Avistar Communications Corporation F3Q08 (Qtr End 09/30/08) Earnings Call Transcript

Avistar Communications Corporation (AVSR)

Q3 2008 Earnings Call

October 21, 2008 1:00 pm ET

Executives

Robert Habig - CFO

Simon Moss - CEO

Analysts

[Charles Wade – Winstone Capital]

Presentation

Operator

Good day every one and welcome to Avistar Communications Corporation third quarter 2008 earnings conference call. (Operator Instructions) At this time I would like to turn the call over to Mr. Habig, CFO of Avistar Communications Corporation; please go ahead sir.

Robert Habig

Good afternoon, I am Robert Habig, Chief Financial Officer of Avistar. I’d like to welcome you to Avistar’s third quarter 2008 earnings conference call. Joining me today is Simon Moss, our CEO.

Before I turn the call over to Simon, I’d like to remind the participants on this call of the Safe Harbor provisions and qualifications related to forward-looking statements which I’ll quickly read.

Statements made in the course of this call that are not purely historical are forward-looking statements, including statements regarding the company’s or management’s intentions, hopes, beliefs, expectations or strategies for the future.

Because such statements deal with future events they are subject to various risks and uncertainties and actual results could differ materially from the company’s current expectations. Factors that could cause or contribute to such differences include the risk factors discussed in Avistar’s filing with the US Securities and Exchange Commission available at www.sec.gov.

All forward-looking statements in this call are based upon information available to Avistar as of the date of this call and Avistar assumes no obligation to update the forward-looking statements discussed in this conference call.

We will have a Q&A session at the conclusion of the call at which time we’ll invite your questions and feedback..

Let start off by reviewing some of the significant developments that Avistar experienced during the third quarter, developments actually that we stated were our goals for this period when we discussed our second quarter results with you back in July.

Simon Moss

Thanks Robert. Good afternoon everyone I hope you are all well. Just to remind you of our situation that we are focused on during the most recent reporting period, Avistar is in the midst of a major reinvention. It’s a company with a history of innovation and an enviable set of established reference accounts specifically in the financial services industry.

Its also been a company to certain extent that has over built its cost structure, certainly relative to predictable revenues. In some past quarters we’ve been very fortunate to have posted decent performance based on large patent licensing settlements, some involving litigation and others freely negotiated.

When we didn’t have a licensing deal during a given quarter that elaborate cost structure and cash burn was exposed and out standing in the capital market suffered. In the third quarter of 2007 is the best example of that challenge and it is that challenge that we have sought to address.

My goal and the goal of the new management team has been to adjust the cost base of the company so that it was aligned to predictable revenue allowing top line growth to drop down through the bottom line.

The first half of 2008 had that as a primary objective and we largely had accomplished that at midyear after a series of painful but necessary actions. We stated back in July and then subsequently that the third and fourth quarter of 2008 need to be focused at the top line.

Integral to that re-architecture of the firm was a diversification of our distribution approach. This really entitled the broadening of our product channel from solely direct to more the establishment of strong partnerships with knowledgeable resellers and distributors.

The second aspect of this diversification strategy which we considered really critically important was the shift from patent licensing to a more value added technology license and emphasis. The third quarter is we believe demonstrated great progress along both of those dimensions.

To really summarize our results we believe it was a very good quarter for Avistar in both execution and strategy and the financial results of that strategy is beginning to develop.

We achieved adjusted EBITDA profit for the quarter without the benefit of a patent licensing windfall. We continued to reduce our operating expense albeit at a more modest rate then we would have done if, then while we were making at the same dramatic revisions to our cost structure, we also posted a strong top line performance.

Revenue increased by over 50% compared to the second quarter and the product revenue component of that result more than doubled.

We saw the same improvement in total revenue also compared to the third quarter of 2007. As you may recall the second quarter revenue result also represented a great performance up 56% based against the first quarter of 2008.

So we believe we’re on a solid path of growth at this point. Beyond the numbers and math these results evidence what we have been identifying to you as a key objective of management, thoughtfully and thoroughly planning the work and then quite simply executing the plan.

We believe that the last two quarters represent such discipline and execution. To put this into some additional context, if past patent licensing windfalls were excluded from our historical performance the third quarter 2008 was the best quarter of products and services revenue then we’ve posted for the last five years.

But at the same time the firm is moving quickly to a model of more predictable and understandable revenue growth without the lumpiness of patent settlements which have created their own set of challenges and distortions in the past.

