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BroadVision, Inc. (NASDAQ:BVSN)

Q3 2008 Earnings Call

October 22, 2008 5:00 pm ET

Executives

Andrew Hub – Director Investor Relations

Dr. Pehong Chen - President, Chief Executive Officer and Chairman of the Board

Shin-Yuan Tzou - Chief Financial Officer

Analysts

Joe [Romelli] – Unknown Firm

Rashmi Joshi – IIIR Group

[Stephen Lock] – Unknown Firm

Jeff Cohen – Unknown Firm

Operator

Welcome to the BroadVision Q3 earnings announcement and investor conference. As a reminder all lines will be in a listen-only mode and there will be a question-and-answer session at the end of the call. (Operator Instructions)

At this time I would like to turn the call over to Mr. Andrew Hub, Director of Investor Relations so that we may begin our call.

Andrew Hub

Thank you. Good afternoon everyone. My name is Andrew Hub, Director of Investor Relations at BroadVision. Welcome to our 2008 Q3 financial results announcement and conference call. I will first provide our standard cautionary statements on forward-looking statements and other legal matters. Next, Dr. Shin-Yuan Tzou, our CFO, will review the third quarter results which were announced in a press release earlier this afternoon. Then Dr. Pehong Chen, our CEO, will provide product and marketing updates and wrap up with a summary.

As always we will be pleased to take your questions following the formal portion of the call.

During the course of this conference call BroadVision may make forward-looking statements. All forward-looking statements included in this call are based upon information available to BroadVision as of the date of this call including statements regarding our expectations of future financial results and product releases and BroadVision assumes no obligation to update or correct any such forward-looking statements. These statements are not guarantees of actual performance and actual results could differ materially from BroadVision’s current expectations. Actual future results may be impacted by various important factors including without limitation changes in the market, competitive environment and macroeconomic conditions. Additional information on the potential factors that could affect the company’s financial results is reflected in the company’s periodic reports on forms 10K and 10Q and other documents filed with the SEC.

In addition, we will discuss certain non-GAAP financial measures such as net income and operating expenses that exclude restructuring charges or credits and certain non-cash charges. Information about the specific non-GAAP measure adjustments is included in our earnings release published earlier today which can be found on our web site at www.BroadVision.com under the Company/Investor Relations/Investor News page. You can also view our SEC filings and historical financial results under the Company/Investor Relations/Financials page.

Now I will turn the call over to Shin-Yuan Tzou.

Shin-Yuan Tzou

Thanks Andrew. First our Q3 2008 results in terms of P&L, balance sheet and other operating highlights.

Revenues: Q3 2008 revenues were $8.2 million with $2.1 million in license, $4.4 million in maintenance and $1.7 million in consulting services. Sequentially this compares to Q2 2008 total revenues of $8.0 million with $2.4 million in license, $4.3 million in maintenance and $1.3 million in consulting services. In comparison, Q3 2007 total revenues were $12.8 million with $2.3 million in license, $5.8 million in maintenance and $1.7 million in consulting services. The Q3 versus Q2 2008 revenues were about the same.

Q3 2008 revenues by region were 50% America, 38% EMEA and 12% APJ compared to 51% America, 34% EMEA and 15% APJ in Q2 2008 and 77% America, 13% EMEA and 10% APJ in Q3 2007. As we have discussed in the past we set our geographical mix to fluctuate somewhat from quarter-to-quarter mainly due to our small footprint.

Expenses: On a GAAP basis, total operating costs plus costs of revenues were $8.0 million in Q3 2008, same as Q2 2008 and down from $8.3 million in Q3 2007. In Q3 2008 we generated a GAAP net income of $0.3 million or break even per diluted share compared to a net income of $1.4 million or $0.01 per diluted share in Q2 2008 and a net income of $5.5 million or $0.05 per diluted share in Q3 2007.

