NMS Communications Corporation Q3 2008 Earnings Call Transcript

NMS Communications Corporation (NMSS)

Q3 2008 Earnings Call Transcript

October 23, 2008, 5:00 pm ET

Executives

Herb Shumway – SVP of Finance and Operations, and CFO

Bob Schechter – Chairman and CEO

Joel Hughes – President of LiveWire Mobile Division

Todd Donahue – VP, Corporate Controller and Chief Accounting Officer

Analysts

Steven Silk – C. Silk & Sons

Kevin Dede – Morgan Joseph

Presentation

Operator

Good day everyone and welcome to today’s NMS Communications announces preliminary financial results for third quarter ended September 30, 2008 conference call. Today’s call is being recorded. At this time for opening remarks, I would like to turn the call over to the Chief Financial Officer, Herb Shumway. Please go ahead sir.

Herb Shumway

Thank you, Glenn. Welcome to the NMS Communications preliminary third quarter 2008 earnings conference call. As Glenn indicated, I am Herb Shumway, NMS’s Chief Financial Officer, and with me on the call today are Bob Schechter, Chairman and Chief Executive Officer of NMS; Joel Hughes, President of LiveWire Mobile; and Todd Donahue, NMS’s Corporate Controller and Chief Accounting Officer.

The purpose of this call is to review preliminary results, provide an update on the NMS Communications business and share our outlook specifically for the LiveWire Mobile business and then answer your questions.

Bob will begin with some brief comments and then I will conduct a brief review of the financial results, and Joel and Todd will then provide some business perspective and guidance for LiveWire Mobile. Then we will all be available for your questions. We have also updated our investor presentation and that will be available later this evening at www.nmss.com under the Investor Relations’ section.

Before I proceed I would like to caution you that our remarks today will contain forward-looking statements, I direct you to today’s NMS Communications press release and recent SEC filings including the company’s 10 K, 10 Qs and 8 Ks for additional information regarding the company’s risk factors. The content of this call is time sensitive and reflects the company’s perspective as of October 23, 2008. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so even if estimates change.

With that, I would like to turn the call over to Bob Schechter. Bob?

Bob Schechter

Thank you, Herb. Thanks everybody for joining us this evening. Given the pending sale of the NMS platforms business, the primary purpose of this call is to provide an update on LiveWire Mobile and our outlook for this business which Joel will share with you shortly. We accelerated our normal close process somewhat so we could speak with you today in anticipation of the proxy solicitation and shareholder approval process related to the sale of our Communications Platforms business. The auditors are still working on completing their review of the quarter but we don’t anticipate significant changes from the numbers we will share with you today.

As you know, on September 12 we announced the signing of a definitive agreement to sell the NMS Communications Platforms business to Dialogic Corporation for $28 million. As detailed in the proxy filed on October 6, we expect to incur approximately $5.2 million in deal costs which include banking, legal and accounting fees as well as retention bonuses and severance costs. In addition $3.2 million in cash will be placed in escrow for a period of up to a year. During the last 12 to 24 months, we have independently focused and separated our two businesses. Our conviction has been that the value of the two businesses separately was greater than the whole and that the LiveWire Mobile business represents the best half to profitable growth and shareholder value creation. Therefore selling the CP business and focusing a 100% of our resources on LiveWire Mobile is an essential next step. As described in the proxy, the board conducted a comprehensive sale process and we believe we obtained the best possible price in selling that business.

Joel will be providing you with the business update shortly, but I want to share with you that notwithstanding the very difficult economic environment everyone is presently experiencing, we all remain really excited about and confident in Joel and LiveWire Mobile team’s ability to execute on its long-term growth initiatives and build on its early leadership position in the growing market for Mobile personalization services to build a significant business. As previously announced pending the close of the sale of the NMS platforms business, we will change the name of the company to LiveWire Mobile and Joel will become the CEO of the company. Todd Donahue, who has been our VP of Finance for the past few years, will become the new CFO replacing Herb Shumway. I know you are going to enjoy working with Joel and Todd and the LiveWire Mobile leadership team.

With that, I am going to turn the call over to Herb.

