Good day, everyone, and welcome to the ClearOne Fourth Quarter 2012 Earnings Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to PondelWilkinson's Mr. Roger Pondel. Mr. Pondel, please go ahead, sir.

Thank you, Kate. And good morning, everyone. Welcome and thank you for joining us today to discuss ClearOne's 2012 fourth quarter and full year financial results. On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Vice President of Finance. First, some housekeeping before we begin. Please be advised that this call is being broadcast live on the Internet at www.clearone.com. A playback of the call will be available for 3 months and may be accessed on the Internet at ClearOne's website. Before we begin, let me just 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 actual results could differ materially from those stated or implied. And with that, let me now turn the call over to Zee. Zee?

Thank you, Roger, and good morning, everyone. Thanks for joining us today to discuss our 2012 fourth quarter and full year financial results. We finished the year with a solid quarter, with record fourth quarter revenue. We exceeded $13 million in quarterly revenue for the first time in Q4 and achieved 9% year-over-year growth. We also ended 2012 with a small year-over-year growth in revenue. We believe this is strong performance when compared to the performance of our bigger competitors in the market. We also made excellent progress strengthening our balance sheet. We did this by reducing inventory levels and adding more than $38 million to our cash position with the settlement proceeds from litigation related to auction rate security. Over time, we will thoughtfully evaluate opportunities available to us and use the cash for selective infusions of technology, sales and marketing, infrastructure and/or other investments to fuel our growth, and we will consider acquisitions that may strategically fit our business and would be accretive to our performance. To that end, we recently announced an increase to our stock repurchase program from $3 million to $10 million. We will make these purchases in the open market. In December, we announced our new digital wireless microphone system, a complement for professionally installed audio conferencing product line. This microphone system uses radio frequency digital wireless signal transmission technology with highly secure encryption and importantly, it is optimized to work with our CONVERGE and INTERACT professional products. This new wireless microphone system will complement our hugely successful ceiling microphones and the newly introduced very innovative Beamforming Microphone Array, the only one of its kind in the industry. The Beamforming Microphone Array and wireless microphone system are expected to ship in the weeks ahead. On the sales front, we continued our strategy of establishing…

Thank you, Zee, and good morning, everyone. Before I begin, I would like to point out 2 things: First, I will be discussing certain non-GAAP financial measures. Reconciliation of these non-GAAP measures to reported GAAP measures is included in the earnings release. In addition, our financial results include favorable judgment awards and settlement proceeds. As Zee mentioned, we received more than $30 million in the 2012 fourth quarter from litigation settlement. We also received a $3.7 million judgment award last year which is included in the 2011 full-year results. Both amounts can be found in the operating expense section after statement of operations and had the positive effect of decreasing total operating expenses and increasing both operating income and net income. Now turning to our financial results for the 2012 fourth quarter. Please note the following comparisons refer to the fourth quarter of 2012 and also the same quarter of 2011, factoring in, it leads you to $13 million, up 9% from $12 million. Gross profit was $7.4 million or 57% of revenue, compared with $7.1 million or 59% of revenue. The decline in gross margin as a percent of revenues was due to higher inventory optimism. Turning to operating expenses. Sales and marketing expense rose slightly to $1.9 million from $1.8 million. Research and product development expense increased to $2.3 million from $1.9 million. General and administrative expenses increased to $2.4 million from $1.3 million. G&A expense in Q4 2012 included a special bonus paid to key litigation participants and contributed to the [indiscernible] arbitration and to the successful settlement of the litigation with UBS. Operating income was $39.1 million and net income was $24.5 million, up $2.67 per diluted share, which includes $38.3 million of net proceeds from litigation settlement. This compares with operating income of $2.1 million…

Thank you, Narsi. With that and for the time available, we would now like to address any questions you may have. Operator?

[Operator Instructions] And I'm showing we have a question from the line of Jim Gentrup with Discovery Investment.

Just wanted to ask you about the growth that you're talking about. Kind of a little more drill down into what products you see growing, what areas your core business and as opposed to some of your newer acquisitions you made and that you expect -- also, if you expect it to be double-digit in nature?

