TaoWeave, Inc. (TWAV) Q1 2013 Earnings Report, Transcript and Summary

Good afternoon, everyone. Welcome to Glowpoint’s First Quarter 2013 Results Conference Call. Before we begin, I would like to remind listeners that this call is being webcast live over the Internet and then webcast replay will also be available on the company’s website www.glowpoint.com following the call. The call is being hosted by the company’s CEO and President, Pete Holst and CFO David Clark. There will be a brief question-and-answer period following the company’s prepared remarks. Slide two summarizes the company’s Safe Harbor statement, the company’s partial discussion of its financial results should be read in conjunction with the consolidated financial statement and related notes contained in the company’s quarterly report on Form 10-Q for the three months ended March 31, 2013 filed with the SEC. Various remarks about the company’s future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under The Private Securities Litigation Reform Act of 1995. Such remarks are valid only as of today. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company’s most recent Annual Report on Form 10-K filed with the SEC. In addition, today’s call and webcast may include non-GAAP financial measures within the meaning of SEC Regulation G. I would now like to turn the call over to Pete Holst, Glowpoint’s CEO and President.

Thanks very much. Hi, everyone. Thanks for joining our call today. I want to start by giving you a sense of how we are thinking about our opportunity, my priorities over the past quarter including efforts around people and products, and some expectations for the business throughout the rest of 2013. Then following David Clark’s review of the first quarter financial, I’ll discuss division and direction for Glowpoint moving forward. The business is delivering great service in a rapidly evolving market, is ultimately dependent on the connection between systems, process and people, and the companies with the best combination win. Our team has experienced numerous changes over the last six months and my from very first day in the middle of January, we’ve focusing on training efficiency and accountability We are committed to establishing an open dialogue with employees, customers and investors, as a commitment to ongoing transparency. We are establishing feedback mechanisms, systems that remove bureaucracy rather and new performance measurements that clearly layout quarterly goals for the company. Once in place, these systems are structured to improve our ability to execute faster, return value to our shareholders, attract the best talent and make Glowpoint, the best service provider in the market today. In addition, to focusing on our people and empowering them to execute we’ve also focused on our products. Over the past three months I’ve dedicated significant time to product and business reviews. We started with our core product, service delivery and the components our customers required a flawlessly execute everyday meetings. Historically, we’ve done a great job managing complex video environments for enterprises, and well our customers have a continued demand for this application they are desired to add more mobile compounds into the ecosystem and provide a high degree of real time service to solve interoperability challenges will be one of the core drivers of our growth. We are encouraged by the early progress the team made in the first quarter and executing on our strategy of instituting process enhancing the service platform and driving operating leverage. I’m pleased with our people and product development rather in Q1, it was an active quarter marked by good progress, but tempered by a lack of growth in our sequential quarterly revenue from Q4 to Q1. To that end, 2013 remains a transition year, and we continue expect uneven non-linear results in the near-term reflecting the company’s desire to produce sustainable growth based on sound fundamental principles of people, product and process. The projected unevenness is also exacerbated by our decision to minimize one time revenue opportunities associated with custom software development that historically may have delivered modest short-term performance, but is [comity] expense of long-term results. These were hard decisions for us, but we’re confident they were the right once for the future of our company and our business. On that note, let me past it over to David Clark, our new CFO to walk through our Q1 financials David?

Thanks Pete, I will begin with a review of our revenue for the quarter that summarized on Slide 4. Revenue for first quarter of 2013 totaled $8.5 million and increase of $1.8 million compared to revenue of $6.7 million for the first quarter of 2012; this increase was attributable to revenue contribution from the Affinity acquisition in October 2012. The increase in revenue was primarily seen in managed services where revenue increased from $3.3 million in Q1 of last year to $5.1 million in Q1 of this year. Network services revenue of $3.1 million in professionals and other revenue of $300,000 for the first quarter, but both slightly down as compared to Q1 last year. Now I will turn to review of our expenses as shown on the statement of operations on slide five. Our operating expenses were $10.1 million in the first quarter of 2013, an increase of $3.6 million over the same period last year; this increase was due to several factors. Global managed services expenses increased by $1.5 million mainly due to expenses associated with acquire Affinity business. G&A expenses increased by $1.7 million due to an increase in non-cash stock based compensation in several non-recurring charge including asset impairment charge and severance and acquisition cost; these items are excluded from our adjusted EBITDA which is summarized on the next slide. And finally, depreciation and amortization expenses increased by $318,000 due to the amortization of intangible assets from these Affinity acquisition. Total interest and other expenses increased to $383,000 in Q1 of this year from $26,000 for Q1 of last year; this increases due to the debt we added in connection with Affinity acquisition Moving to the next slide; slide six summarizes the reconciliation of net income or loss to adjusted EBITDA. As I mentioned there were several non-recurring charges and increases in non-cash expenses that impacted our net loss for the first quarter of 2013. As shown on this slide, these items are added back to arrive at adjusted EBITDA, an important measure management uses to access the operating performance of the company. Adjusted EBITDA increased to $837 for the first quarter of 2013 as compared to $727,000 for the first quarter of last year. And now turning to slide 7, I’ll summarize key data for our cash flow and balance sheet. We generated positive cash flow from operations of $264,000 in the first quarter. We ended the quarter with a cash position of $2.2 million and positive working capital of $548,000. Looking forward to the remainder of 2013, we’ll continue to carefully mange our operating expenses and we currently expect to generate positive adjusted EBITDA and cash flow from operations for the balance of the year. Now I’ll turn the call back over to Pete.

