XWELL Inc (XWEL) 2011 Q3 法說會逐字稿

Greetings. Welcome to the Vringo third-quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Darren Minton of Trilogy Capital Partners, Investor -- IR consultant. Thank you, Mr. Minton. You may begin.

Thank you, and thank you to everyone who has joined us today for Vringo's third quarter 2011 earnings conference call. I'm joined here today by Jonathan Medved, Chief Executive Officer; Andrew Perlman, President; and Ellen Cohl, Chief Financial Officer.

There are a number of items we look forward to discussing with you this afternoon, including Vringo's financial results for the third quarter ended September 30, 2011, recent developments in Vringo's business development and contract pipeline, as well as Vringo's plans for the future. At the conclusion of the call, we will be answering questions during a brief Q&A session.

I also want to bring your attention that a webcast and replay of this conference call is available by following a link contained at the bottom of Vringo's earnings release earlier today and will be available on Vringo's website, IR.Vringo.com.

Now before we get started, I will take a moment to read the Safe Harbor statement regarding today's conference call. This conference call will contain forward-looking statements within the meaning of the US federal securities laws concerning Vringo, Inc. Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially. Please refer to the Company's filings with the SEC which contain and identify important risks and other factors that may cause Vringo's actual results to differ from those contained in our forward-looking statements.

All forward-looking statements are made as of today, November 14, 2011 and Vringo expressly disclaims any obligation to revise or update any forward-looking statements after the date of this conference call.

Now with that, I would like to start the call with a few words from Vringo's CEO, Jon Medved. Jon?

Good afternoon, everyone. And we again really appreciate your taking time to join us on today's call, our third-quarter 2011 review. We had a very productive quarter, including successful product launches and strategic deals, and I'm excited to share with you some of the highlights. I will first provide a quick overview of Vringo for the benefit of new followers.

Vringo provides a range of software platforms for mobile social and video applications. To date, we have developed four different mobile social platforms. Our Video Ringtone platform, our Facetones platform, our Video Remix platform and our Reality TV Fan Loyalty platform.

We plan to develop more mobile social and video application platforms and to acquire additional product functionality and services via acquisitions. Our recently launched Facetones platform integrates with Facebook and provides a new way to get automatic visually exciting social content each time a user makes or receives a phone call. Our Video Ringtone platform enables users to create, download, and share mobile entertainment content in the form of Video Ringtones for mobile phones with built-in social networking capability. It also provides our business partners with a consumer friendly and easy-to-integrate monetization platform.

Video Remix is an application that enables users to create their own music video on a smartphone or tablet in partnership with music, artists, and brands.

And lastly, our Reality TV Mobile Fan Loyalty platform lets users interact, vote, and communicate with contestants in certain reality TV series and even sets their performances as Video Ringtones.

In the beginning of 2009, together with mobile carriers and other partners around the world, we launched our first social mobile platform in the form of a paid Video Ringtone Service and a subscription-based model where users pay a monthly fee for access to our service and additional fees for premium content.

As of today, we have approximately 360,000 total subscribers of our commercial Video Ringtone Services, of which 340,000 are paid subscribers. On a blended rate basis, we are now averaging about $0.14 per subscriber per month. We anticipate that our monthly monetization figure per subscriber for this Video Ringtone Service will increase as we move to the more lucrative markets of Europe and North America. We have built an important initial team of partners around the world for our various product platforms. We have launched our Video Ringtone service to date with seven partners, including leading carriers and partners, such as orange in the UK, Maxis and Celcom in Malaysia, by the way covering 80% of the Malaysian market, StarHub in Singapore, Etisalat in the UAE, Hungama in India.

Our Fan Loyalty product has been released initially with Nokia and Rotana in the Middle East. The application features exclusive content and fully integrated live voting capabilities for the blockbuster Star Academy reality music show, which reaches over 300 million viewers in 17 countries in the region.

Our Video Remix was launched with Heineken. Video mixes created on this platform can be played, shared and posted across social media and the web on YouTube and Facebook. For those of you who have been following the company, we've been putting a large part of our focus on our newest product, Facetones.

Facetones is the next level in mobile social integration. It combines your social media channels with your primary social network, your phone's contact list. Facetones creates a match up of your friends' Facebook pictures, syncs them into your address book, and then when you make or receive a call from your friend, you see a dazzling slide show of their profile pics.

We are supplying this to consumers in three models. First of all, a free ad-supported product; secondly a paid download product; and third, a subscription-based product via mobile operators.

We have recently released Facetones in partnership with Telefonica in Spain and South America, NTT DOCOMO in Japan, and most recently, Verizon Wireless in the US.

