Good morning, and welcome to the ClearOne Communications First Quarter 2012 Earnings Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Robert Jaffe. Mr. Jaffe, please go ahead.

Thanks, Amy. Welcome, everyone, and thank you for joining us today to discuss ClearOne's 2012 first quarter financial results. On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Vice President of Finance. First, some housekeeping before we start. Please be advised that this conference call is being broadcast live on the Internet at www.clearone.com. A playback of this call will be available for at least 3 months and may be accessed on the Internet at ClearOne's website. Before we begin, I'd like to make the cautionary statement and remind everyone that all of the information discussed on the call today is covered under the Safe Harbor provisions of the litigation reform act. The company's discussion today will include forward-looking information reflecting management's current forecast of certain aspects of the company's future, and our actual results could differ materially from those stated or implied. With that said, let me now turn the call over to Zee. Zee?

Thanks, Robert, and good morning, everyone. I'm pleased all of you could join us today to discuss our 2012 first quarter financial results. The revenue for the 2012 first quarter fell short of last year's record-setting numbers. This was primarily due to a decline in sales in EMEA and softer sales in the Americas. We believe the softness in the North American market can be mainly attributed to reduced procurement and project delays in the government sector. Also, revenues from APAC remained flat due to sustained regional macroeconomic conditions. It should be noted that the year-over-year revenue drop of 5% in the first quarter of 2012 followed record 28% year-over-year revenue growth in the first quarter of 2011. In mid-February, we completed the acquisition of VCON, a leader in high-performance, end-to-end software-based video conferencing and infrastructure. The acquisition will complement our established audio leadership in the enterprise marketplace with lower-cost, high-quality videoconferencing and collaboration solutions. This acquisition allows us to combine and seamlessly deliver VCON's full high definition videoconferencing technology with ClearOne's legacy crystal-clear audio for a variety of enterprise applications, including feature-rich systems and desktop video applications to enhance infrastructure and network management solutions. With this brief introduction, I would like to turn the call over to Narsi for a more detailed discussion of our financial performance.

Thank you, Zee, and good morning, everyone. Before I begin, I would like to point out a few things. First, I will be discussing certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to reported GAAP measures are included in the earnings release that went out this morning. Also, the financial performance in the first quarter of this year was solid. However, we reported record revenue gross profit and operating income in last year's first quarter, making for a challenging quarter-over-quarter comparison. Finally, financial results for the 2012 first quarter included the operations of VCON, the videoconferencing solutions company we acquired in mid-February 2012. Now turning to our financial results. For the 2012 first quarter, revenue of $10.2 million compared with $10.7 million for the 2011 first quarter. Gross profit was $6.1 million or 60% of revenue compared with $6.3 million, or 59% of revenue, for the prior year first quarter. Total operating expenses were $5.4 million, which included proceeds from litigation of $250,000. Excluding the litigation proceeds, total operating expenses were $5.6 million. This compares with $5.1 million for the same quarter last year. Operating income were $711,000 compared with $1.2 million for the 2011 first quarter. Net income was $453,000 or $0.05 per diluted share compared with $812,000 or $0.09 per diluted share for prior year first quarter. Non-GAAP net income was $626,000 or $0.07 per diluted share compared with $1.1 million or $0.12 per diluted share for 2011 first quarter. Our balance sheet continues to remain strong. At March 31, 2012, our cash balance was $10.6 million and no debt, which is after paying for the VCON acquisition. I would now like to turn the call back over to Zee. Thank you.