Thanks, David. It is my continuing belief that 2013 much like I mentioned in the prior calls the transition year for Glowpoint and we have a solid foundation on which to reposition the organization for growth. Fundamentally Glowpoint is part of the emerging market communication where growth is expected. We’ll become a growth company by inspiring our employees and delivering flexible customer services solutions around the core set of features and applications. The first step is to grow at the same pace as the market and then later gain users and share disproportionately as our service platform becomes more robust. Today there are more than 1 billion mobile users globally and that figure will double in the next three years. And while we made progress in providing tools and application to enable connectivity, capitalizing on the mobile opportunity require investment in back end development and a detailed differentiation of service modules where customers can compliment their existing environment with specialist as determined by their infrastructure. Our vision indirection for Glowpoint is to provide a suite of services in applications to simplify the video conferencing experience, we’re focused on reshaping our services, driving broader distribution through our partners and making organic investments to grow our market share. There is clear upsight potential here and we’re making the right investments in people, messaging and systems to reposition the company for growth. This concludes the formal presentation portion of this conference call and moderator you may open the call for questions.

Thank you. (Operator Instructions) Our first question comes from the line of (inaudible) please proceed with your question

Good afternoon, question is of the $3.6 million of additional expenses, what sourcing events should we expect to see going forward and what portion of it might we not expect to see going forward.

Yeah, hi this is David I think as we kind of laid out in the call and in our press release and you can also view our 10-Q as we filed today. Those sort of non-cash charges and charges that you may not see in the business moving forward are going to be summarized in the adjusted EBITDA table. So we did see an increase in stock based compensation in Q1 that’s were due to some charges that we don’t expect to move forward. We’ll have some stock based comp moving forward, but not to that extend. Also during the quarter, there were severance charges that we don’t expect to see to that magnitude moving forward. And then finally, there were acquisition cost during the quarter from the Affinity acquisition, we don’t expect for that to move forward. And then the asset impairment charge of $435,000 in Q1 that was related to some assets that no longer going to be used in the business. We don’t expect to hit this time to have assets impairment charges like that in the future.

Okay, thank you.

(Operator Instructions) Our next question comes from the line of Nathan Pollack. Please proceed with your question.

Hi, I have a couple of questions. I looked at the proxy statement that was sent out from actually focusing on the year 2012. My first question was just that there appeared to be salary to the Chairman of the Board for consulting a $12,500 a month and then it seemed to Jason Adelman I believe investment banker like a $144,000 for the year of 2012. To me that seems like it was an (inaudible) number whether you are actually purchasing those consultants or not I don’t know. The other question I had was really that since the joining – since Affinity has been taken over, the stock is less probably 60% of its value even more than that, no announcements, no business, but nothing really to keep these stock from just going down. If you could just tell us the issues please?

Sure, this is Pete, Nathan, I’ll address those. So with respect to Mr. Adelman and DeLuca respectively – Mr. Adelman has been a long time provider of services to the company as it relates to either investment banking or ongoing capital markets. And that is an agreement that the company has long had and continues to have, on a go-forward basis. With respect to Mr. DeLuca, he, as you pointed out, he is the Chairman of the company but has also provided supplemental advisory services as it relates to capitalization and ongoing sort of guidance as it relates to the direction of the business over and above his chairmanship title. Again that’s an agreement that the company has had in place for some time as you pointed out the proxy and we continue to use both of those gentlemen and leverage their respective skill sets and intend to do so going forward over here in the near-term. With respect to the stock, I think it’s obvious that the stock is a very, very thinly traded stock. There is a tremendous amount of, it seems like a momentum around the actual stock price. As you probably know, I am a substantial shareholder in myself having brought in effectively at a much higher price than it is today. So, I don’t manage the business to the stock price in any given moment in time, I manage the business to make sure, we can get to an objective, and a goal over a period of time and I believe the stock will follow at that point. Currently right now, the stock is traded down on a very, very low volume and again I will just say, I don’t manage the business to the stock price as it stands today, with a short term view of things, and I have a much longer term view of what I think of valuation of the businesses.