In addition to our consumer offerings, last week, we signed a major agreement with ZTE Corporation, the largest handset manufacturer in China and fourth largest globally to preload Facetones application on Android's handsets. As part of the commercial terms of the agreement, these handsets will be sold via mobile phone operators and through various OEM contracts to brand-name handset manufacturers. We believe that this model can be replicated with other handset and device makers. We have a vibrant business development pipeline and are pursuing additional agreements with mobile carriers, brands, handset manufacturers, and other partners over the coming months. We have invested more than $25 million to design and market our product platforms. We have filed over 20 patent applications for our intellectual property with our third US patent being awarded to us in October.

We continue to vigorously create new intellectual property. We are now focusing primarily on monetizing our mobile social applications and services and driving revenues and ultimately profits. While we are an early-stage small-cap company with limited awareness from the capital markets, we believe that as we more effectively tell our story, including the exciting markets that we are addressing, the differentiated product platforms we have developed, and the deals we already have made in the mobile social arena, investors will find Vringo ultimately a compelling story.

As those who have been following the company can attest, we've been very active in signing up new deals and partnerships across various continents, and we have put in place a strong platform for our future growth.

In July, we announced that prominent venture capital firms Benchmark Capital and DAG Ventures led an investment round of $2.5 million in convertible notes to Vringo. These leading Silicon Valley venture capital firms previously invested in leading technology companies, such as eBay, Twitter, Zipcar, Juniper Networks, Red Hat Software, AdMob, Plaxo, Segway, and Yelp. They don't often invest in public companies such as Vringo, and we are delighted they have chosen us as an investment partner.

This investment from such leading venture capital firms not only leverages Vringo's strong portfolio of mobile social and video applications, but also validates Vringo as a new leader in the mobile social arena.

While we are not providing specific guidance on our revenues and earnings, we anticipate that our top-line revenue for the remainder of 2011 will expand due to organic growth and increased consumer uptake, launches with new partners, new products, as well as the success of our Facetones platform, which we will discuss in more detail later in the call. We intend to hold the line on operating expenses we drive to break even and ultimately, profitability.

I will now turn the call over to Andrew Perlman, Vringo's President, to summarize some of the highlights of the third quarter. Andrew, please go ahead.

Thank you, Jon, and welcome, everyone. I'm pleased to provide this business update.

The number of subscribers in our seven active commercial launches of our video ringtone product totals approximately 365,000 to date, representing a 78% growth rate so far in 2011, up from over 200,000 subscribers as of December 31, 2010.

Paid subscribers total approximately 340,000, representing a 126% growth rate this year to date. We have successfully launched our services in markets ranging from the UK to Malaysia and we have a strong business development pipeline.

Based on organic growth as well as new services coming on line, we believe that our subscriber base and revenues will grow at a more rapid pace. As we have discussed in previous calls, we are pleased with our success in Malaysia, where our subscriber base represents an approximate 5% penetration of our partner Maxis's data-connected subscriber base.

As Jon mentioned before, in addition to Maxis, we have expanded in Malaysia with the recent launch in October with Celcom, marking the first country in which we have subscription services live with two major operators.

Having surpassed more than 285,000 Vringo subscribers with Maxis, our Celcom agreement expands our potential reach to approximately 25 million customers in Malaysia.

The early results of our launch with Celcom have been phenomenal, and in the first two weeks of marketing, we already have over 10,000 subscribers in the commercial launch. Celcom is part of Axiata Group, one of the 10 largest carrier groups in the world, making this another huge validation of our technology.

Furthermore, we have been operating our Video Ringtone Service in various markets around the globe with a number of other carriers such as Etisalat and Orange UK. We have continued to build value for our business and our partners and expect to continue to launch new versions of the video ringtone platform with additional partners son.

We are particularly excited about our new Facetones social platform for the fast-growing Android operating system. Vringo's innovative Facetones product represents a breakthrough in combining social networking functionality from sites such as Facebook with the key moments around the phone call in a new and exciting way.

Reaching 100,000 downloads in the first 30 days of active marketing, Facetones has been off to a tremendous launch. Now just over two months into the campaign, we are incredibly pleased to announce that Facetones has surpassed 400,000 downloads. To put this rapid growth into perspective, this means we have tripled the rate of downloads from 100,000 in the first month to over 300,000 in the second month. This rate of growth is a tremendous milestone, and we believe Facetones will continue to grow at a quickening pace as it becomes even more viral.

As an example, for everyone that installs the application on their mobile phone, a notification automatically appears on their wall in Facebook, making their friends aware of the service and offering the app for download whenever one of their friends clicks on the notification. In fact, over 30% of our current downloads are being driven directly from this viral effect on Facebook.

