Good day, everyone, and welcome to the ClearOne Second Quarter 2013 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Laurie Berman. Ms. Berman, please go ahead.

Thank you. Welcome, everyone, and thank you for joining us today to discuss ClearOne's 2013 Second 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 would 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 Hakimoglu.

Thank you, Laurie, and good morning, everyone. We appreciate that you all -- all of you could join us today to discuss our 2013 second quarter results. We achieved modest revenue growth, under 1%, in the second quarter. With this, we have our fourth consecutive quarter of year-over-year revenue growth. We were able to achieve this revenue despite challenging macroeconomic conditions, which included a slowdown in China, continuing uncertainty in Europe and reduced government procurement in the U.S. as a result of the sequester. Our overall top line and bottom line financial performance was better than our industry peers. We also reported higher non-GAAP operating income, a year-over-year growth of 7% and higher non-GAAP net income, a year-over-year growth of 40% for the quarter. Narsi will provide further information when he talks in detail on our financial results. Even though the year-over-year revenue growth in this quarter doesn't match the year-over-year growth we attained in the previous 2 quarters, we remain confident that the best is yet to come. The market continues to recognize the value of the lower-cost, software-based solutions that define the future in video and are addressed by the strong ClearOne offering. At InfoComm 2013 during this last quarter, we showcased for the first time, our multimedia streaming solution, VIEW, and our software-based videoconferencing solution, COLLABORATE, that were built on our latest unified media engine platform. This powerful and flexible ClearOne unified media engine was derived from technology integrating VCON and StreamNet technology. With this new unified media engine platform, we now offer a streaming product that has the highest quality video with virtually loss of compression available in the market today. This makes the VIEW multimedia streaming product a highly desirable solution to deploy in today's highly bandwidth-sensitive enterprise network. The new unified media engine has…

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. A reconciliation of these non-GAAP measures to reported GAAP measures is included in the earnings release that went out today. In addition, our financial results for comparable first half in 2012 include favorable settlement proceeds of $250,000. The settlement amount can be found in the operating expense section of our statements of operations and have the positive effect of decreasing total operating expenses and increasing both operating income and net income. Now turning to our financial results for the 2013 second quarter. Please note, the following comparisons refer to the second quarter of 2013 versus the same quarter of 2012. Net revenue increased slightly to $11.70 million from $11.66 million. Gross profit was $6.9 million or 59% of revenue, compared with $7.1 million or 61% of revenue. The decrease in gross margin as a percent of revenue was due to unfavorable product mix and inventory obsolescence costs. Turning to operating expenses. Sales and marketing expenses declined by 7% to $2.1 million from $2.3 million. The decrease was mainly due to reduced commissions to salespersons and independent reps and reduction in marketing expenses. Research and product development expense decreased by about 9% to $1.8 million from $2 million. The decrease was mainly due to reduced employee costs and consulting fees, partially offset by increase in R&D project costs. G&A expense decreased to $1.4 million from $1.6 million, a decrease of about 11%. The decrease was mainly due to reduced legal fees, partially offset by increased consulting and accounting fees. Operating income increased by 25% to $1.5 million from $1.2 million. Net income increased by 61% to $1 million or $0.11 per diluted share, from…

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

[Operator Instructions] And we have a question from Les Sulewski from Sidoti. Les Sulewski - Sidoti & Company, LLC: I have a 2-part question for you regarding the distribution partners that you achieved and expanded on that. If you could shed a little bit more color? And then also, how will that affect your inventory levels?

I could address the first part of the question. We signed up 3 major, what they are considered to be, IT distribution partners across Europe. They're multibillion-dollar, very large, independent IT distributors. They're mostly interested, again, in our UC products and our video. Recently, we had a press release that we included here that we signed up Almo Distributing in the U.S. They are the fastest-growing AV distributor in the United States. They have an interest in, as described in our press release, in primarily the streaming signage, the video products -- the videoconferencing products, the unified communication products and selective Pro products. As far as inventory goes, Narsi, do you want to?

We already have our deferred revenue policy would exclude any inventory held by our distributors if they record inventory. And our top distributors that report inventory and it shouldn't -- it doesn't affect revenue and it's shown separately in I think -- it's shown separately in our inventory as consigned inventory although it is not consigned. That's the nomenclature that we use to separate out the inventory held by our distributors, which we have already sold but we have excluded for the purpose of revenue recognition. Les Sulewski - Sidoti & Company, LLC: And 1 question regarding pricing. How competitive are you in pricing? And what else would it take to increase your market share on the professional audio side?

