TaoWeave, Inc. (TWAV) Q4 2020 Earnings Report, Transcript and Summary

Hello and welcome to Oblong Inc. Fourth Quarter and Yearend 2020 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Brett Maas with Hayden IR. Please go ahead Brett.

Thank you, operator. Hello to everyone on the call. Hosting the call today are Oblong's Chairman and CEO Peter Holst, CFO, David Clark. Please be aware, some of the comments made during our call may contain forward-looking statements within the meaning of Federal Securities Laws. Based upon our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding our operations and our future results that could cause actual results to differ materially from the management's current expectations. In addition, today's call includes non-GAAP financial measures and a reconciliation of such measures to GAAP measures is contained in the press release issued today. We encourage you to review the safe harbor statement and risk factors contained in the company's earnings release and filings the SEC including without limitation most recent annual report on Form 10K and other periodic report that identify specific risk factors that may also cause actual results or events to differ materially from those described in the forward-looking statements. Copies of the company's most recent reports on Form 10K and 10-Q may be obtained by the company's website www.oblong.com or the SEC website SEC.gov. The company does not undertake to publicly update or revise any forward-looking statements after the call or date of this call but also like to remind everyone that this call will be available for replay through April 13th. A link to the website replay of the call was also provided in the earnings release and is available on the company's website at oblong.com. I'd now like to turn the call over to CEO of Oblong, Pete Holst. Pete the floor is yours.