Downloads of Facetones are also growing as a result of being integrated with multiple mobile operators who host the application on their proprietary mobile app stores. Vringo's Facetones application was first launched with Telefonica, the largest Spanish-speaking mobile operator in the world, with over 290 million customers. Facetones was then launched in Japan with NTT DOCOMO Inc. with over 50 million customers.

Last, but certainly not least, Verizon and Vringo recently announced the availability of Facetones on Verizon's V Cast app store, making Facetones available to Verizon's 100 plus million customers in the United States, which is the world's largest smartphone market.

However, perhaps the most important catalyst for our future growth in Facetones is our recent announcement in regards to our preload agreement with ZTE Corporation. As Jon mentioned earlier in the call, ZTE Corporation is the largest manufacturer of cell phones in China and fourth largest globally, and Facetones will be preloaded on their Android handsets. ZTE shipped 53.3 million handsets in the past three quarters of 2011 and their handset business has been growing at a rate of over 20% in China and over 300% in the United States. We are seeing a trend in handset manufacturers seeking to differentiate themselves with software rather than hardware and the preload market itself has become a new, rapidly growing segment of the mobile economy.

With market intelligence firm, I supply predicting that the preload market will be worth $7.7 billion by 2014. App creators benefit tremendously from preload agreements. Some developments have recently announced that nearly half of their new users are coming from preload alone.

Another major benefit of our agreement with ZTE is that Vringo will receive a per handset royalty for every cell phone manufactured by ZTE on which our Facetones application is preloaded. We believe this has the potential to be a significant revenue stream going forward and will be a game-changing development for both Vringo and our shareholders.

We believe that Facetones represents a critical new business area for Vringo, both as a paid subscription-based premium model service together with carrier and other partners as well as a direct-to-consumer free ad-supported version. We hope to soon be able to share news with you about additional exciting new partnerships in consumer uptake and monetization for this dynamic product.

Let me quickly review the key financial numbers, then I will review the key operational achievements of the third quarter and then we will discuss management's key goals and operational metrics as we move further into 2011.

Revenue increased approximately 237% to $182,000 at September 30, 2011 compared to $54,000 in the third quarter of 2010. For the nine months ended September 30, 2011, revenue increased approximately 334% to $556,000 compared to $128,000 for the nine months ended September 30, 2010.

This increase was primarily due to revenue growth in Malaysia, the development of Facetones for Nokia, the delivery of the Fan Loyalty application to Rotana, the delivery of the Video Remix platform to Heineken and new carrier setup fees.

The gross margin for the third quarter, that is revenue less cost of revenue, was $147,000 compared to a negative gross margin of $10,000 in the third quarter of 2010. This growth reflects higher utilization of the fixed base of costs required to operate our service. We expect to continue to improve our gross margins as we scale the business and our number of commercial subscribers.

Operating loss for the third quarter decreased to $1.5 million as compared to $1.7 million in the third quarter of 2010. This reflects primarily the increase of revenue, a lowering of R&D and marketing expenses partly offset by a concurrent increase of G&A expenses pursuant to merger and acquisition activity, and non-cash costs relating to stock-based compensation.

Of particular note, R&D costs decreased over 20% or $389,000 for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010, as a result of proactive cost-cutting initiatives.

On a per-share basis, net loss fell by 37% to a loss of $0.32 per basic and diluted share in the third quarter of 2011 compared with a loss of $0.51 per basic and diluted share for the third quarter of 2010, mostly as a result of several factors, including a decrease in operational expenses, an increase in the weighted average number of shares, and our revenue growth.

Now to wrap up, our key accomplishments at Vringo -- our traditional business continues to grow. Our launch with Celcom resulted in 10,000 paid subscribers in two weeks, an extraordinary feat. Our new Facetones platform surpassed 400,000 downloads in the second month of our marketing campaign, representing truly spectacular growth. Our milestone agreement with ZTE to preload Facetones on their handsets has the potential to be a major new revenue stream going forward. And lastly, our balance sheet is stronger, and we continue to improve our financial metrics on all fronts.

As we look forward to the end of the year, we are excited about launching our new platforms and expanding our reach around the globe. This is a very exciting time in Vringo's development. We believe we can leverage our existing early successes and quickly ramp up the size of our business.

We appreciate the strong support we have received from shareholders and look forward to keeping you updated on our progress and developments as we work through the year.

That wraps up our formal discussion. Operator, we will now open up the call for Q&A. After the Q&A, we will provide some closing comments.

(Operator Instructions). Harold Weber, Morgan Stanley Smith Barney.

Sounds nice. I just, if you could, just walk me through this for a moment. All these different platforms, could you sort of give me an illustration of where revenue generation is coming from for these different type of platforms?