The company’s Q3 2008 GAAP net income included $0.6 million non-cash gain from revaluation of the company’s outstanding warrants previously issued to certain holders of the now retired convertible divestures to purchase approximately 3.9 million shares of common stock. GAAP requires that these warrants be mark to market at the end of each financial reporting period. Until these warrants are either fully executed or retired you should expect to see this item impacting our GAAP bottom line either positively as in this quarter or negatively as in previous quarters. This is why we turn our attention to non-GAAP measure results as well.

Our non-GAAP measure basis excluding adjustments for restructuring charges, stock compensation expense under SFAS 123R and the revaluation of warrants Q3 2008 operating expenses plus cost of revenues were $7.6 million, a decrease of $100,000 from $7.7 million in both Q2 2008 and in Q3 2007. Non-GAAP measure net income for Q3 2008 reflecting the same adjustments were $0.3 million, down from $1.1 million in Q2 2008 and $6.7 million in Q3 2007. We believe these non-GAAP measures numbers are useful information in tracking and analyzing the company’s ongoing core costs and profitability. Information about the sitting non-GAAP measure adjustments and rate consolidation is included in our earnings release published earlier today which can be found on our website.

Looking at our four main cost centers, first cost of goods sold concentrated mainly on cost of services was $2.2 million in Q3 2008, the same as Q2 2008. R&D expenses for Q3 2008 were $2.2 million, decreased slightly from $2.3 million in Q2 2008. Sales and marketing expenses for Q3 2008 were $1.9 million decreased slightly from $2 million in Q2 2008.

Finally, G&A expenses for Q3 2008 were $1.7 million increased slightly from $1.6 million in Q2 2008.

Balance Sheet: Our balance sheet is strengthening trend in the past eleven quarters. As of September 30, 2008 we had $62.5 million of cash, cash equivalents and short-term investments. This represents a 6% increase from the end of the second quarter position of $59.1 million and a 16% increase from the year’s starting position of $50 million. Positive cash flow from business operations contributed to the cash generated during the quarter. We have no exposure to auction rate securities (NYSE:ARS).

Receivables were $5.3 million at the end of Q3 2008 compared to $7 million at the end of Q2 2008 due primarily to better collections. Day sales outstanding in Q3 2008 were 60 days compared to 80 days in Q2 2008.

Prepaid expenses and other current assets were $2.6 million at the end of Q3 compared to $2.0 million at the end of Q2 2008. We prepaid insurance and certain VAT which we are claiming a refund in later periods. Other assets were $0.6 million at end of Q3 the same as Q2 2008. Accounts payable were $0.8 million at the end of Q3 and $1.2 million and the end of Q2. The decrease is primarily due to the timing of invoices received and the payments made.

Deferred expenses were $5.5 million at the end of Q3 compared to $5.9 million at the end of Q2. Deferred maintenance was $8.8 million at the end of Q3, a decrease from $9.5 million at the end of Q2 2008.

Other non-recurring liabilities were $3.1 million at the end of Q3 compared to $2.9 million at the end of Q2 2008.

Customers: We signed ten licensers during Q3 2008 with an average sales price of $532,000. In Q3 2008 there was one deal greater than $1 million.

I will now turn it over to Pehong for [inaudible] and the marketing update.

Pehong Chen

Our main focus for Q3 was to continue to building of a solid foundation for future quarters. Here are some key highlights along our three product lines, our K2 platform, e-merchandising and CHRM.

Key deals in Q3 2008 include Wal-Mart, Raiffeisen Bank, State of Minnesota, Epson, Highmark, Honeywell, Bio-Rad and others. Gexpro new B2B portal based on BroadVision 8.1 is now live and the customer is very happy with our work. Gexpro, formerly known as GE Supply is one of the world’s leading distributors in electronic components and a member of the LaSalle SA, a $12 billion powerhouse in that market from France.