Well, in terms of pricing, our pricing is generally two-fold, comes from 2 angles. On the Pro side, we're certainly not the lowest cost solution, but that's because we have the best performance in terms of audio. And I would say that we maintain a pricing, such that we're competitive based on our value adds. At the same time, our margins are good for our channel. So our pricing is set, based on what we need to see back, based on what is competitive in the market, as well as being able to offer the channels, the best margin for their effort. On the IT and videoconferencing side and the video products, the same principle holds. However, we are more -- significantly more competitive in terms of pricing of our new video COLLABORATE -- videoconferencing COLLABORATE product because it's software processor-oriented, our pricing is significantly lower than the big players. And on the UC products, we are very competitive. Some of the products are not even, I would say, available through some of the other competitors. But here again, we make it a point to set the pricing such that we make good gross margins, as well as our channel partners making more money selling our products than the competitors, which keeps them loyal and interested. Of course, we could always lower pricing but ultimately, we balance that very, very carefully to make sure that we meet all these attributes. Les Sulewski - Sidoti & Company, LLC: Okay. And another thing I've noticed on your balance sheet for this quarter. The long-term marketable securities. Can you just shed a little more color on that was. What is that exactly?

Since we have a good amount of cash available, we started looking out to investments that gives us some level of return and also we have utilize the professional money managers to help us do that. And that 8 plus million dollars that you see in the balance sheet reflects those investments that we have made to -- earlier to return on that, actually. Les Sulewski - Sidoti & Company, LLC: Okay. And then, as far as that, is this kind of like implemented plan moving forward, or are you looking for increasing in acquisition activity, or maybe the opportunities are not there in acquisitions, so you're kind of looking to invest that money into other means?

No. Actually, if you look at the whole close to $42 million in our cash and the portion invested, we have not invested the entire thing in investments. Therefore, we will be balancing our objectives, which we already stated clearly in our press release, as well as in previous calls, that we will be -- if any opportunities that comes along that we can buy this absolute [ph] that complements our strategic product roadmap, then we will go for it. At the same time, we are not going to assume that an acquisition is going to happen tomorrow, actually. We need to put some money in investments that can earn some money. We're cautious and we are balancing -- optimizing our options, actually. Les Sulewski - Sidoti & Company, LLC: Fair enough. And 1 last question. Regarding the decrease in non-GAAP year-over-year, sales and marketing and G&A expenses. From I understand is, did you lose some people, or is that what it's related to mostly?

No. Actually, I touched upon it the -- a few minutes back in the call. The decrease was mainly due to our sales and marketing, it has -- due to commissions that they pay to salespeople and our independent reps. We already discussed this before but I will explain again, the commissions are a function of what we thought we could achieve. And it's not a function on the actual revenue, actually. The revenue may go up, but commissions will still go down if our expectations are not met, actually. We were able to reduce commissions because of the revenue did not go up as expected at the beginning of the quarter because of all the macro economics that reduced the sales commissions that's for the sales and marketing. On the G&A, the most important savings came from reduction in the legal expenses. We also had other reductions like in -- but mostly for legal fees for the 6 months when the first 3 months came in, actually. Yes. And mostly for legal expenses, actually. [indiscernible] And we had some increases in accounting fees, which offset the decrease in legal expenses. It's not anything to do with the headcount, actually.

[Operator Instructions] And our next question comes from [indiscernible] from B.P. O'Reilley.

Just to follow up on the commission part, I know you said the commissions were lower because you were below target in some of the areas. Can you touch more of which segments were sort of running below target and -- because overall you came out flat. But the overall commissions they're down. And also, if you could remind us, the commissions are for your employees who are selling into the channels, is that how it works?

Yes. We have commissions that we pay to our independent reps, as well as to our contractors and to our commission reps and to our sales team, actually. The commission that we pay to independent reps is mostly linear. The commission that we pay to our sales team is based on the targets and expectations. We already explained in the press release and in the call that the Europe and Asia, including India and China, they did not do as well as we expected at the beginning of the quarter. That contributed to reduced commissions, actually.

Okay. And I think your gross margins were down and you alluded that the product mix was unfavorable. Maybe if you could touch on the breakdown, either by segment. Or maybe how the mix had changed over last year or last quarter.

We had a little bit of as [ph] discussed. And usually, our gross margins are within plus or minus 3% of 60%. Its within the range. It's hard to pass for something applicable to 1% from 60% standard. It goes up or down depending on the different factors like our marketing programs that net against our revenue and returns coming from our end users. These things play a part. This is not a trend, that is [ph] it's within normal range of our gross margins, actually.