Well, first, let me just get rid of the magnitude of the growth. I can't forecast what that will be, but I will say this, that we have, really, 2 things that are happening on the product side and 2 things that are happening on the channel side. On the product side, as you know, we introduced video conferencing and so that is an area of what we believe will be a significant contributive growth because, as I've talked about before, there's a paradigm shift from hardware-based video conferencing to software-based video conferencing, and ClearOne is fortunate to have technology and products that are extremely innovative in the new realm of software-based video conferencing. Also on the product side are developing extremely innovative products for the pro AV product set. For example, we hope to be shipping within the next couple of weeks our Beamformer Microphone Array, which is explicitly -- interfaces with our professional -- Pro conferencing products. It won't work with any competitive products. It will drive our Pro products for growth, and there is nothing like it in the market today, extremely innovative audio product. So we're growing, were attempting to grow both product sets. On the other hand, as you know, we have worked hard to develop an IT channel strategy because we believe that the IT channel is a great greenfield for further conferencing sales as A/V converges with IT. The IT channel is an area where traditionally, ClearOne has not played in early on, and we're bringing on good strong partners and we expect to see growth with all our products there with the exception of the Pro product. On the pro AV channel side, that is another area we made some manufacturing rep changes, fortified our sales team on the ground, including our man reps and hope to see growth in that channel as well as we introduce the new pro AV products. I hope that answered your question.

Yes. Did you get any -- did you -- was there any material contribution from software-based video conferencing sales in Q4?

Yes. We will be reporting, we have close to $600,000 worth of revenue from the video sales.

How much?

$600,000 worth of video conferencing sale, actually.

600?

Yes.

$600,000. Okay. So you do have -- you are starting to see some contribution there? And is this only sold through indirect channels, the software-based?

Well, we -- all our products -- we generally do not sell any of our products to end-users. We go through generally a two-tier channel through distribution and then to value-added resellers. We also have some premium value added reseller partners that we sell directly to.

Okay. And then in regards to the use of cash, you have your free cash flow positive, and I assume you expect to stay that way, and you have this $55 million. I know you're buying back some shares but have you considered a dividend?

We consider everything. There isn't anything that we don't consider. Our goal as a small company is to fund our growth. We fund our own growth as you know. And in high-tech, as you well know, it's a highly competitive market. There's technology innovation, market innovation, channel innovation and we will look at every possibility as we go and put that money where we feel we will get the best growth for the company, which in turn will bring best value to our shareholders.

Our next question comes from the line of Aaron Martin with AIG Investment Partners.

Can you clarify a little more on the OpEx in terms of the onetime items related to the litigation? And how we should -- what the extent of that was?

Actually, we have disclosed it in another non-GAAP reconciliation, net income fee that was specifically adjusted. We had about totally for the entire year about $900,000 worth of litigation expenses connected to our legacy litigation as for ARS.

Was about just the fourth quarter?

Fourth quarter totaling about 376k.

All right, say that again?

376k.

The increase quarter- over-quarter in G&A.

It was about 340k.

Okay. And that -- the bulk of it was related to that?

Yes. And the G&A also includes a special bonus that was given to all the contributors of the successful settlement of the UBS, actually. That's a big amount that's in the G&A, actually.

And that you did not back out of non-GAAP?

Yes. We backed out from the proceeds from the litigation, actually. We had a separate line that pulled out the litigation proceeds based on the settlement amount, that's the credit that we had, and that's what netted that amount, actually.

Okay. What was that amount?

It was a little over $600,000.

$600,000. Okay. And so I guess we're really looking forward and really would expect to see that G&A line come down a significant amount from a quarterly basis.

Yes. These onetime items will go there actually.

Great. And then just jumping quickly on the share buyback, have you bought back any shares yet?

The other day, announced what we bought back to Q3, we were in the blackout for most of the time in Q4, and we will start coming through the rigorous buyback after this call, actually. Maybe, we'll start sometime -- day after tomorrow.

We were in the blackout, I should add, during the bulk of Q4 because of the actual arbitration activity.

Understood. I mean, as we've talk before in the past with the fact that with all the cash there and the fact is right now as we're growing EPS, whatever we can do to shrink the share count really as you're growing EPS is going to go far away to juice that EPS number.

[Operator Instructions] Our next question comes from the line of George Melas with MKH Management.

I have 2 questions. One of them, Narsi, can you give us the revenue breakdown particularly on the audio side? And the second question is for Zee, on the development of the channel for the video conferencing product, can you tell us what have -- it seems like you're doing good progress there, but can you evaluate that and at what inning you are in that process?

Okay. I can answer that first. I think as far as the development of the products in the channel, there are 2 things that happened. On one hand, of course, ClearOne has not been in the video business prior to our acquisition video conferencing business. So it is a new domain for our sales team and our existing partners -- some of our existing partners. However, we have been in the conferencing business forever, and we work with video as a counterpart to our audio so we're very familiar with that domain, the players, the market, the opportunity, et cetera. There is a ramp-up time. We're making good progress on the training of our team and our outside outside ProA vteam to be more effective as it can. At the same time, the other factor is that software-based video conferencing is relatively new in adoption. I mentioned the company by the name of Vidyo, with a Y, that has been in the business for some time, much longer than us, but as you know, many of our competitors are talking about introducing software-based video conferencing products. They have a long way to go yet. It is not so easy, VCON was in the business for a good solid 10 years or longer developing this technology with funding that exceeded more than $100 million, significant amount of money went into it. So the software-based video conferencing market is a new domain in this video conferencing market as a whole. So there again, users and users, channel partners like to take things a step at a time, evaluate the product, evaluate the application. I would say that we're in scene one, where we have done much of our training, we have projects that are getting bid. I'm happy with the progress that we have made. It's hard to know how the innings will go, but I think that we have a very good start, very good team and the market opportunity will be promising for us. We -- I should also add that the benefit of having video is strong and having it with audio is key because the channel wants full solution. Our audio is the best in the world, and with the video which is the most innovative, I think we have a very good opportunity ahead.