Sure. Basically, there are four different platforms that we are engaged in providing right now. One is our traditional video ringtone platform and that revenue comes from a revenue share with our mobile operator partners, where the consumer pays generally a weekly or monthly fee and then we split that fee with our mobile operator partners.

The second platform is our Facetones platform, which we offer in a variety of different formats, including both a subscription model which we split with our operator partners or a one-time purchase model, and most importantly, a free model, which is ad-supported. And we're starting to see for the first time ad revenue coming to us from Facetones.

The third platform is the Video Remix, which we've received money both from -- primarily as sponsors for sponsoring this application, and that's with the Heineken in particular.

And number four is our Fan Loyalty platform, which we have received revenue one time from Nokia as part of our launch together with Rotana for the Star Academy TV show.

So we have a mix both of recurring revenues that are coming both from subscription revenue splits, as well as now advertising revenue, as well as one-time fees that in some cases actually become multiple sources of revenue from both handset manufacturers like Nokia, sponsorships like Heineken. So we have actually a pretty interesting revenue mix model, which we think, again, having built these relationships with these major corporations bodes very well for our long-term revenue growth. Does that explain the question?

A good part of it, yes. I'm a shareholder. I have a number of clients and they've been all following this for a while. And I just, it looks to me like you guys are really expanding this very nicely. I'm just trying to get my arms around the -- let's say the meat of where our money is going to be coming from.

And I understand the commercial partnering is a -- somewhat of a -- I don't know if you want to call it, a novel method to get the story out there for the company as well as for you, but it seems to me that the -- I guess the lion's share of this is going to be coming from trying to just get regular people signed up. And I'm trying to --

I agree.

And I'm trying to get a feel if this is like -- on a big picture basis, like somebody is downloading an app for $1 or $2 and they've got it forever or are we going to -- I know it was $3 or $4 a month. It's splitting between I guess between the vendor, the carrier as well as yourselves, I'm guessing.

That's correct. In other words, it's more the monthly subscription model than it is the one-time purchase now. But I would point out to our shareholders and listeners on the call, keep an eye on our advertising because this is brand-new, but I think this could actually, over sometime, result in significant revenue.

I agree. I'm just trying to get an understanding of how you are planning to facilitate that to the public.

I think the big issue for us as a small company is how do we get mind share and interest in the broader investment community.

I agree, and without spending a whole lot of money to do it.

Amen to that, okay? So we are doing the best we can. We are pretty proactive about putting news out as we do deals. We are attending a variety of conferences to get the message out. We invite people to join our mailing list and I think we are seeing some results from this, but I think (multiple speakers)

Yes I think you're getting traction, but --

We have a long way to go. We're still early days (multiple speakers)

Oh, of course. It's (multiple speakers) out there. Nobody even -- I mean you ask 100 people I'm telling you 99.5 never heard of you.

That's true. Andrew, do you want to make another comment on this?

Yes. I think the thing that you sort of touched on a little bit is how do you get awareness. And to kind of separate out the investor piece, I think there is also the business development piece, which again, you can notice the rate at which we are rolling out our Facetones product, but the first one is always the hardest.

It's one thing when you come in and you are a small company and you're pitching these huge operators on what your business can do, what your product can do, but once you get the first one under your belt, every -- the subsequent ones become easier. And I think you see that in the rate at which we are growing our subscribers' (multiple speakers) service and also the rate at which we're rolling out our Facetones product.

Has the feedback from the large vendors been to your satisfaction?

I think in general, most of our partners would give us a tremendous grade A kind of rating. From our perspective, as a small company, we want to move as quickly as possible, so --

But you also want to do it right and you don't want to trip.

That's correct.

That's absolutely right.

That's what I -- my -- not that it's happening. I'm not saying that. I just don't want that to happen.

God forbid --

Because once you trip, it's damn hard to get back up again with these (multiple speakers) guys.

Thank you very much for your support and basically following our company as closely as you are. We appreciate it.

And I've got a bunch of shareholders here too.

Thank you very much.

Thank you.

(Operator Instructions). There are no further questions in the queue at this time. I would like to hand the call back over to management for closing comments.

Thank you, operator.

To recap and summarize, again, let me say that we are pleased with our results for the third quarter of 2011, as we believe we have really set the stage for Vringo's future growth.

We've begun to monetize our mobile social software platforms with partners around the world. Our subscriber base has grown substantially. We've developed and are launching additional software platforms. And as we surpass the 400,000 download mark for our Facetones application, we remain committed to becoming the new leader in the fast-growing mobile social arena.

With our robust mobile social platforms and partnerships in place, we believe we are well positioned to capitalize on this market while remaining firmly committed to enhancing shareholder value.

We want to thank you for your time today and we look forward to updating you on further developments. On behalf of the entire Vringo management team, I want to again thank you for joining us today. Thank you.

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