Any color on the breakdown by segment, Pro, UC and video solutions?

Yes, I initially gave out -- for this quarter, Pro [indiscernible] went up by 4.6%. UC went down by 4.5% and the video products as a whole, went down by 18%, actually...

And that's year-over-year?

It's year-over-year, Q2 versus Q2, actually. And overall, it was 4% [ph] growth, actually.

Great. And one last question, you talked about unified media engine, the new product being launched and that's delaying the customer decisions. Can you talk a little more about it? Sort of what kind of feedback you're hearing. Are you hearing that from your channel? And what's happening with customer? Are doing trials, pilot, or where are you in the evaluation phase?

Well, as far as the products, who we hear it from is, of course, we hear it from some of our sales team, both our internal and external sales team. There were certain features that the market wanted and needed to see. And we took that into consideration. We showed it at InfoComm, expressing that those are forthcoming. And so we hear it from the channel, we hear from our internal sales team, of course. Let's see, the second question was related to what -- did I answer your question, or?

Yes, okay. And are you in the trial or in the pilot mode with some of your customers?

No. We actually have first unit coming out at the end of this quarter, the third quarter. We have a production set for these products with these new features. We have some demos that are available, not with all the features yet, because one of the new attributes is a brand-new industrial -- sleek new industrial design for the unit, some connectors or interfaces that we don't have on the current. But in terms of some of the software, yes, we have that software. We've sent some of the new, what we call the actual software features, to certain partners in Asia and they were very pleased with the units. They're waiting for CCP [ph] compliance as soon as we get the new industrial design and they have tested some of these features. We tested these features more internationally than in the U.S., I would say, as far as beta testing.

Our next question comes from Alan Mitrani from Sylvan Lake Asset Management.

Narsi, just wanted to give you good credit, and to Zee as well. The inventory, which I've talked about on the calls for a couple of years now, seems to be getting back under control, whether it's the days inventory or total inventory, so I just wanted to give a congratulations for that. A couple of questions, on the tax rate, what do you expect for the rest of the year?

Actually, since we are only halfway through the year, we are through, [ph] on average, we are getting the benefit of the R&D credit that came from last year. I expect we would finish at about 35% to 36% by the end of the year. That's my expectation, actually.

Okay. So then tax rate for overall would be closer to -- it seems like for the back half, closer to 38% to 40%, based on what you're saying?

It will be, actually, 37%, actually.

Okay. Okay. And then the over -- can you tell us how the acquisitions are going? The Israeli acquisition and others? How is the product development coming from that? How is it working? Zee, maybe you can -- how is it working with having all these employees? Normally, everybody's mostly in Salt Lake, but now, over the last couple of years, you have a lot more employees outside of Salt Lake. Just give us an update on how the acquisition integration is going and what your thoughts are.

Okay. Well, first of all, the acquisition is going very well. As you could see the results of operating income, G&A sales and marketing, R&D, are reflecting that. We're -- we've pared down what we don't need and kept, essentially, what we do need. As far as -- the results had been good, as I mentioned. I'm not going to get into it again. But we have finally integrated the unit -- the video from StreamNet and the video from our VCON acquisition and showed the products, and we'll have those products at the end of the quarter. So that is real progress. They were working, they were working excellently. Each complemented the other and we were very pleased with the results. It took a lot of time. As always it does. But we're very pleased with the, at least, technical and product results. In terms of the management of different operations, as we speak, we have product line managers that are, physically, have been in Salt Lake, also, let's see, Austin and Israel, and they spend extended time there. And it works out very well. We are received well. We also have significant visits with the team that come and visit us here. We have a new CTO, as you know, when we acquired VCON and he spends considerable times here at ClearOne and at the Austin facility. So I will say that before we make any acquisition, there is nothing more important than chemistry and to be on the same page, understand each other's cultures. It's just as important as the technology and the finances. And we're very careful and sensitive to the matchups and I could say that we're quite pleased.

Good. Okay. That's good to hear. You talked about the sales environment and the overall end market being a little difficult. Are you seeing any improvement? Can you tell us a bit how it went through the quarter and into July in general. How much you're seeing in some of the different geographies?

Well, I could tell this, and maybe Narsi can add more. We started the quarter very slow, okay? It was a disappointment and surprised us. When we talked to our partners, we asked them about others in the industry and they said, it's not just ClearOne, it just seems that people, again, it would seem to have basically frozen for the first 2 months in the quarter. We were worried. However, very happily, the last month was extremely robust and saved the day. There was slowness in Asia, in particular China, because of the new government that had been put in place, the new minister. It's basically fully froze and people didn't know their budgets and spendings and they were trying to clean up. So that was quite an impact. I will also say, even in EMEA, there's still a lot of uncertainty. It comes in, as they say, fits and starts. And -- but for our good products, hard-working team and our good partners, I think we pulled it through, again, better than our peers.