We also secured a multi-year license contract with Honeywell on Quicksilver. Most significant was the signing of Wal-Mart for assigned license for our e-merchandising solutions. E-merchandising allows value added strategies which provide the client ability to offer their customers contextual pricing and incentives that react with the shopper’s browsing and product selection.

Contextual and real time messaging will encourage add-on purchases and large cart sizes which is critical for etailers in a tough time like what we have right now. We hope to help Wal-Mart increase sales with these solutions both online and offline.

The primary goal of BroadVision on-demand and the CHRM solution during Q3 was to get all newly signed customers live and referenceable. I am pleased to report this goal has been duly accomplished. In the meantime we continue to build solid pipelines in both China and the U.S. by participating in key trade shows such as the Asia HR Expo in Shanghai and HR Technology Show in Chicago and with our outbound telemarketing and telesales campaigns. On top of that there are now nearly 80 CHRM60 customers in China serving more than 30,000 users each of which is a great prospect for paid CHRM modules.

CHRM60 provides companies with an integrated internet portal, content management and workforce management all for free. We believe this free is a great strategy and will eventually lead to our critical mass and speed out of market penetration.

Looking ahead Q4 will continue to be busy for marketing and lead-gen activities. We will continue to participate at a number of events across the globe include several e-commerce events in North America, Europe and Asia.

Last but not least a quick update on our pending reverse stock split. We are in the process of completing a 25/1 reverse stock split which we expect to become effective on the OPC bulletin board by Monday, October 27. We are also in the process for applying for re-entry into the NASDAQ main board which we hope to complete within the next few weeks.

In summary, given the current unprecedented uncertainties due to the recent global financial market meltdown and the worldwide economic downturn or even recession in some places we are very glad that over the last three years we have been able to build up a very solid war chest with a strong balance sheet and zero leverage. Our end of September cash position of $62.5 million is 13 times the balance of $4.8 million on December 31, 2005 when our turnaround effort began thanks to the hard work of all our employees and the support of our customers. I know we have experienced some set backs this year as we transitioned from O product lines with an install base into our new product footprint but we remain very confident of our future for several reasons.

Number one, our current product portfolio consisting of the K2 platform, personalization and e-merchandising solutions and CHRM is indeed very compelling. Second, our revenues, backlog and pipelines have increased thereby improving our visibility. Three, our install based remains strong and committed. Four, our cost structure is very fine tuned and very much under control.

Accordingly, we are poised to compete with lower prices as customers hunker down, reduce spending and look for lower cost solutions. Next, we have also figured out how to implement large e-business projects on a [Tri-Shore] basis on site with the client, at our headquarters and from our low-cost Beijing R&D lab. So when opportunities arise we believe we can scale the business while maintaining good margins. We intend to grow our business based on this strategy.

Finally, we have a very solid balance sheet as mentioned before with plenty of cash. While investors have suggested various great ideas about the best use of our cash, especially in light of our currently depressed stock price, we believe at times like these the best use of our hard-earned cash is to put it away until opportunities present themselves that allow us to change the game through M&A and other activities. There is no hurry on anything but I am glad we are keeping our powder dry and can pull the trigger at the right time.

In conclusion, not only are we well prepared to survive a potential global economic nuclear winter we are confident we can come out a stronger company than before.

Andrew Hub

Thank you Pehong. That concludes the formal portion of the call. We will now take a moment to open up the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from Joe [Romelli] – Unknown Firm.

Joe [Romelli] – Unknown Firm

I had a thought you guys had actually gone through the perfect storm before and I know you alluded to a lot of this and you came out the other side lean, hungry and with a wad of cash whereas a lot of your competitors are going to be forced into a position where you were several years ago where they are laying off people and dealing with the negative effect on employee morale. It seems like actually in a weird way this could really benefit you coming out the other side.