Thank you, Narsi. I'd like to share with you some nonfinancial corporate highlights since our last call. The video market is approaching and inflection point. We believe the architectural shift from hardware-based to software-based video applications will bring disruptive changes in the market. The timing to introduce software-based video solutions for the room and desktop is ideal for ClearOne. To leverage these impending changes in the coming years to the benefit of ClearOne, we bolstered our executive management team with the addition of 3 new executives having a wealth of knowledge and experience in the video streaming and signage market. Avishay Ben-Natan, appointed as the Chief Technology Officer for ClearOne, will drive strategic technology innovation by aligning ClearOne's technology vision with its business strategy. Mr. Ben-Natan brings more than 30 years of experience in advanced technology including digital video compression, streaming, codecs, professional conferencing and digital signage. Rami Bahar is an industry veteran with more than 25 years of sales and marketing experience in the professional AV and digital signage industry. As an industry veteran, his previous experience includes managing national and international sales, market and business development operations for Sharp and Philips. Mr. Bahar will have worldwide sales responsibility of all ClearOne video products including videoconferencing, multimedia streaming and digital signage products. Additionally, Mr. Bahar will have international sales responsibility for the entire line of ClearOne audio solution in the markets outside North America. Finally, Shai Toren, appointed as Vice President of the Videoconferencing business, will be responsible for business operations and go-to-market planning for ClearOne's videoconferencing solution. Mr. Toren most recently spent 5 years with Polycom video solutions group managing worldwide video partnering solutions for the company. We also would like to share with you a significant development with respect to our efforts to fortify our channel partner relationship. ClearOne has secured the most preferred partner status with one of the world's largest leading professional audiovisual integration services company. We achieved this distinction as a result of our consistently superior product and support offerings. We believe this strategically important enhanced partner relationship will give us a competitive market advantage and lead to significant growth opportunities in the future for our entire product portfolio. We look forward to seeing many of our partners at the biggest audiovisual exhibition of the year, InfoComm in Las Vegas, during the week of June 11. During this event, we will be launching several of our newest solutions for professional audio, streaming, conferencing video and digital signage, including our first software as a service cloud-hosted signage platform. We welcome investors and other stakeholders to stop by to see, hear and experience for themselves the extraordinary evolution that ClearOne has made in this extraordinary and fast-moving market of audio and visual communication. With that, and for the time available, we would now like to address any questions you may have. Operator?

[Operator Instructions] Our first question is from Chris Armbruster from B. Riley & Co.

Could you give us a rundown of the product groups, the contribution for revenue for the quarter and the growth rates professional, tabletop, premium, et cetera?

Sure. Professional -- the share of professional is 62%. Firstly, let me go through the share of the revenue and then I will go through the growth rates or decline rates, okay? Professional, 62%. Please note that when I gave the breakup last quarter, I included one product, INTERACT Pro, as a premium product after discussing with the industry people and also with the way industry evaluates us. We went back to grouping INTERACT Pro along with pro products. We made the change last quarter and now we are going back to the our consistent old way of including INTERACT Pro as a pro product, okay? That's why when you see this, you may want to take this into note. And if you want to have the prior year quarter numbers revised, I can give you the number also, okay? Professional, 62%; personal, 15.2%; tabletop, 9.5%; premium, 5.9%; NetStreams, 3.2%. And the growth rate: professional, it's 2.7% down; personal, it's 3.6% down; tabletop, it's 12.7% down; premium, it's 10.5% down.

Okay. And what's was the contribution from VCON for the quarter?

VCON, the revenue was about $78,000.

Okay. So that -- some of the weakness that we're seeing is kind of spreading to the different product groups and you mentioned that it was EMEA and soft Americas that were kind of contributing to it, but is there any kind of broader trend towards spending for -- that you maybe expect to continue throughout this year that might be more at the CapEx level than just -- than you might have expected previously?

At CapEx level? We don't have usually big budget for CapEx. It's always the...

No, I think he was referring to at the consumer CapEx level. The fact that this was sort of across-the-board really indicates that, again, it's kind of macro project delay hold-off on spending phenomena, quite frankly. That's how we see it.

Okay. And then can you just maybe comment a little bit on the inventory situation? It looks like it jumped again this quarter. I know you strategically built inventory in the past, so can you give us a little bit of color behind that?