Herb Shumway

Thank you, Bob. Now for the preliminary financial results for the third quarter ending September 30, 2008, these results are inclusive of the NMS Communications Platform business. We currently expect to report total revenues in the range of $16.1 million to $16.4 million and GAAP net loss per share from continuing operations in the range of negative $0.16 and negative $0.15 for the quarter ending September 30, 2008. The non-GAAP net loss per share from continuing operations is expected to be in the range of negative $0.10 to negative $0.09. Expected non-GAAP results include approximately $0.06 of amortization of intangible assets, stock-based compensation expense and transaction costs.

Communications Platforms business had revenues in the range of $12.5 million to $12.8 million for the third quarter. Revenue was down sequentially primarily due to products that were shipped during the third quarter but we were not able to recognize associated revenues in the fourth quarter. Communications Platforms business has had market demand issues that we have discussed on previous calls which continue to persist. We feel very strongly that the sale of this business to a company that is in a better position to realize value from the core assets such as Dialogic is in the best interests of our shareholders.

The LiveWire Mobile business had revenues of approximately $3.6 million, a slight increase sequentially and relatively flat with the third quarter of 2007. LiveWire Mobile’s growth was negatively impacted to continue to decline in the CapEx portion of the business coupled with delays in the launch of new managed services primarily in Europe. As Joel will discuss in a moment, LiveWire Mobile will be focusing exclusively on selling managed services in North America moving forward. In doing so, LiveWire Mobile will be more aggressively de-emphasizing the CapEx channel portion of this business. As we have discussed in the past, the managed services opportunity is significantly larger than the comparable CapEx opportunity and it has the added benefit of generating recurring revenues as to one-time revenue with the CapEx model.

Looking at the balance sheet, cash, cash equivalents, and marketable security balances were approximately $4.6 million on September 30, 2008, a decrease of approximately $4.7 million compared to the $9.3 million at the end of last quarter. The ending September 30, 2008 balance included approximately $3.8 million drawn on our line of credit, slight decrease from last quarter. Cash balances do not include the anticipated net proceeds from the sale of our NMS Communications business.

With that, I would like to turn the call over to Joel to provide a business update on LiveWire Mobile.

Joel Hughes

Thanks, Herb. Thank you for joining us as we look forward to operating as a standalone company after the completion of the sale of the Communications Platforms business and being able to speak with you on a regular basis.

Today we are announcing several strategic changes to LiveWire Mobile to enable us to better focus on our managed services business as well as preserve capital in order to help us achieve our long-term growth and profit objectives. These actions include focusing our resources exclusively on selling new managed services directly to operators in North America, more aggressively de-emphasizing the CapEx channel portion of the business, and right-sizing the organization to significantly reduce our breakeven revenue run rate and better aligned with our strategic focus. I will spend a little time on each of these starting with the CapEx channel portion of the business.

The revenue associated with the CapEx channel is less profitable due to higher cost of goods sold and is more unpredictable compared to our managed services business. And although we have been shifting our focus and resource investment away from the CapEx channel business over the past year in anticipation of a decline in revenue opportunity, we have experienced a more rapid decline in revenue than expected over the past several quarters. We plan to take a more aggressive approach to this de-emphasis and expect an accelerated decline in CapEx revenue during 2009.

In turn we will be focusing exclusively on growing our managed services business in North America. While we continue to support all our existing customers worldwide, we believe that North America represents the largest long-term opportunity for us and will enable us to maximize our current client relationships and internal resources. We believe that the market opportunity in North America is large enough for us to build a substantial business and we see stronger operator interest in our managed personalization services here than in other regions at this time. Our focus on accelerating the shift towards managed services is expected to significantly increase a percentage of revenue generated from recurring revenue sources which will improve the visibility and predictability of LiveWire Mobile’s revenue.