Pehong Chen

We believe so. We think a low sort of market like this; smaller guys have some advantages like us. We don’t really depend on big deals and I think we have tuned ourselves in terms of product offerings over the last few years so that we can survive with more smaller deals than in the past which still a lot of companies are dependent upon these mega elephant size deals. I think that is really probably what the future is going to lead us to. To be more nimble and be able to address with very high quality and superb technology but being able to really play small.

Joe [Romelli] – Unknown Firm

Some of the competitors’ cost structure would not allow them to compete for $200,000 deals I would imagine.

Pehong Chen

Exactly. That is where it is going to be where the rubber meets the road. For however long, nobody knows how long this downturn is going to be but our goal is I think we are well poised to come out of this either organically or through other means to become more competitive.

Joe [Romelli] – Unknown Firm

The other question was on CHRM. Are you having…it must be the issue with changing customers’ perception of BroadVision as the e-commerce company to have them look at you in another light as a SAS human resources vendor. How are you going about changing the perception and with the marketing message how is that being received in the U.S.?

Pehong Chen

I think that is a matter of educating everyone. The market we are targeting for CHRM tends to be a smaller SME, maybe average size of 500 employees. These companies tend to be newer so I think in some sense they probably don’t have as much of a past experience with us as perhaps some of the e-commerce players would be. So in theory it probably is maybe confusing but in practice we don’t believe it will be a big issue. The important issue right now is for everyone to understand historically our business has always been very balanced. We have one-third in B2B, one-third in B2C and one-third or more in B2E. Our CHRM really is a new business model indeed which is SAS but it is really just an extension of our traditional historical portal/B2E business providing more value at a lower cost to our customers. So once we explain that or people understand our background in that well balanced legacy they very readily accept that being a very strong pedigree frankly.

Operator

The next question comes from Rashmi Joshi – IIIR Group.

Rashmi Joshi – IIIR Group

I just want to discuss a little bit more about the cash balance and the possibility of giving a dividend. I know you addressed this in your remarks but the way I look at it is given the small size of your company if you do acquisitions it may be a management challenge given the resources you have and the cash balance is enough for two years of expenses and why would you need to keep that much idle cash? I can understand six months or one year of expenses you want to hold in cash but why? The market value is $60 million and the cash is $60 million which seems to suggest it would be better used if shareholders could get part of the cash.

Pehong Chen

I think if the cash position continues to strengthen at some point that definitely is worth considering. We are not discounting that at all. We understand your vision in that. I think at this juncture all our interests would be better served as shareholders when we look at perhaps there are some opportunities that may arise that would allow us to; I call it a game changer that would allow us in a sense to get in some situation where we simply become more able to grow the business. Growth has been a problem as you well know over the last few years. So I do think there are companies that are going to be strapped in terms of not having any liquidity or enough cash flow that could be very complementary to us. I really can’t tell you exactly what they are yet but we are seriously evaluating some situations which I think would actually add a better trajectory and I think then at that point we as shareholders would actually be much better served for the use of cash that way than just simply paying ourselves some cash.

So I think we are right at that sort of inflection juncture and if we don’t really see any more opportunities presenting themselves in due course, I think what you are suggesting is definitely something worth considering and so I am actually on the same page with you on that. But I think at this point given the unique market opportunity and given sort of the any outlays for a lot of small companies is essentially shut, I think we may want to kind of look at things strategically and be able to take advantage of opportunities and thereby allowing us to come out of the storm with perhaps a better configuration.

I absolutely agree with you that small companies absorbing other companies is not sort of at all trivial but I do believe we are not from our experience over the last few years in this turnaround have got sufficient experience that if we do it carefully there might be some opportunities out there.

Rashmi Joshi – IIIR Group

The other question I have relates to the results you just announced. I noticed your services revenue actually went up although licenses keep going down which is worrisome and you mentioned you have a little more visibility into license revenues going forward. Is this likely to be the bottom in revenues or should we expect them to be more down?

Pehong Chen

We have been, as you can see, the revenue has been kind of level although the mix of revenues varied a little bit between the last two quarters. We do feel like with the better visibility and I mentioned the revenue backlog we are going to see some improvement in the future.