In India, we experienced problems due to strengthening of our dollar versus the Indian rupee that made our products more expensive. And hopefully, it will ease sometime this quarter, actually.

Okay. And just overall, I know the U.S. is still the majority of your business. At least as of last year, it was at 64%. How is the U.S. doing?

This quarter, the entire Americas, which includes Canada, and some portion of North America, it's about 68%. And it has gone up from about 67%, last year, actually.

And is it growing?

It fluctuates. For example, 2012 it was 67%; Q1, it was 66%; Q2, 68%. So far, if you look at the first half, it's 67%. That's what -- you don't see, the mix is not changing much, actually. It looks more like an [indiscernible] actually going up and down by 1 or 2 points [ph] making a trend, actually.

And could you remind us how large your share repurchase authorization is right now, and whether you bought back any stock in this quarter?

Yes. We bought -- from stock, we spent $450,000. Totally now we have spent close to $1.35 million, actually.

I'm sorry, you spent -- that's through the first half, or that's including July?

No, I just gave you numbers for Q2, actually.

You said $450,000?

Yes, up $400,000 plus in Q2. I will have all the numbers reported when we released our Q in a couple of days. I'm just thinking of them by memory. It's $400,000 plus in Q2. And overall, we have spent close to $1,350,000 so far, actually.

Okay. But I think your share repurchase authorization is fairly large. And...

$10 million.

Right. So...

$10 million.

Okay. I mean, I just -- it's just -- it's hard to get it. I mean, I'm glad you're putting some of the money back to shareholders for share repurchase, but right now, with your stock at $7.86, the whole enterprise value of the company is 32 point -- call it $33 million, you still trade at 2/3 of sales and 3 and change times EBITDA and almost at book value. I mean, you have 56% of the company in cash. It just seems like there's got to be a way to return some of that money back to us faster, or do accretive acquisitions that get you the scale you need to get to those kind of growth levels that we're talking a few years ago. How is the strategic direction, in your mind, going in talks with the board?

We were actually in a blackout for a portion of the quarter. And so we do seriously look at opportunities that will bring us the scale and the market that we need. But at the same time, we simply are not going to overpay in a hurry to do that. I could tell you, as we all believe, cash is king, especially in these days where interest rates are going to go up and people aren't people necessarily throwing money at you. But cash is king and we were in a blackout but we will not overpay and we are extremely active in our evaluation of the landscape to meet our business roadmap, which includes products, technology and revenue.

Okay. And lastly, do you expect the second half to show that same acceleration that you maybe saw on -- that you normally get in the year? And maybe just give us a sense of was July also, a continuation of some of that strong growth that you saw in June?

In the last couple of years, Q3 seems to reflect a little bit more than Q2 and Q4 comes out very strong. We don't expect a significant change from the trend. I think we will finish strong in Q4 and Q3 will be, we hope it would be better than Q2, definitely. And we can show growth and finish very strong at the end of the year, actually.

Our next question comes from George Melas from MKH Management.

Narsi, can you repeat the revenue mix to Pro you see in the video by percentage for the quarter?

Yes. [indiscernible] Talking about the mix. Pro contributed 69%. UC contributed 24%. Video contributed 7%, actually.

Okay. And I'm just trying to see how that compare to -- so video was actually down sequentially quite significantly?

Yes.

And is there -- how do we understand that?

As I mentioned, the first time we introduced the product, we got excitement. We sold models to our channel that needed to have them to continue the sales. When we came out in June with our new engine, we received feedback. Having done so, when we introduced the first set of products, we got good feedback on some of the features that we needed that were missing. We knew we had certain features missing, of course, but we got a little bit more information, valuable information from the field. We incorporated those and addressed those at InfoComm. And with that, customers make decisions in partners, and we understand that. In fact, we -- probably, it's the right thing that we incorporated those changes. We did have a month delay in sending that out for production, I will tell you that. And had hoped to have that completed by the end of August. But it will -- now we anticipate that we will have these features that we have addressed by the end of September. And some of these features, as I mentioned, we got good input across the board from our partners in Asia, some of our partners here in the U.S., primarily.