Yes, we look into the possibility of rolling back some of our forecasts and cutting the production. Since we had already given the forecast, it was more expensive and it's not cost effective to reduce the inventory against our forecast. We are confident the current level of inventory is something that we can consume in the normal course of business in the next 2 to 3 quarters without having to make costly production cuts against the forecast. And if you have seen our prior financials, we do not propose [indiscernible]. We have upwards of $15 million. And now we have about close to $17 million, but we were able to reduce from $15 million to somewhere around $10 million gradually. And similarly, I think we can do it, but I don't want to do anything that will hurt our margins. And we are not in a situation where we have to force production cuts to [indiscernible]. We have cash. We can absorb it in the normal course and we have, since June 2009 levels, we have more than 50% revenue actually. I think in gross, in dollar terms, it will look like inventory is going up. It has gone up, but I think since our shelf life is very long and we don't see any obsolescence or any of the issues coming up, it's not a concern for us and we think we can consume in the normal course in the next 2, 3 quarters.

I also wanted to add that we have a percentage of business that we do directly with the value-added resellers and integrators. I mentioned at the end of the call that we have achieved preferred partner status with one of the largest integrators in the world. I also mentioned that with that, we expect more direct business from that relationship. So again, our inventory and our direct relationships they're correlated and certainly we expect our direct relationship business to increase, further accelerating the consumption of inventory. I will add it is not uncommon for us to have requests -- significant requests for second and third-generation equipment, the XAP, the ClearOne AP. Had we that equipment on our shelf, we can also sell that. Our equipment is not computer equipment, which had been aging that diminishes the value and there's no history, I think that Narsi could agree, where our solid products have hurt us financially by sitting in inventory.

Okay. And I also noticed in the quarter you spent a little bit more on R&D. Is that something that is related to the acquisitions and integrating the technology into your combined offerings?

Of course. R&D includes additional expenditure. Everything out of VCON personalizing part of our consolidated financials. But even without VCON, we did spend more on R&D and it's part of our roadmap to introduce new products later in the year. And it's necessary and it is not an unbudgeted expense. It's already -- this was planned product.

Okay, and then last one. Just going back to the revenue, the revenue weakness, I guess, or softness. Is this something that you guys are seeing as a multi-quarter situation? Do you have a feel for when you think some of these product segments are going to pick back up?

We don't have obviously a crystal ball on these macroeconomic conditions. Certainly, there's greater threats in EMEA. We couldn't possibly say that EMEA has fully stabilized with the elections. I think that in North America, we see more activity but we're in an election year and who knows what the future holds. I would say that going into this quarter, we're relatively satisfied with our results and we will do whatever is necessary to manage the top and bottom line.

Our next question is from Elliott Gold with TeleSpan Publishing.

Actually my question was about VCON and the question was already raised. If I understood correctly, you said that the revenue contribution for the quarter was $78,000?

Yes, basically we bought VCON in this situation with minimal inventory, quite frankly. There was very little workable inventory. So we are just gathering -- I would just say gathering our operations there, consolidating it into here and we've actually moved production to Flextronics. We'll be moving it in the weeks ahead after ordering materials to fulfill demand. So we sort of assembled what we have, put together what we have, but they were not in the shape to make shipments quite frankly.

Our next question is from Laura Engel with Stonegate Securities.

I wondered as far as looking forward and you did discuss sales channel and some new developments there, what can you tell us over this quarter and looking into the next quarter as far as how the sales channel is developing as far as new channel partners? And then also maybe I know we had discussed scaling certain solutions to increase sales in small and medium business markets and resellers. Can you comment on that?