Operator

The next question comes from [Stephen Lock] – Unknown Firm.

[Stephen Lock] – Unknown Firm

My question was I wanted to know about the maintenance mix. What are the percentages going into maintenance? What products are you seeing the maintenance in? Where do you guys see maintenance heading sort of in the near-term and in the immediate term?

Pehong Chen

Maintenance of course our maintenance comes essentially from our installed base from our platform products. Our CHRM product is a subscription based model and our e-merchandising product is fairly new in the market. The maintenance has been, if you look at this year roughly at this level, it comes up and down by a few percentage points here and there typically due to how much of a true up or catch up we get in during that quarter. We do sort of expect the maintenance we take the average of so far this year will probably be in that range. I don’t know, does that answer your question?

[Stephen Lock] – Unknown Firm

Most of your revenue it sounds like is coming from your e-merchandising and the CHRM product.

Pehong Chen

It is not. All the maintenance comes from our K2 platform products.

[Stephen Lock] – Unknown Firm

So the drop off in the maintenance is that related to a gradual reduction in the number of users?

Pehong Chen

We talked about this in the past quite a lot. The drop off in maintenance year after year typically is an annual thing because the renewal comes annually and at the beginning of this year for example we lost quite a bit and as I explained back in January we lost several big federal deals for non-renewing and one can only sort of attribute that to a shrinking defense budget in terms of their willingness to be on the maintenance program despite us advising them that is not a good idea. So unfortunately we did lose in situations like that. Those are customers that are still on our platform but choose or cannot afford to be on maintenance. There are several different scenarios where one may lose or have attrition in maintenance which is kind of a general industry average of 10-15% annually. The way you want to make it up or even grow your maintenance is to make sure you bring in new customers and that is an area where we need a lot more work obviously.

[Stephen Lock] – Unknown Firm

Do you see any more skittishness in your current maintenance base?

Pehong Chen

The thing is, I can’t tell you obviously because every quarter there are renewals. So far I think a lot of the big lumpy impacts pretty much have all worked out of the system. So what we have got left in terms of our installed base in maintenance is a bit more I would say a lot more balanced than before.

Operator

The next question comes from Jeff Cohen – Unknown Firm.

Jeff Cohen – Unknown Firm

Can you give us a little bit more color on what you would consider a game changer or the types of acquisitions at least generically that you might be interested in?

Pehong Chen

That is a very good question. I think the global economy is such that people in IT are absolutely going to look for cost-effective solutions. We can see that in our own installed base as well. So what we have been learning, practicing and experimenting and I think we have now got pretty high confidence in is the model we call the [Tri-Shore] e-business model. We believe that people continue to need to have new websites or have new websites built whether it is in B2B or B2C and we are one of the very few remaining in the world that was one of the original pioneers in this area. So we have tremendous technology and a very, very deep experience base. We think that could be coupled with better labor sources overseas. Specifically we mean China. We have now developed our own know-how there and have been doing so the last several years. Even though it is not a big operation, it is enough for us to know the in’s and outs. I think there are opportunities and increasing outsourcing companies in China will start to play a more important role in the global IT supply chain. I think given that the outlet in the financial market is very, very tight for a lot of the players, I think we being a public company and we have great technology and great experience and great brand name might play a role in sort of bulking ourselves up in terms of having more resources to take on more projects in that sense.

Jeff Cohen – Unknown Firm

Would these be opportunities that would have revenues just in China or would they be worldwide?

Pehong Chen

Most outsourcing companies whether it is in India, China or somewhere else their clients are actually worldwide. They may have some clients in China but my understanding so far is the bulk of their customer base is worldwide.

Operator

We have no further questions.

Andrew Hub

Thank you very much. That concludes BroadVision’s 2008 Q3 investor call and financial results. We look forward to speaking to you again when we announce our Q4 results.

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