Okay, thanks.

(Operator Instructions) Our next question comes from the line of Jim Wookey, Please proceed with your question. Jim Wookey – Wookey Investment Management: Hi Pete.

Hi Jim. Jim Wookey – Wookey Investment Management: Couple of questions one on combined revenue activity in Glow looks like a year ago is minus $9.4 million

Yep Jim Wookey – Wookey Investment Management: Yeah that’s a huge, relative to the economy that seems to be stabilizing and growing, if you can address that, if it’s going through (inaudible) on a going forward side or what that, you know next question would be announce the relationship with (inaudible) really have any follow-up with that I was wondering what is the status of that was is there any further development on the effort.

Yeah, no problem. So with respect to your question one related to revenue, on a pro forma basis obviously now we merged together and so we don’t report separate in terms of which business unit is driving revenue on what side of the fence on the other, we are consolidated at this point, but with respect to the drop itself on a pro forma basis I itemized one of drop right where we made a pretty conscious decision to walk away from one-time revenue that I thought, while, certainly in the near-term might be helpful, when you look at the P&L historically there is a lot of one-time related revenue going back a number of years and that just wasn’t core to where I wanted to take the business going forward. It’s dilutive to our overall vision and strategy of the business to try to build products from the ground up and put process in place rather than running doing one-off opportunities that while short-term may add a little bit of incremental revenue, it doesn’t create long-term value for the business, so that’s really one source of the drop. I think the other two main sources of drops were a little bit forecast last year, where we had some of our partners specifically who represented a substantial amount of partner revenue last year and trickled down over the year as they couple of them specifically had bought either competitive application platforms or had bought competitors at the OEM level or the manufacturing level and therefore had indicated at some point there was a day that was going to come where they were going to take those services in-house so that day came in the past in the first quarter and that represented a fairly substantial amount of the drop I think another product converging is on the public room side of things which is the classic affinity side is the notion of public rooms are really set of four very highly structured, extremely professional business class meetings and while those are still in demand without a doubt, some of our customers are simply moving products, they still want to use the service without a doubt, but they are moving from a higher touch, higher cost product to a lower touch, more readily available on demand product and the economics of that are 2:1, 2.5:1 difference in terms of top line revenue. So, its s compliment events Jim, as it relates to three or four things specifically in Q1 to create that impact as it relates to revenue. With respect to Reges, which I think as an announcement that came out sort of summer time of last year. We continue to work pretty diligently with the folks at Reges; great group folks over there and we’re making pretty good progress on the operational side of things in terms of systems, and delivery and process. And I think that something that certainly generates revenue now for us no doubt about it. But in terms of order of magnitude, I think that we’ll see an impact of the Reges opportunity more in the second half of this year than you will in terms of the material impact in the first half of this year, but that opportunity is coming to provision and coming to bear and it’s just take a tremendous amount of time to get a customer who is a global customer, who has one of the largest video footprints in the world frankly, up in operational in a systematic and procedural manner that can enable us to deliver the level of service to which they become accustomed. Jim Wookey – Wookey Investment Management: Excellent, you mentioned two to one whether they’re maybe using to high end, what would be the example of what customers are going to relative to where they are coming from, what is the lower revenue product, lower revenue product if this is something that even though it’s lower revenue mark product and appear to be much greater?

Sure, yeah, so that the lower revenue product is more of the mobile product. And I talked about sort of the mobile opportunity on the call in terms of the expansion of mobile devices whether it’s a tablet or a smartphone et cetera, et cetera. The exponential expansion in that world is dramatic. And customers are looking for flexible solutions for a specific meeting type and I don’t – the notion of a professional business class meeting is not going away anytime soon and there are certainly a great amount of our customers today that continue to demand that almost studio like environment where it’s extremely structured. There is a subset of our customers maybe small medium business customers at the end of the day, who are looking for more cost effective solutions and that solution is typically, I would like to join the meeting today from my tablet or I like to join it from my PC or my Mac and can you orchestrate that for me on my wireless network from such and such a place and we have to sort of do a little bit of perhaps obviously to get that meeting up and running, but it’s not as complicated or not as structured as the professional business class meeting is in the studio environment. So that’s what customers are demanding more and more is flexibility and inherently that means I want to have the high-end the mid-end and the low-end solution. And we are tailoring and have been for some time now, tailoring solutions around the low-end experience, which is the desktop/tablet experience right where you have a number of variables in play there that won’t necessarily enable an HD or high-end business experience based on either network or processing power your camera, your lighting, your audio et cetera. But it will enable a good enough experience for customers who are looking at more of the desktop activity as it relates to going forward on video. Jim Wookey – Wookey Investment Management: I know your vision is one of taking reliance on the mobile opportunities. How?