Thanks Brett. Good afternoon and thank you everyone for joining us today. 2020 was a significant year for Oblong ending with momentum and marked by another quarter of sequential revenue growth along with a measurable increase in our pipeline of new business opportunities. We achieved this progress amidst the pandemic that probably shut down our primary end market, in conference room is both impressive and an incredible adaptation to the team's ability to gel and focus on building great user experiences. Let's briefly look at fourth-quarter achievements. In the fourth quarter with COVID peaking across most of the United States and people continuing to work from home, we delivered $1.6 million in core product revenue from our Mezzanine collaboration suite, we completed two financings raising $7 million in net proceeds to fortify our balance sheet and give us capital to grow, we eliminated $5.6 million in debt or $2.5 million to strengthen our balance sheet and overall capital structure, we continued to improve gross margins three quarters in a row and we narrowed our losses by half again from the prior quarter and we entered '21 now with the best pipeline in our history particularly in larger deal with qualified opportunities in excess of 100 rooms. Our focus has been on training and developing key partners and geographies where we believe a return to the office is likely sooner than later. As the market begins to reopen, we believe our sales model is both highly efficient and sized personally to leading indicators in our channel. Our most prominent source of lead generation continues to be with our primary partner Cisco, who we believe with their unmatched combination of network, security and collaboration solutions are at the forefront of primary beneficiaries as enterprises to reopen their offices. Recent Cisco research suggest there are two significant drivers in the reopening process. The first is a strong desire for more advanced tools, with over 96% of respondents to their recent research efforts launching intelligent technology to improve their work environments. The second is a prioritization of the employee experience, with over 86% of respondents stating that empowering a distributed workforce with seamless access to applications and a high quality collaborative experience is either important or extremely important. Interestingly enough, this jumps to over 95% of companies with more than 1,000 employees. With our singular focus on employee engagement and user experience, we were recently awarded a new Cisco certification in the constant experiences category. This certification offers WebEx video device users a more seamless user experience dramatically increasing their ability to share and engage with live content streams. Mezzanine's integration with WebEx allow distributed teams to share up to 10 live streams of content, simultaneously delivering both a unique and unsurpassed level of user engagement. In addition to inter room experiences, Oblong's certified integration enables remote participants to also be full participants in the meeting by using newly added features and WebEx, touch enabled devices can now remotely connect participants to a Mezzanine experience. As we look back over the last 12 months, in many ways our performance during the pandemic is all the more impressive. First and foremost, we sell our product today that goes into enterprise conference rooms. One year ago everyone who were using those rooms went home. Lights went dark and IT buyers went to the sidelines. Every IT buyer we spoke to back in March and April of last year said call me when this pandemic ends. It was unnerving to say the least. In spite of that, we raised $2.4 million very quickly from the SBA within three weeks of broad stay-at-home orders being issued. We restructured our operating expenses significantly and worked quickly to simplify our product offerings with our four partners while also building the sales pipeline that both tangible and aligned with the reopening sales cycle. Near the end of second quarter, we implemented a new pricing model for flagship Mezzanine suite of products making pricing more attractive for customers by offering CapEx and OpEx models that allow them to potential deals not otherwise available historically. As a result we are now involved in almost three times the amount of larger scale opportunities compared to the prior nine months representing more than 10,000 conference rooms across hundreds of thousands of potential individual users. The new structure and greater focus on cost of goods sold are also driving rather higher gross margins, which combined with the actions we took in the late second quarter of 2020 to rightsize the organization have significantly reduced our overhead, putting us on a trajectory to grow the business thoughtfully and symmetrically to demand. Fast forward three quarters from the inception of the pandemic and with the great majority of commercial real estate still remaining either at a minimum or shattered state, we still sold almost $1.6 million of our core products in the fourth quarter. We improved gross margins for the third quarter alone and we improved our adjusted EBITDA loss by approximately $600,000 up sequential quarterly basis again an improvement for both Q2 and Q3. But now the pandemic is beginning to show signs of abating. We are incredibly encouraged with the rollout of vaccines across the US and other countries who have been diligent in their approach to managing reopenings. Businesses are starting to think about what return to work will look like. In fact IT leaders have been thinking about that for some time, scheduling demonstrations of next generation technologies like Oblong and working to synergize the work from home and return to work mindsets, recognizing that will have something of a hybrid model in most cases for some time to come. Helped [ph] by accelerated vaccination in the United States and recent reopening announcements from major corporations, we've been invited to bid on a number of larger scale opportunities. In fact this has really just accelerated in the last 30 days. While our internal metric to define larger scale is both a combination of conference rooms and more importantly, looking downrange potential cloud users of our perspective new offerings, recent opportunities have exceeded both of those metrics, indicating growing demand for hybrid offerings at scale. There are a number of indicators that suggest our growing confidence in 2021 and '22 is warranted. Oblong is in fact a major reopening play. As businesses unlock their doors, conference rooms will need to be updated, the old labor sitting across the conference table and sharing a linear content will no longer be sufficient to either engage or entice workers to return to the office. COVID demonstrated that things must change. Going forward, half participants in a given meeting or workgroup will be remote and very likely working from upgraded home offices. Social distancing will still be prevalent and enterprises must harness technology to enable collaboration and engagement in new ways to create greater productivity. Those that don’t will simply be left behind and simply put, Oblong makes all of that possible and we're working with one of the global leaders in IT in Cisco, who we believe is poised to break out in the next 24 months. Our progress on developing the cloud offering is coming along very nicely. We expect to release a beta version to a select group of existing customers in April and believe the addressable market for this complementary service is not easily in the millions of users, now the COVID has dramatically increased the awareness and usage of virtual meeting services. As evidenced by the demand for more advanced and engaging technologies, we recently presold our first annual recurring revenue cloud deal based solely on an early version of our cloud service generating $75,000 in ARR in 2021. Based on this prototype the same customer has now come back and asked us to generate a proposal for a hybrid cloud offering of mezzanine when we release a full version in the second half of '21. The scope of that proposal is a 1,000 conference rooms and over 100,000 cloud users. Now let me just turn the call over to David to quickly discuss the financial results.