In regard to our product distribution by the end of the quarter we will have nearly two dozen resellers and distributors signed up and more then a third of our new product bookings have been generated through this new formative channel.

We expect that percentage of the total mix to increase further in the fourth quarter as we continue to migrate our business to an indirect channel approach.

We are still concentrated in a few large and prestigious financial services accounts by see the transition to our indirect channel is providing healthy diversification across additional verticals and geographies.

On the intellectual property licensing front both LifeSize and IBM agreements were excellent examples of our stated goals. As we discussed during the conference call that we held on September 17, 2008 these firms saw the value in our technology and how it had the potential to compliment their own offerings providing in the process a much healthier business arrangement and greater potential for taking advantage of additional opportunities going forward.

Let me address two other topics in the area of intellectual property and then I’ll move on to discuss where we are with the product. As we discussed during our last several presentations we clearly recognize that people are very interested in the status of our discussions with Microsoft.

As a brief orientation to our new listeners after a number of months of which we perceived to be collegial negotiations, Microsoft had our entire US patent portfolio placed into reexamination at the US patent office.

Most of these requests were initially rejected but with Microsoft’s rebuttal of five of our 19 PTO rejections, we still have 15 of our patents being reviewed. Interestingly enough a number of these patents don’t appear to have anything to do with Microsoft’s products so with that brief reminder and recognizing everybody wants to know where we stand, I’m afraid I will simply repeat what we said in the past which is we are continuing to discuss details at this time in conversations with Microsoft continue to get us both to a mutually acceptable resolution of this issue.

The second topic relating IP that I wanted to update you with is actually closely related to the Microsoft challenge. We’ll be issuing a separate press release shortly announcing that during the month of October the US Patent office will have issued four additional patents of Avistar.

Two were published on October 14, one is issuing today, and one is scheduled for issuance on October 28. Importantly these four new patents related to instant messaging and VOIP incorporate the prior [art] that Microsoft relied upon in challenging our existing US patent portfolios.

All of this is solid recognition of our innovations much of which is in already imbedded and implemented into our robust and high performance product portfolio that we’re selling through our distribution channels and selling through our technology licensing agreements.

When combined with effective financial management and accelerating market penetration we believe that this will be the basis to Avistar’s increasing success.

And we also believe that the third quarter is an excellent example of the performance we expect to see on a more regular basis. On the product side of the business we continued to build out the functionality that our customers and partners are looking for to make desktop video operate effectively in the unified communications environment.

But unlike of our past, we’ve been leveraging a much more cost effective offshore engineering resource organization to develop products like our software MCU, our firewall traversal code, interoperability with various infrastructure providers and the server-less client.

All these features and functions are delivered off our product roadmap. Desktop video can be positioned as not only a collaborative tool in its own right, but also as an effective and complimentary addition to existing conference room installations.

Ubiquity, high quality, ease of use, and spontaneous video collaboration are our goals. Although a useful tool for executives in scheduled room based interactions, the real power of this communications tool won’t be fully recognized until it is thoroughly integrated into where ever the workers work and interact.

At the corporate level the next set of objectives relate to sustainable positive net income. The last three quarters of 2008 have had us focused on [inaudible]. The net losses always improve substantially.

At the [inaudible] net loss of over 50% better then the second quarter of 2008 and over 80% better then the third quarter of 2007. We will also focus on continuing to move to a sustainable cash flow positive position.

We have no intention of seeking capital and believe our operating model is not accelerating well and that the challenges that the firm faced in the past are being effectively overcome.

We continue to focus on top line growth, brand recognition, in a large and continually growing market with continued discipline and rigor in execution. We will expect to share and we [consider] will be some similar results of our focus on execution in the January, 2009 conference call.

So let me had the call back to Robert to discuss specific financials posted in Q3 and our outlook into the fourth quarter and then we’ll share some concluding perspectives.

Robert Habig

Thanks Simon, our third quarter represented great sequential progress for the company and evidenced the consistency in execution relative to what we discussed as being our specific objectives when we visited with you after our second quarter results were published back in July.

third quarter 2008 revenue was $2.7 million and represented a 51% increase over the $1.8 million revenue figure generated during the second quarter of 2008 and the third quarter 2008 revenue result represented about the same increase; 54% over the third quarter of 2007.

More then a third of our product bookings recorded during the quarter related to sales made to our developing reseller and distributor communities. We indicated during our last earnings call that demonstrated progress in building this distribution channel was a key objective of the third and fourth quarters of this year so we’re really pleased with the progress that mix result represents.