You bet. Jim Wookey – Wookey Investment Management: What do you see as far as demand, number one; and number two, how long do you spend, what competitive issues are there, I guess that’s the second question. And the third is, how long does it take to develop strategy internally, so everything of this [industry]?

Sure. Well I think there is a million different opportunities out there in the mobile space right now, as it relates to either the client side in the terms of people building applications at the client side, or at the device side. So you’re starting to see the market gather some steam as it relates to multiple devices using multiple applications now. So fundamentally the markets becoming more complex, not less, not less complex. And there are great many competitors out there at the device and application side, not necessarily our competitor, we probably tend to partner with those folks. That are enabling a whole host of customers at the client layer, at the application layer. And I think what you’ll see as it relates to development of our strategy is, more and more messaging around modularity and flexibility of service delivery. I think the customers today are looking at going. This is great. We love being able to bring a tablet in, or we love being able to bring a PC into the process. But how do we connect to ITP here, how do we connect to 3-to-3 device or set device, right substandard based at the end of the day. And most of these new devices that are coming into the market are going to be mobile, they’re not going to be fixed. And that just creates an inherent complexity in terms of service delivery. So you’ll see us point the message more towards service delivery model holder service delivery, and the application layers we have built around that to enable customers who are looking for varying degrees of helpdesk and support. As the world becomes more complicated the customers will be wanting to outsource different kinds of support, not necessarily a level one support and maybe they will, may be they won’t, but they will want multiple levels of support to kind of choose from in a menu and that’s where the company will continue to point itself towards the support element of the business with a pretty good commitment to the application layer as well. And this company has built Glowpoint has built a lot of intellectual property over the years and it’s now coming up on us to aggregate that IP consolidated and message it properly to the market, so that the customers fundamentally understand that. We are really more than just a managed services which is just an overused term in this space, but a managed services provider. We are really a very high end series of help desk solutions with a pretty robust level of applications around it that people will look for to manage the automated side of their business and the high touch side of their business once they get a client or device or something along those lines instead. So the time line to get there Jim is, my view of the world, vision is we need to put a lot more systems in place a lot more process in place, but it’s not a five year plan. I am running this plan through the rest of 2013 and starting to address our customer base with these new services and we’ve done a lot of market research in the first 90 days of being here to understand exactly what our customers are looking for. So I have good expectations coming out of it. I think we have some great people on the application side of our business who are developing some fantastic stuff and I am looking forward to sort of hitting the ground running here, Q3, Q4 this year. Jim Wookey – Wookey Investment Management: Excellent. That’s all.

Thanks Jim.

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

Thanks, with Tania. We actually have a couple of questions on the web that we like to take and address. One of the questions on the web is why did we not announce that we were assisting the NFL draft and we’re still involved with the draft? And we are involved with the draft and certainly if you tune in this year, you would see our brand kind of front and center on the draft this year and we continue to be very, very strong partner of ESPN. As it relates to the NBA draft specifically, I think that’s actually a project that ESPN is considering, putting aside for the next few years for whatever reason. I think they’re, as you might guess, the NFL draft and the NBA draft are very different drafts at the end of the day in terms of the time and commitment required. So, the NFL draft is still a very substantial production, and ESPN is a great partner and continues to be a fantastic customer for the company going forward. Another comment from the web is can you comment on the head count or any overhead change? At the end of the Q1, we had 126 heads in the company. I have a continued commitment to improving customer service. And some of that can be done through automation and some of that has to be done with head count in the near-term. And I’m extremely focused on making sure we deliver a high level of customer service to not only or partners, but our end customers as well. So, if it takes a few more people in the customer service domain at this point to make sure we deliver the quality of service that not only that the customers expect, but I expect. We’re going to do that and make sure we continue to invest in the operation side of our business. And there is a question here with respect to the stock price dropping again, which I think I addressed earlier and setting a target price for the company, the target stock price ending in 2013. I know I am not in this sort of hypotheticals and I certainly can’t predict what the stock price is going to be at the end of this year or end of this month. So I will let the market do its natural course of business and more sort of take things from there. So those were the three questions we had in the web. I think (inaudible) I think for all intensive purposes, I am not sure I have any other questions coming from the phone. I would like to thank everyone for participating today and again on behalf of the entire management team at Glowpoint, I really like to thank everyone for joining us and we really appreciate the continued support.

Thank you. This does concludes teleconference. You may disconnect your lines at this time and thank you for your participation.