Okay, great. Good. Narsi, quick question on the legal expenses. I think that you expected a receipt of $500,000 to indemnify what was fees that you have previously paid to indemnify the company's former CFO. Did that happen this quarter or is that still sort of pending appeal?

Yes. It's still pending. Utah Supreme Court have accepted the opposition sides request for rehearing, which is quite unusual. And the Utah Supreme Court has received a brief from both sides and the Court has not ruled on it, actually. We don't know when it will happen. It's an unusual situation, we don't know. We keep our fingers crossed, actually.

Okay, great. And then 1 question for you, Zee. It seems like the revenue mix between the Americas and the rest of the world did not change much year-over-year, yet it seems that you had higher expectation internationally, and those were not quite met. First of all, is that right? And why did you have these higher expectation internationally? Is it because of the development of the distribution channel, and you didn't quite -- you didn't meet your expectations despite a greater opportunity?

The expectations with the new products are primarily derived from the Asian market. The Asian market is highly sensitive to cost and pricing -- pricing, I should say. And with our new products, because they -- with the features, as I mentioned, have not fully satisfied the market just yet, but will, with our release at the end of September, some of that growth was tempered. I still feel that Asia and India are prime markets for our video products. They build a lot of buildings for the streaming. They are our perfect products for that market because they boast lowest cost, compared to the, I would say, compared to the incumbents today. There's no question about that. So I anticipate greater adoption of our products there. The U.S. is always a tougher market, and when you introduce new products, in my view, and in ClearOne's experience, that doesn't mean that we're not going to see good results in the U.S., but that is really the explanation, I think, on the Asia side. And we have been working for some time to increase our IT distribution channel overseas. We're doing some different things, as I mentioned. And I think that's going to make a difference for us.

Actually, to give a little bit more color and that. Last quarter, year-over-year growth for APAC was 15%, actually. And EMEA growth was 5%, actually. Therefore, our expectations are based on these last 2 quarters are how we have been performing recently in these geographies, actually. Okay?

Yes. Okay. I think it's very consistent. I think I understand well. And then I have 1 more question. The product -- the streaming products, where are you -- it would be also sold through the -- primary through the IT channel, I understand or I believe. And what does it really target -- what applications are you able -- are you targeting there?

Okay. So the StreamNet product is a multimedia streaming product plays both on the Pro AV side and the IT side, quite frankly. It depends on the distributor. Our international IT distributors are interested in carrying StreamNet. On the other hand, the IT distributors in the U.S. had to focus on the videoconferencing, so I want to make that clarification. The application for multimedia streaming is really applications where you need to pass video and data-related content in a single direction. Conferencing is not taking place. You are streaming information, whether as a network operation center, a NOC, or whether it's an enterprise where you're broadcasting information on call centers. Whether it's at certain enterprises and hospitals, telemedicine, where you are broadcasting surgeries, you want the absolute best video from the theater in the operating room to the doctors and the medical patients that are out there. For education, it's essential because you're essentially streaming lectures, content, et cetera, to diverse classrooms in diverse locations where you're not going to engage on a 1 to 2,000 party conference. Houses of worship, for example, want to broadcast their Sunday or Saturday communications to the parishes. Finally, casinos, stadiums, these are the, really, hotels. These are venues where you go into Las Vegas, which has been our most successful, actually deployment or most common deployment. There, you're going to be showing sports, content on gambling, whether they call it gambling where they post up how much you have won or lost. Sports, videos, advertising. So there's a very big application. The good news is, again, we have a core platform, thanks to our VCON video technology that we have put into our StreamNet technology that we never had. We had analog, we have HDMI but we simply didn't have the quality and the bandwidth to be as aggressive as we can be in the market that's competitive. What StreamNet do offers is that -- the beauty of StreamNet is that mesh IP LAN network, any source to any destination that we were -- that we still keep on our StreamNet product, which is not relevant to videoconferencing. So I hope I explained what those apps are.

I think that's very good. It seems like then it's a fairly significant market. It's not a market that you have to evangelize and create. It's a market that's already there and you're coming up with good capabilities.

It's an established market and interestingly, there's an -- it's market that is growing and getting interest because again, because video is everywhere and anywhere. Sometimes it's 2-way, sometimes it's one way. But the cost of the video, I would say, display placement is so cheap today, you almost can't afford not to have it.

I see no further questions and would like to turn the conference back to Zee Hakigmoglu for closing remarks.

Okay. Thank you, Laurie, and we thank the investors for their continued interest in ClearOne and joining us today for our quarterly update. If there are any further questions, please don't hesitate to contact our Investor Relations, Narsi or me. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may all disconnect at this time.