So if we look at your channel -- your audio channel with most of the VARs want, do most of these VARs also sell video conferencing?

Yes. Exactly right. They're not audio resellers. They're A/V, audio/visual integrators and value-added resellers, and they sell video and audio all the time. They had just been, prior to our acquisition of video conferencing, in VCON, they've been focusing on our audio products married to video products so they're extremely familiar with video. What they have to learn is our video, our solutions and they're learning it.

Okay. And then a question, does your video integrate with other audio products or just with your own?

Well, I'll take it a step further. Our video products, of course, work with our audio, but they also work with competitive audio. Further, our video products are not what we call a closed garden. They have fully interoperable with all the leading current video manufacturers such as Polycom, LifeSize, Cisco Tandberg, et cetera, RADVISION. So we have an open garden in terms of our video, and we wouldn't have it any other way. We wouldn't have had an interest in purchasing technology that was not an open garden. And now to Narsi.

Our 2012 full year, our Pro products, which includes an Converge Pro product line Interact Pro for our microphones, all of these products together contributed 70% of the revenue, actually. Our UC products which includes CHAT and MAX lines, they contributed 22%.

22%?

Yes, 22%. And the balance consisted of our media products is about 8%, actually.

Our next question comes from the line of Alan Mitrani with Sylvan Lake Asset Management.

The cash number that's on the balance sheet, the $55.5 million, we have to net that out with the $14.8 million of accrued taxes that you're going to pay, right? So the net cash number of A/V at the end of the first quarter or something like that might be $40.7 million?

Yes, $40.7 million, actually. Yes, that's the right number.

Okay. So the right number after you paid out the 15%, after you paid taxes is cash on the books of $47 million. Okay, great. The inventory -- the sales actually this quarter were pretty good, better than I thought. It seems like you've returned to growth for a while. What was driving that? Which geographies, was it the U.S. or other areas? Can you just give us a sense of where the growth was coming from?

Sure. I can give it by 3 separate regions. Americas, APAC and EMEA. Americas in Q4 grew by about 7.4%.

7.4%?

Yes. And APAC grew closely to 13%, and EMEA grew by close to 12%, actually. That's all around contribution from all the regions, actually.

Great. And for the year, how much of your sale -- what was your sales number in the U.S. for fiscal year '12?

I -- we don't break it out but...

In the 10-K every year, last year was $29.2 million. I'm just wondering what it was this year.

I'll get back to it in a minute, actually. I have it, but it's not in my sheet right now, actually. After all the questions has been answered, I can give it to you.

Let me just ask a couple of modeling questions for this coming year. Your tax rate, what kind of tax rate should we use?

I think we will be at between 34% to 37% actually.

Okay. A little higher, so not that higher than the 35% you thought maybe, let's call it 35%, 36%.

I have to -- since you're asking about the tax, I need to inform that like all high tech companies, our tax rate went up in 2012 because we couldn't get the R&D credit in our book in 2012, actually. Since the law was signed only in January, we will be taking a good amount of R&D credits in 2013. You will see onetime dip in effective tax rate next quarter, actually. I'm not giving a forecast, but that's the already calculated, I guess, for what's going to happen next quarter.

Wait, I'm sorry, I missed the number. So for next quarter there's a lot of R&D tax credits, so what do you think the rate might be for this first quarter?

I can't give you a percentage because it depends on what is going to be net income next quarter. But it will be hard to predict that, actually. It will be a sizable R&D credit that will be coming next and I don't want to play guessing games with the real numbers, actually.

Okay. You've been growing your R&D this year as you took in -- you've bought a couple of companies you bought -- and the people. Do you expect R&D to continue to grow double digits this coming year?

I would say that we like to maintain that steady R&D of relative to revenue. We've made some changes, but the idea is not to dominate with R&D certainly.

That's helpful in terms of a percentage of revenue. And also your inventory. It seems like long time I've talked to you guys about inventory, it seems like for the first time in a long time, this quarter -- the inventory turns moved up. Actually, it looks like your highest in a couple of years if I take in account your overall inventory and your long-term inventory came down. What can you expect? Was it a conscious goal to try to work down the inventory and as well to work down this long-term inventory and can we expect that to continue?