Thank you, Pete and good afternoon, everyone. I'll start with a review of our quarterly results. Revenue for the fourth quarter of 2020 was $3.9 million a 20% sequential increase compared to $3.3 million for the third quarter of 2020. This sequential increase was driven by higher product sales from our flagship Mezzanine collaboration suite, which increased more than 50% to $1.6 million in the fourth quarter of 2020 as compared to $1.1 million in the third quarter 2020. Our gross profit margin for the fourth quarter of 2020 was 59%, a sequential improvement of 800 basis points as compared to 51% for the third quarter of 2020. This improvement was primarily due to an increase in margins specific to our Mezzanine offerings from 63% for the third quarter to 68% for the fourth quarter. We generated net income of $1.3 million for the fourth quarter of 2020 compared sequentially to a net loss $2.1 million for the third quarter of 2020. Fourth-quarter net income was favorably impacted by a non-cash gain on debt extinguishment of $3.1 million. We reduced our adjusted EBITDA loss by 57% in the fourth quarter of 2020 to $447,000 as compared sequentially to an adjusted EBITDA loss of $1 million for the third quarter of 2020. This sequential improvement was primarily due to growth in our revenue and gross profit for the fourth quarter of 2020. Turning to our balance sheet and Cap [ph] table. We made significant improvements in these areas during the fourth quarter of 2020 and subsequent to year-end. We ended calendar year 2020 with a total cash balance of $5.3 million compared to $4.6 million at the end of 2019. We strengthened our liquidity position with a private placement of common stock that closed in December 2020 and we eliminated $5.6 million of debt during the fourth quarter in exchange for a one-time cash payment of $2.5 million resulting in the $3.1 million nonoperating gain I mentioned earlier. As of year-end, we had no debt outstanding other than a $2.4 million note under the Paycheck Protection Program of which $2.2 million is expected to be forgiven 2021. Importantly on February 12th of this year, our common stock began trading on the NASDAQ Capital Market and all Series D and Series E preferred stock converted to common stock. As of that date, we had no remaining preferred stock outstanding. With that, we'll open the call for questions.

[Operator instructions] Our first question today is coming [indiscernible]. Your line is now live.

Can you talk a little bit about the cloud offering and I'm specifically interested in any increased expenses that you might incur in order to complete the development and also any increased expenses to market the product so that's one part of it. And then the second part of it is, I was hoping you could elaborate on the sales cycle for the cloud offering. If you got the beta in April and then a rollout in the second half, what would be a reasonable timeframe to think about meaningful revenue contributions from the cloud offer?

So in terms of the first question as you think about rolling out the cloud service for Oblong particularly around development and sales and marketing costs when you think about rolling out a SaaS product, a hybrid product, our sense right now is we will continue to increase expenses from the current levels throughout '21 to invest in both product development and time-to-market and as I mentioned a little bit earlier, we're pretty careful about how we manage the sales and marketing ratio as it relates to going to market primarily because we're going to channels as opposed to going direct, where generally the marketing cost and usually the sales expenses are quite higher on a direct basis. We're going to focus the vast majority of our go to market in '21 through our primary partners. They've been very, very good about setting up opportunities for us with existing customers of theirs. So we don't see sales and marketing expense going up dramatically higher from the current ratio at which we're operating today. So I'd say that ratio we're going to continue throughout the course of '21 and unless you see greater demand signals especially in the second half of the year. I think with respect to the rollout itself in the second part of your question, our sense right now is not terribly similar from where we were last time which is we see demand growing very, very quickly. One of the big catalyst is demonstrations right, how fast these demonstrations we'll be doing when the customers are coming to you more proactively than reactively and just as I mentioned in the last 30 days, we've seen a significant uptick in demonstration demand both for the in room product and the cloud product. I think is important to note that because our roots are in the conference room to begin with and great many of the customers that we deal today if not all, are in the enterprise sector, the vast majority of IT leaders are looking to balance that to do that barbell approach right, with one hand that's in the conference room, on the other hand we have a number of users in the cloud and we want to address both constituents in an egalitarian manner and they want to have security and real time communication capability across the product. So I think we don’t see a dramatic change in the ratio in sales and marketing and we see incredible demand in particular both the conference room product and product relative to even where we were three months ago right now.

And specifically try to pin you down a little bit on the demand that you were experiencing and I'm looking at an in room solution and I get a demo today and I know it's all over. But what would be a typical room that purchases about the cloud purchase.

