as Joe mentioned in his remarks during the call, the industry is really following the audio paradigm and moving more toward cloud as service provider-based -- cloud-based solution using infrastructure as a service from the cloud. So, having said that, the entry of new players into our market only creates awareness. And, one of the things that I keep on saying all the time is our biggest competitor is the do-it-yourselfers. Removing -- bringing the idea of using the cloud-based services on a much more cost-effective way, use the resources only when you need, and pay only when you use.

It is a very compelling story. I think as more players are getting in, we are seeing more and more interest in our services. When I compare Glowpoint to other providers of the same bridging type of services, we have a leg up on that competition because they provide what we provide on the bridging side. But, they don't have the additional services around remote monitoring and management, the outsourced IT support-type of services, help desk-type of services. So, it really opens up the world. Any enterprise that comes into market to use video infrastructure as a service, we have them on our radar, and we are in good shape on that front.

Looks like we have another question that came in online. It is related to one of our newer partners in the past couple quarters. It's Nexus IS. The question is, are they contributing to our business?

Nexus IS is active, really active, with Glowpoint. We're really excited about that partnership. For those of you not familiar with Nexus IS, they are a sizable organization in the IT integration space and part of the Cisco ecosystem. And so, have very strong relationships with some of the largest enterprises in the world who rely upon them for their traditional data, security, and voice needs. And ultimately, made a conscious decision to get into the video communications market, and we were fortunate enough to secure them as a partner. We have won some deals with them, and we have a strong pipeline with them. Without going into gory detail as it relates to the actual numbers associated with them, because there are some restrictions around that, I will say that everything is going very well with Nexus IS.

There is another question online regarding the stock received -- or to be received when the acquisition closes by Affinity shareholders. Will that stock be restricted for any period of time? Yes, there will be a lockout period for the stock as part of the merger agreement. That was filed along with the 8-K. That was filed regarding the signing of the deal yesterday. So, you can find the information there. But yes, there is a lockout period for the stock.

Operator, are there any other questions in queue at this point?

James [Wookey].

Joe, just a quick question. Back in January, you presented at the Noble conference. I believe you quoted Gartner talking about the growth outlook for our industry. And, quoted like 35%-plus growth for the [manservice] marketplace. The question I have is, are the analysts way off? Or, are we missing something that we're only growing our [block] at the 5% level?

Yes. That is a great question, Jim. Thanks for asking. The actual number is 38% compounded annual growth rate. And, it is out of the Gartner data. They put out a market report on the video conferencing segment. And, yes, the analysts are a bit off as they are at times.

Here is the good news. Industry analysts, as far as I am concerned, they are typically directionally correct. From a timing perspective, historically, it is a bit of a crapshoot and is based on economic conditions and such. So, exactly how much they are off, I can't speak to at this point. But, we could go back and take a look at what the current market data looks like as it relates to the study we used for that particular analysis.

Okay. Do you believe it is more -- been delayed just because of what is going on in the cloud? Or, on the equipment side?

Yes.

Or, the capital spending in general by corporate America?

I appreciate it. Thank you for the leading question because, I don't know if you caught in our press release -- I realize that you didn't have a lot of time to potentially digest it before the call. But, we absolutely attribute much of the conditions, as I call them, relative to elongated sales cycles attributable to buying decision-making process being delayed. The primary reason of the delay -- sure, you could chalk it up to economic trouble. I think we're all familiar with what is going on in the European Union and everything else.

But, I see it differently. Of course, I don't discount that. But, at the end of the day, there is a rapid shift. This is undeniable. In the needs of enterprise communities, and what we inevitably see in RFPs and such, is a fairly new endeavor to evaluate options relative to go into the cloud. So, that is a shift that is changing and delaying certain buying decisions in buying perhaps videoconferencing gear or infrastructure and so on and so forth.

So, Glowpoint benefits from both sides, interestingly enough. When someone goes and buys more technology, Glowpoint is there to manage it or to ultimately connect it into our cloud for B2B services and such. So, delays nonetheless, regardless -- although I do speak to -- I believe that puts us in an advantageous position because these conditions and trends, ultimately at some point, become more cloud-based decision-making upfront as opposed to evaluating something different first. And, that is exactly what we do, right? So, I definitely attribute much of the delays and would think Gartner and the likes of Frost and Sullivan and everyone else will be talking about those kinds of things. I don't just make this stuff up. That is the commentary on that one.

Okay. Are you seeing any indication that those delays are ending, if you will, as we move forward and the deal closes?

Well, for Glowpoint, I can speak to. Like I mentioned, Q3 and typically the summer months for sales bookings are somewhat slower. We are seeing the opposite. So, all bets are off on trends relative to that stuff.

But yes, I absolutely do see things come to fruition. In fact, I do see some very good sales booking numbers at this point at this stage in the quarter for Q3. Hence the reason, I feel good about growth returning to the levels that we expect.

Excellent. Thank you.

You bet.

We do have one more question from the line of Jack Gilbert.

Just real quick. You mentioned the Stryker, Sabre. You mentioned, I think, over the last three or four months, three different major things, and one that nobody has mentioned at all. Could you just talk a little bit about Regis?

I don't know that we publicly disclosed anything about Regis, Jack. So, I appreciate the rumor mill. I won't hold it against you. But, we did talk somewhat cryptically. We try to be as transparent as possible. Right?

I guess it was the Sabre mentioned Regis, and then it mentioned us right below. I guess that was my mistake.

No worries. The big opportunities that were mentioned are certainly in the process of being on boarded. And so, we're looking good in that regard. But, there are some big things that have come to closure kind of going to what we just talked about, and that is a positive thing for us. Where we were a bit sluggish there in the first half of the year.

Okay, thank you.

You bet. Okay, there is one more question online that I would like Tolga to hit on because it is an interesting one. And, the question is, in light of the near demise of Knight Securities, which was an interesting development last week, right? Is there any consideration that the Company is contemplating moving to the NASDAQ? I will let Tolga speak to it. But yes, that was an interesting development there. Pretty scary one.

Right. It looks like they got the capital infusion. They survived. They are back -- by the way, for those who don't know Knight Capital is our designated market maker on the [NYC NKT] trading place platform. And, we currently have no plans to go through any shifting in our listing status. Although we are not committing to anything.

Okay. I think that is a wrap. I just wanted to, on behalf of the entire management team here at Glowpoint, mention that we look forward to coming quarters. We'd like to thank everyone again for your participation today on the call. And, as always, we very much appreciate your continued support. Thank you.

Thanks, everyone.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.