Okay. That's quite a few questions. But speaking broadly, first, I must stay we don't give guidance, as you know. But I will say that last quarter we saw good progress in the development of our IT channel. I think if we separated out our telephony personal products, they made good progress with their new channel partners so we continue to work in that direction. Our integrator channel, as I mentioned, is very important to us and we will have some new solutions in the weeks -- I guess I would say in the months ahead, that I think they're going to be very excited for. We believe that, that is a very important channel that we continue to focus on obviously. VCON brings some interesting channels to us. As you know, the software-based videoconferencing is an ideal solution for small and medium businesses and they have brought to us partners that they had been trying to foster in the past year, albeit with great challenges in not having inventory. And I just got back from a very large tour in Asia and Rami has basically had a very large tour of Asia, India and Europe in the last couple months fostering those channels. So we're optimistic that our focus on developing these channels for the diversity of products that we're introducing is looking -- is improving.

Okay, and then related to VCON, for this next quarter as far as any additional integration costs or effects on your P&L, what should we expect for that or would you consider that fairly integrated at this point?

We have started VCON. Right now it's more a separate entity we are still integrating. We can -- I think, this quarter since acquisition, it was more than $200,000 of expenditure. But going forward, it will be a little harder to give those numbers. Teams interact with each other and VCON engineers won't be working exclusively on VCON products, and similarly, ClearOne engineers and other engineers will be working together. Just like we integrated [indiscernible], it will be harder to give certain pictures like this going forward. It would be an integrated team. But as of this quarter, in this 1.5 months, they added more than $200,000 to our costs actually.

Okay. And then lastly, I guess, can you just comment on any seasonality with the business that you might expect in the next, I guess, 2 quarters as we approach the summer months and people travel. I know you mentioned you saw some hold-off on spending with some of your buyers, do you have -- historically, have you seen that seasonality or is it a smooth growth trajectory that you expect to see?

Usually, Q1 is our worst quarter and Q4 tends to be the best quarter. But we have seen, last year, that the variations among Q2, Q3 and Q4 have not been much actually. That's why I say confidently that Q2, Q3 and Q4 are going to be better than Q1, but I can't say how good the remaining quarters are going to be in terms of scaling actually. It would be better than Q1.

Our next question is from Michael Kay with Kay Associates.

Yes, the one about VCON and its contributions was already answered. Excuse my ignorance, but what's EMEA, please?

EMEA is Europe and Middle East. It represents a regional territory where we look at it to consolidate sales in that region.

So would you say that the company is now somewhat more dependent upon sales in international sales than U.S. sales?

No. Our revenue is -- Narsi can give the figures, but it's predominantly centered in North America. But we've seen the greatest growth in APAC as a secondary. Narsi, do you want to give [indiscernible]

Typically, we get more than 60% of our revenue from the North America and it hasn't changed significantly in the last few years. The trend has been to move towards international, but it's not been much. We are predominantly dependent on North America even today.

So those results in North America were more or less even for the quarter, but was there -- there was a deceleration of the increase in revenues in Europe and the Middle East and Asia, right?

There was a decline in revenue in the Americas, but it wasn't as much as it was in EMEA. In APAC, it was kind of flat actually.

The next question is from Alan Mitrani with Sylvan Lake Asset Management.

Just a few balance sheet questions. It seems like your accounts receivable were down a lot year-over-year and sequentially your days sales outstanding improved. Was there something specific to this quarter or in the business that accounts for that?

In the last 3 to 4 quarters, we have focused pretty well on our account receivables and we have been very rigorous in bringing down overdue accounts and everything. This would be a continuing trend actually. This is not a one-off thing actually. We have improved the way we manage our accounts receivables.

Okay. And also your deferred revenue product revenue line, can you just explain that line a little bit because it happened to be that in -- back a couple of years ago, that line was in the $5 million high 4s and now you've dropped a lot over the last couple of years. It's down year-over-year. Just talk a bit about what's driving that? Is there just a change in the way you do business? Or what does that line represent?