Okay. First, I have repeated this many times. Long-term inventory is simply arithmetic of what we think we can sell in the next 12 months. We, of course, want to keep it low, but it's not actually the absolute inventory that have some additional risk, actually. It's simply what we have beyond the 12-month forecast, that's a different issue. And we talked about high inventory levels then we had the conference call in our -- after the 2012 June numbers. We said we're going to bring down the inventory, and we have been following it up seriously and they're bringing down the inventory. And still have more room to bring the inventory down and we will pursue the goal to keep the inventory at optimally lower levels as possible, actually.

Okay. I mean, Is there any reason you have any inventory the past 12 months?

Oh yes. Let me address that. Yes. We have inventory because we have a very long pipeline between our manufacturer, who was Flextronics, and the time that we have to stock. We don't get great forecasts. Okay. We had distribution, you try to get the best forecast. We have, I would say, that we try to keep a quarter's worth of inventory in stock to make sure that if there are bluebirds or unexpected sales opportunities or mix of distribution of products that we have sufficient inventory to fill the channel immediately, the distributors will not tolerate a lack of inventory from us. Narsi, you may have some other points.

Specifically, on the long-term, I mean, the fact, we discussed it before, we have certain products which we can, we hold as raw materials to service our products, which have been -- and along with our own prediction of how long our inventory pipeline is, although some of our products have low-volume, but to keep the manufacturing cost down, the other one single run for an entire year that also pushes our long-term inventory up, actually.

And if you recall, a high mix low-volume but we still have to supply.

Okay, great. And when you think this video product that you're coming out -- that you've come out with will start to accelerate? Like when do you expect that to result in maybe double digit revenue sales as it rolls out over the next 18 months? When do you think you'll start getting more acceptance in the market and we'll see it on the sales line?

Well, we hope that we're getting acceptance. And it's not necessarily always a linear process. But it's certainly a priority. We'll see that as it goes. We're satisfied so far and hope to be further satisfied. I'd hate to give you a number, but it's certainly -- the entire video domain is a very strategic market for the company and we look at the whole thing. Again, we look at the -- all aspects of video, and that's our focus.

Okay. And then lastly, the gross margins have come down over the last couple of years. I assume it's due to some new product mix or others. Can you just speak to that a bit? And what you expect as you roll this product out or should that come in with lower gross margins? So that's what we should be aware of? Just speak a bit about the changing gross margins.

Actually, this particular quarter, our average is 60%, actually. We still are very close to our average. We had 60% last year, we have 59% this year. So this particular quarter, Q4, we took inventory losses from exiting one product line since it was not after a review of our current technologies and how we are operating the video business, we -- decided not put in this further and take a write down of inventory from one particular product line. That has contributed to us normally 60% gross margin to 57%. But this is a onetime thing. But it should not happen regularly and we should be able to maintain 60% gross margin consistently going forward. I don't see any risk to maintain that margin levels, actually. Of course, we will be the first one to tell you if we feel any risk to that number, actually. We take that seriously and our entire business model is based on maintaining that gross margin levels, actually.

Okay. And I guess, I thought this was the last question but I have one more. On the share repurchase, you have one large shareholder who owns about 28% of the company, right?

Yes. Somebody, yes.

Right. And if you're looking to buy back what's $10 million worth, that represents about 15% of the company here. Are you able to -- so 2 questions. Are you able to do that one in private deals as well such that you might be willing to try take him out at a certain price because otherwise what happens is he becomes a much bigger holder. Do you have any sort of limits, cap limits on ownership from one or two people and so that you don't want someone in a position to exert undue influence or make an offer for the company if he owns too much, be able to do something like that? I was just wondering your thoughts on it. It might hard to buyback 15% of the company in the open market. You may have to do some sort of tenders. I just want to understand your thoughts on that.

Yes. Well, first of all, we don't have a tender, and we don't restrict shareholders from purchasing stock and we encourage shareholders who have an interest in ClearOne and think that it's a good investment to do their part and invest if they think that it's worth of an investment.

Okay, so you're just going to buy all back all this stock in the open market not in privately negotiated transaction?

No, I said we didn't -- we are not proposing a tender on this buyback so we will be buying on the open market. If there are parties that want to do private transactions, we'll refer them to B. Riley who will handle that for us.

I'm not showing any further questions at this time. I'd like to turn the call back to management for closing remarks.

Okay. Well, we appreciate your interest in ClearOne and thank you for joining us today for our quarterly and annual update. If there's any further questions please contact ClearOne at Investor Relations. This concludes our call for today and we thank you for your attention.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.