Managed services also come with higher gross margins. We currently expected in 2009 managed services revenue will grow approximately 100% over 2008 and will be greater than 50% of our total revenue. We believe the growth drivers for our managed services business are our growing active subscriber base and our increasing revenue per subscriber. We will continue to grow active subscribers by launching new services from our expanded portfolio of integrated personalization services including ring back, ring tone and music. This is predominantly aimed at our existing customers who have already deployed our products and services. These customers are telling us that they we want to launch new personalization services while they seek to consolidate platforms and suppliers around trusted partners like LiveWire Mobile. As we have been saying the up-sell and cross-sell opportunity within our existing base will be the key driver for increasing our active subscribers with a more limited emphasis on new operators. Managed services revenue growth is also expected to come from an increase in ARPU driven by a move from a la carte content transactions towards subscription pricing where we receive more revenue. We also believe over the next several years we will begin to see a greater move towards multi-service content subscription bundling with a significantly higher multi-subscription fee resulting in a higher ARPU for LiveWire Mobile.

In addition to our efforts to optimize our revenue mix and our long-term market opportunity, we need to reduce our comp structure, right-size the company for the managed services business and significantly lower the company’s breakeven level. To that end we are announcing a plan that will reduce headcount by 30% to approximately 140 people. Reductions will reflect strategic emphasis on North American managed services as well as simplified G&A requirements for smaller business. The result is that we expect to reduce our non-GAAP operating expenses by approximately 45% to around $16.8 million in 2009 and lower our quarterly breakeven to $6 million or 50% of the current breakeven run rate. We believe these actions will dramatically decrease our net loss in 2009 to approximately $3 million and we believe will position LiveWire to be profitable and generate positive cash flow in 2010. With a lower cost structure and cash proceeds from the sale of the NMS Communications business, we believe LiveWire Mobile will have sufficient cash in the balance sheet to execute effectively on the growth strategy for the business. Lastly, over the next year, we plan to evolve our board of directors to more closely align with LiveWire Mobile’s strategic focus.

We remain extremely excited about the opportunity ahead of us and believe the actions we have announced today will make us a leaner and more focused organization. We are committed to focus on capital preservation and running a profitable business. The right sizing of the organization helps us achieve these goals while also funding better targeted growth. Finally, to look at the bigger picture, a vision for LiveWire Mobile is 1 x 10 = 100. This symbolizes our goal having $1 monthly ARPUs, $10 million active subscribers and a $100 million plus revenue business over time. Obviously the math doesn’t work precisely but the vision allows us to focus our daily efforts on ARPU and active subscriber growth ultimately delivering a simple but powerful business model. We believe the market can support a sizeable company then we expect LiveWire Mobile will be a leader.

With that, I will turn the call over to Todd Donahue to provide you with some additional color on our preliminary 2009 guidance. Todd?

Todd Donahue

Thank you, Joel. The guidance I am about to provide assumes the close of the sale of the Communications Platforms business during the fourth quarter of 2008, this was the completion of the restructuring actions described by Joel. LiveWire Mobile currently expects to end fiscal year 2008 with net cash balances of approximately $11 million inclusive of the net proceeds of the Communications Platforms business sale, cash used for operations in the fourth quarter, repayment of the current line of credit, and costs associated with the announced restructuring. We currently expect 2009 total revenue to grow modestly to approximately $20 million with much more rapid year-over-year growth in managed services revenue of approximately 100%. Overall, top line growth will be dampened by the planned decline of the CapEx portion of our business and managed services are expected to contribute the majority of total revenue in 2009. The reorganization actions we just discussed are expected to preserve capital and significantly reduce the breakeven levels and cash usage for LiveWire Mobile. For 2009, we expect a modest non-GAAP net loss from continuing operations of approximately $3 million at the end of the fiscal year with net cash balances of approximately $8 million inclusive of cash used in operations during the year, lease obligations and the receipt of the cash in escrow from the sale of the Communications Platform business. The company also expects to be profitable and generate positive cash flow from operations in 2010.

With that, I would like to turn the call over to the operator and will be happy to discuss and take your questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We will go first to Steven Silk with C. Silk & Sons.

Steven Silk – C. Silk & Sons

Good afternoon. It is just very disappointing to see the amount of cash that is going to be left net after the deal and it just boggles my mind how much – what is on severance, what is on bonus, how is it to find that bonus is even earned at this point? Maybe you can comment on that how is it only $11 million net?