Yes. Typically, that line represents the amount of inventory carried by our distributors, which we don't account for in our revenue. Basically, those inventory is paid for in the normal course. It's not our inventory. Legally speaking, it's their inventory, they accounted on it. But since we have a safer way of calculating revenues, that's the portion of inventory that's, I think, will be distributors but also are in their inventory, we are not counting it. But the deferred revenue calculates that part of it. We have -- and there is no risk of not collecting that portion of inventory. It has been just out of our warehouse and sitting in their warehouse, it has been paid for, mostly paid for. Second, we have -- since June of 2010, we have increased the number of resellers with whom we deal with directly. Even the deal with resellers directly, we don't have any deferred revenue from those resellers. And it has caused our deferred revenue to go down since there is no inventory that we account back instead.

Okay, so it's down also because you're dealing directly, so you don't have to see that, great. Just a question on inventory. Why is it that your long-term inventories increased in the last 2 quarters? I was under the impression that, that line eventually was going to go away as you had worked it down considerably from the $6 million level down to $1.5 million in September. But then for some reason it went up the last 2 quarters. What don't you just get rid of that line and eventually as you work that down, why is it increasing?

Okay. There are 2 components to what we do with the long-term inventory. Some of them are parts of the inventory which we keep. As I said, we carry it from our -- for various reasons, we inherited some long-term inventory. It will take some time for us to rework into existing inventory that we can sell. All of those, can be reworked into sellable current inventory parts that we can sell. But the second part -- that will take some time. Slowly, it won't an immediate reduction. But on the other hand, there is also a portion of inventory, which is simply a mathematical calculation based on the run rate of our existing revenue and what we see in the forecast, which exceeds more than one year of our revenue. Since we accumulated from stock due to our forecast before, mathematically some of them will be higher due to run rate actually. It will go down as we consume and as we -- as I said to Mike Kay, the next 2, 3 quarters when we reduced overall inventory, this number would also go down actually.

Okay. I don't spend a lot of time on this balance sheet stuff, but I'll get back to the income statement. Could you just explain, you talked about the fact that you're not worried about inventory. You tried to cut your inventories, but it seemed to be too expensive to change your orders. And it sounds like, just from the way you're talking, that inventories are actually going to go up the next couple of quarters as VCON comes in and actually builds some inventories. It just seems, though, that in order to clear your inventories a couple of years ago, you have to had 30% to 40% sales growth. Now, you're facing negative sales growth. And I'm just worried as to why you're not concerned that your cash conversion cycle and the time it takes you to convert $1 into sales, into cash is close to a year now. Inventories are almost a year. You have 370 days of inventory. It's 355 days of inventory counting the long term of inventory. It's too much.

Okay, let me explain to you. If you looked at our balance sheet, in June of 2009, when we had our peak inventory, we had close to $15 million and we had a run rate of about $30 million, $31 million in revenue. Now, we have a run rate of close to $42 million, $43 million plus. It's 50% more, but we have another $5 million, $6 million in inventory -- about $2 million, sorry, $2 million more in inventory. Our run rate we are not expecting it to go down significantly from what we are doing, that's point one actually. And we have shown before how we can reduce the inventory from that high level to $10 million to $11 million and we can do it. Second, the forecast of what we said -- if you had paid close attention, our inventory started going up only from Q3 actually, Q3 of last year. Up to Q2 2011, it was fine because we were in growth mode our forecast where taking into account growth mode and the inventory is there, forecast is based on that. We have a new forecast of -- we have revised our forecast starting from Q3 actually. But if you have seen the buildup starting in Q2 and then [indiscernible] happening right from Q3 actually. And I am confident by Q3 and Q4, you will see a good reduction inventory to match our optimal run rate for our revenue and inventory.

Okay, I'm not going to harp on that anymore, but I appreciate the explanations and the hope. But Zee, just following up, it seems like you're not seeing an acceleration of sales. You have a very tough comp -- you have, in fact, you have tough comps coming up the next few quarters because you had sales growth last year in the second and third quarter. It just strikes me that sales aren't going to grow this year despite the VCON addition. What are you doing to mitigate it from a cost perspective if you do not have any sales growth this year?