Management views the results of income from settlement and licensing which is a line found in operating expense in the P&L which records patent licensing proceeds when generated through the filing of a claim in the courts, as a key metric of top line performance in addition to GAAP revenue.

Income from settlement and licensing was flat during the quarter as compared to the second quarter of 2008 and the third quarter of 2007 and we are not projecting real growth in our patent and licensing business over the balance of the year at this time.

For the third quarter of 2008 we reported a net loss of $774,000 or $0.02 per basic and diluted share. This result compares to a net loss of approximately $1.6 million or $0.05 per basic and diluted share reported for the second quarter of 2008, so a 52% improvement quarter over quarter.

The net loss in the second quarter had also reflected a 57% reduction in sequential loss as the first quarter of 2008 had a net loss of $3.8 million. A year ago during the third quarter of 2007 Avistar had a $4.1 million net loss.

On an adjusted EBITDA basis the metric management is using as the key indicator of bottom line progress during the restructuring we improved from a $1.2 million loss in the second quarter of 2008 to a $53,000 profit and we expect to continue to post sequential improvement in adjusted EBITDA in the fourth quarter of this year as well.

We’ve have moderated our cash burn quarter to quarter during 2008. We used $1.3 million of cash for operating activities in the third quarter as compared to $3.2 million used in the second quarter and $4.8 million used in operations in the first quarter of 2008.

Cash, cash equivalents, and short-term investments were $4.4 million at September 30, 2008. We expect to achieve a major milestone for the company in the fourth quarter as we project cash breakeven from operations.

We believe that we have adequate financing through both our existing cash balance and line of credit to continue to build the business and generate positive cash from operations during 2009.

Now let me turn the call back over to Simon to share a few final comments.

Simon Moss

So overall a damn good quarter. I am very happy. The team has done a great job in executing what we consider is a thoughtfully and thoroughly designed plan to turn Avistar around and deal with the challenges that it had.

Now we’ve focusing the fourth quarter on continuing to grow additional top line growth. The sequential progress that the second and third quarter financial results evidence are satisfying for sure and we’ve taken a minute or two to reflect on the progress of these accomplishments.

However we still have a tremendous amount of work to do in order to take full advantage of the opportunities that we have and we certainly don’t intend to slow down our pace or our focus.

With the challenges that have held the firm back in the past, and now we have a strong portfolio which is gaining recognition amongst [friends], partners, and competitors in the markets. We’re looking to continue in the rigorous execution of our diversification plans growing the company relative to both financial and brand metrics.

The results of the third quarter indicate the fact that this strategy is strong and indeed consistent and we intend to continue that execution with focus, rigor, and a great deal of effort.

I look forward to speaking to you when we close out 2008 in January 2009 and I expect we will have more interesting developments to report at that time.

As always we value your interest and support as we continue to develop this company into something that we can all be proud of. Thank you very much for your time and at this point we will open the call to any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [Charles Wade – Winstone Capital]

[Charles Wade – Winstone Capital]

Going forward what are your projections for the first couple of quarters of 2009 in terms of the cash positive flow that you’re receiving for the third and fourth quarters of this year?

Robert Habig

We are projecting cash flow positive in the fourth quarter. I think we’ll have, we’ll be pretty close to the margin. I think we’ll have cash flow positive results for 2009 although on a quarter-to-quarter basis there may be fluctuations.

So when we provide more specific 2009 guidance in January we’ll hopefully have greater visibility on the quarter-to-quarter but at this point suffice it to say we expect and project being cash flow positive in 2009.

[Charles Wade – Winstone Capital]

I did hear that you’re not going to be looking for any type of capital infusion, are you going to be looking for any type of acquisitions in that aspect.

Simon Moss

I think the answer is no to both of the interpretations of that question. We don’t seek to be acquired and I think the company has legs, has a robust strategy and we’re executing well in the market that’s continuing to grow despite some significant economic events that we’re seeing out there.

Secondly we believe that we have a strong and competitive product portfolio so we don’t, as well as a growing client base and distribution channel, so I don’t see us necessarily having to acquire other firms or brands whether for client list or whether to give us additional product functionality so I think no to both of those interpretations.

Robert Habig

I think our partnership strategy is developed around trying to expand our capacities through partnerships as opposed to through acquisitions.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Robert Habig

Thanks to all the participants for your interest in Avistar. We think we’re on a pretty interesting journey and that we have great prospects and we look forward to speaking with you again come January and at that point hopefully some new additional positive developments and some additional guidance for 2009. Thanks again everyone and have a great day and a great week.

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