So you're right. It is all over the place and I think IT buyers are starting to lean in a little more than ever. I'd say three months ago there was still some hesitancy in the market in terms of trying to find it from their perspective on a real basis but I'd say over the last, obviously what's happening especially in the US and certain other countries who have been very diligent in their approach to managing the pandemic, I'd say that here's a great example. So we were given a lead for a very large scale opportunity about 45 days ago. That opportunity literally is in the middle of proposal and coming to fruition from a buying cycle in Q2. So you could make an argument that that was a four to six month kind of end to end start to finish buying cycle. I would say generally speaking enterprise sales particularly whether it's cloud or on premise, historically at six to twelve-month sales cycles and it's generally somewhere in there from the moment you get a qualified lead all the way to close and then obviously there's rollout right. So if you have a payment solution that's in conference room, there is some logistics involved, you're keeping some hardware and software to get the configuration done. From a product perspective, naturally that's easier to spin off right. It's almost instantaneous. So I'd think the sales cycle rather remains probably generally speaking in the next six to nine month range from the moment you get a qualified lead. I am sure I gave a better pin but hopefully it's closer to your question.

That's helpful. If I can ask one more, when you look at the quarter to quarter progression in revenues this year, is there any reason to expect, is there any seasonality that would make any one quarter lower than the prior or is it reasonable to expect that throughout the year, assuming that pandemic could abate that you will have sequential revenue growth for every quarter.

That's a good question Jim. Traditionally, certainly across the IT sector, the first quarter of the year, the first calendar quarter of the year tends to be the lightest. Usually there's a huge push towards the end of the year across all sectors and so generally speaking, January to March if there is a quarter that add seasonality to it, that tend to be sort of aside to the end of year and the people start to pick back up into the new year gradually and buying starts again. So I think that's generic to the IT market holistically and as you know with Cisco being our largest partner, they have a calendar year end that is July 31 and so they're operating on a slightly their fiscal calendar to where we operate on a traditional. So some of that can go off sequence a little bit, but not the margin, I'd say the first quarter if there was to be something, the first quarter of every year from a classic IT tends to the softest.

[Operator instructions] We do have a follow-up from Jim Wookey. Your line is now live.

Yeah. Thanks again. If the K is going to filed tonight or is that tomorrow?

Hi Jim. It's David. The 10-K was actually just filed. So you should see it on SEC.gov.

And if you can just help me understand what you think about gross margin going forward? Is there any reason to believe that they're significantly different this year versus what you saw in Q4?

At this time, I think there are still some gains to be made Jim throughout the course of the year. I think our performance in Q4 specifically around mezzanine was pretty strong and when you're selling a hardware, software combination, I think we're trending pretty close to that the higher levels of what that product deliver. I think the margin expansion and increased operating leverage obviously comes from diversifying the mix in the cloud going forward. So I'd say generally speaking that we have a little bit of upside left in gross margin left for the rest of this year particularly around that, but I think the perspective is pretty consistent at this stage.

Yeah I was trying to be tricky in that really get a sense for your projection on mezzanine filed this year

I'd say that the cloud apps that our business measured early standalone shouldn’t be fundamentally different than any other cloud's app service and so given the cost to deliver that product. So you should -- it proves the point but ultimately those metrics tend to be in the 75% to 80% range appears standalone basis from gross margin perspective.

Okay. And then as far as the data in April and then the full rollout for the rest of the year, I'm assuming that the data will drive to some extent the product development, but if you can just focus on the beta, what you either worried about or what do you think needs a little bit more work or what are you particularly focused on in the beta that you think is important either from a customer experience or a technological capabilities aspect?

Sure. Well I think of the fantastic advantages we have in our team today is we have very, very deep roots and expertise in design and user experience and the team pays a tremendous amount of attention to interaction with software and I think anytime you go through a MBP all the way through data you're always tweaking things to eliminate friction and as a product evolves over time, I think that'll be our core focus Jim which is how easy is it to buy, how easy is it to plug in other networks and other systems and other applications and how seamless is the transition from the current conventional sharing model to what we believe will be the sharing model of the future right which is multi share and how do you make those user experiences contiguous so that they don't break the brand promise right from the existing provider. So most of our work between current state and GA will almost assuredly be in getting ourselves to a point where users are giving us feedback on a regular cycle where we get to a stage where they say this is friction less right. The whole goal is to create seamless experiences for people where they can get optimal user experience by sharing multiple pieces of content. So that's where all the work will be between now and then is let's get a no friction environment.