Well, I'm not anticipating no sales growth this year, to start, okay. But we -- that's one. I do anticipate that we will be making investments in our acquisitions again that are of strategic importance to us to, in fact, grow. We may this similar decision back in 2004 and '05 when all we had was pro products and we made a strategic decision that we're going to invest in growth. It doesn't come for free, I wish it did. And I anticipate that we're going to do pretty well this year. I will say that we have also demonstrated that we are very good at managing our expenses for unforeseen, which we don't anticipate, events. And we budget carefully, we manage our expenses, we don't put on things that are unnecessary. But we feel we are taking the proper steps to pave for the growth that we deserve and that we think we are capable of in the years ahead, but it won't come for free. It's of strategic importance. I mentioned also that we're kind of at an inflection point in terms of conferencing. We have all the pieces and with some hard work and some good luck, I think we're going to get there.

Our next question is from Wyatt Carr with Crowell, Weedon.

Just a quick question. You said you expect acceleration in the distributor business and I'm curious as to what's your margin expectation is between the direct and the distribution in distribution model businesses?

Wyatt, I think we had a bit of misunderstanding. What I said is that we have developed a significant relationship with a direct dealer who is not, in fact, a distributor. This direct integrator buys directly from ClearOne. So with that, we expect a good growth in this relationship for our entire portfolio of products. I can't put a number on it, but I will say that it's a very important relationship. They've always been a very, I guess, you could say they've been our top direct dealer in the past. They're the world's largest integration services partner and so we expect to see good revenue growth in the future with this new relationship that we've established.

Let me add to what -- Wyatt, if you're talking about the reduction in deferred revenue due to going direct. Going direct has again some usual distribution doesn't give us any significant margin additions because we have to invest in more people and everything. But at the same time, it doesn't dilute our margins. It's a bit of between other costs and margins. But what we do gain is our ability to be flexible to the market demands since we are cutting one layer of intermediary. We are closer to the end customer and we are able to give better pricing, we are able to beat our competition. We have more chances to work with reseller directly. And that's what our model has been to, as much as possible, as it is economically and reduced to solely our customers. Ultimately, it's the end customers will decide how they want to work with and we try to do what works for our end customer the best, okay?

Okay, great. And then secondly, Zee, in talking about the video market and the shift to soft base versus hardware. Is a portion of your revenue is going to be software? And if so, what kind of impact to margins do you see software versus hardware?

Well, yes -- and yes we expect at the desktop software-based client or software packages with dongles and so, as you know, software generally has very good margins and we anticipate that those margins will continue. There are appliances associated with software-based codecs oftentimes used for infrastructure and other things and again because they're software-based, the bulk of the value within the software and not in the supporting PC hardware. So we anticipate, as we planned, that our investment in VCON would be a very good match to continue our very strong gross margins as a company going forward. We have nothing to lose, but everything to gain.

Okay. And just last kind of cleanup question. On the legal side, your legal fees came down substantially in this quarter. Are there anything -- is there anything lurking out there as far as either patent or prior that you expect that could increase the legal fees?

Okay, Wyatt. One thing I want to point out is that if you are looking at the non-GAAP adjustments where you saw litigation expenses relating to prior legacy issues limited to $127,000. That's not the entire litigation expenses that we incur. That's the portion that is attributed to other legacy issues. We always break it out because that had been an interest of our investors and we have done that. There are other legal costs like the one that we are engaging currently on the -- on our arbitrations proceedings against a couple of big banks on the audit rate -- auction rate securities, sorry, auction rate securities. We do incur legal costs on those issues. And to answer back on is there anything lurking on those patent issues, we have given a very detailed disclosure in our 10-K and we don't have anything more to add on this call and we will be issuing our Q Monday and you can, if there is an update, you will see there. As far as sitting from here, we don't see anything material that needs discussion here in this call actually.

This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Okay, thank you. We appreciate your continued interest in ClearOne and joining us today in our quarterly update. If you have any further questions, please contact ClearOne Investor Relations. And that concludes our call for today. We thank you for your time.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.