And have you shared how many users or how many installations are in the data and if you haven't, can you give us some general…

So we haven’t shared it, but I'll give you some basis right. We're going to keep it very, very tight to our top customers across multiple verticals and I suspect we'll probably roll this out to 10 or 15 customers probably across 100 different conference rooms and 1,000 different users at this stage. Like we said or like said earlier, there's one extremely large global customer in particular was has taken a very strong interest in this and obviously they will be part of the date effort and they were part of the prototype, but that's a scale Jim. We're testing purposes call it a 100 conference rooms and 1,000 users during that MVP to GA period.

Okay alright that's great. That's it for.

Thanks. Our next question today is coming from Richard Molinsky from Max Communications. Your line is now live.

Congratulations on the fourth quarter. Congratulations on getting the capital structure strained out to cash. The one question I have for you is the start of the new year to where you are today, what concerns you at this point of time maybe what has gone slower than expected or may be moved fast than expected possibly maybe with the Cisco relationship or the salespeople, What's the few things that really -- that you want to focus in and maybe hasn’t happened as quickly as you'd like it to?

I think to answer that generically, I think we all like the market to open faster right. So those sort of a more broad rollout across the G7 G8 countries I think would be certainly a welcome outcome for us a little faster them we were headed. That said, we're seeing some like I said in the last 30 days, we are seeing some very strong leading indicators that people believe particularly in the countries who have accelerated their vaccination policies that they are going to consume. So I think you probably read in the last couple weeks Google, Microsoft, some of the larger titans, most of the investment banks have all come out and publicly stated that they are getting ready for reopening in the next 30 to 90 days. So all those things are great leading indicators for us and it's supported by the fact that we have been getting calls in the last 30 days or so from many of those IT folks who are very closely aligned particularly with Cisco where the Cisco sales reps we're talking to us saying okay we're starting to see demand build, we're starting to see people engage. We really want to get demonstration of your products right. So that's a great leading indicator for us right. Just our demonstration volume is probably up in the last 30 days. So it's also a function of people saying I think we're ready to start making some buying decisions here the next 6 to 12 months right as we look to refurbish our offices and we have millions of home users now who have clearly adopted things Zoom and WebEx and Microsoft Teams etcetera, but they were made into that user experience and now every IT buyer is they now what right? What's the next step, what's the next step in the evolution of engagement and we need to look at new technologies that can really enhance the user experience. So that's not so much of worry, but I think it's been worry for most every company in America over the last 12 months, but from our perspective, we look at this it's inevitable that the market is going to reopen, it's just a function of managing the timeline and managing your business for that timeline and as we see these buying signals start to open, we need to invest in the sales and marketing resources both pure domestically in the United States and frankly abroad as was starting to the other countries who are probably a little bit ahead start to reopen their doors and looking for similar technologies to address the problem.

And how are you monitoring the cash to make sure that you could execute without having to raise much money at this time or you'll pick the time and place to raise the money when the time is right.

Sure I think full credit for David and the entire finance team. I think we're pretty judicious right with our capital structure. As I said we manage the balance sheet very carefully to the signals and I think David has done an incredible job as has the entire team on giving ourselves an appropriate amount of runway into 2021 to allow us to build business opportunities, build pipeline and close deals that would offer our investors really strong signals of growth potential for the company in the future. So I think at this point, we're in very good shape on the cash side and I think we're in really good shape in terms of managing it going forward.

We've reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

As I mentioned earlier, we are increasingly optimistic about 2021 and beyond as we believe the return to office is accelerating and imminent and business is quite frankly reimagining what they need to look like in the future. No doubt it's been a challenging environment, but the exogenous headwinds we faced in 2020 are in fact abating and we are building upon extremely good recent momentum with the robust and innovative technology platform a very strong channel partners in Cisco and a strong balance sheet, we are also well-positioned to grow our business in a very meaningful and thoughtfully in the and I look forward to sharing a lot more information in the coming weeks and quarters ahead. Thank you very much.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.