Todd Donahue

Steven, this is Todd, thank you for the question. At the end of September, we expect to end the quarter with $4.6 million and major cash considerations for Q4 as we mentioned include proceeds from the sale, repayment of the line of credit which as of September outstanding was approximately $4 million, obviously the LiveWire Mobile restructuring, corporate restructuring that Joel just alluded to which is a 30% reduction and as we continue to turn around the business and accelerate the decline or move away from CapEx, we will use that cash in operations for Q4.

Steven Silk – C. Silk & Sons

It just seems one restructuring after another purchase of a company where you paid a multiple of revenue, I don’t even think they had much revenue and then selling the business at a fraction of revenue that was generating profit, each step over the last year and a half has been a misstep, and it is just very difficult to believe how things are going to turn around. I saw the filing by a large shareholder yesterday calling perhaps for Bob to step down and step aside, perhaps the whole board should step down and step aside. I think it should be very much looked at whether the revenue run rate that you need to be profitable and I think you can do it if the model works, you need to evaluate why is that you are even a public company or you should be looking to sell that part of the company or maybe the model works well with a stronger hand, would work even better because of the stronger sales force and whatever, but I don’t see how anybody on the current board of directors should be involved with the company going forward they should be [inaudible], something needs to be done that is not been done at the company.

Bob Schechter

Steven this is Bob Schechter and I understand your concern and your frustration.

Steven Silk – C. Silk & Sons

Right.

Bob Schechter

It has been disappointing. Some of the results have been – many of the results have been disappointing for us as well. The changes that we are making are quite dramatic changes. As Joel described, we are reducing the breakeven level of the business in as substantive a way as we can while we pursue the managed services opportunity that is being described and I think that we are quite confident that we have a plan, Joel and his team have put together a plan that can be successful. With respect to board changes, as Joel described, we are going to go through a process, hopefully an orderly process but a process nonetheless, of making changes to the board based on really the new business that we are in. It is a somewhat different business than the traditional Communications Platforms business and so we definitely see that as something that needs to be undertaken and will be undertaken. With respect to the sale of the business, it is correct that it was a profitable business , it has remained a profitable business however as you can see, it is a business where the top line has declined rather significantly in each of the last three years and it has declining again significantly this year and it was our view that it was just not – we were not able to either flatten out or grow the top line and the judgment that we made was that another owner would have – that was totally focused on that business whatever, a better shot at doing that and –

Steven Silk – C. Silk & Sons

You had thought that maybe there was constantly bottoming out and it never really happened. We kind of missed that, maybe the opportunity to sell it was a year ago. I know Groove and LiveWire was not set up to be able to be standalone at that point. So, maybe you had to hold-off in doing that but I don’t even know again the cost of being a public company versus the assumed revenue, will it be profitable with that much faster –

Bob Schechter

Steven, I think that there is no doubt that we are going to enter the next year as a very small public company and if you were starting with a clean piece of paper, you wouldn’t start it that way but we are a public company today, and unless we take an action to really sell the company or take the company private, that is where we are at this time. We do believe that we have got the cost, the G&A cost associated with the business right-size with the changes that Joel described, but there is no question about it, it is a small company.

Steven Silk – C. Silk & Sons

All right. Thank you very much Bob.

Operator

(Operator instructions) We’ll go next to Kevin Dede with Morgan Joseph.

Kevin Dede – Morgan Joseph

Hi Joel, congrats on all the announcements and Bob, Herb, and Todd. I was hoping you wouldn’t mind just giving me a little insight on the underlying foundation for your forecast next year. You are saying 100% growth and you are focused on North America, I am just sort of wondering what gives you the confidence that you will be able to put that together in managed services while backing off on the other portion of your business?

Joel Hughes

Okay Kevin, this is Joel. Maybe just a couple of points to try and get a little bit of a view without getting into detail here –

Kevin Dede – Morgan Joseph

I mean, please, the other thing I would like to hear from you too is that you have considered the current economic environment.

Joel Hughes

Yes. I think there are a couple of big things to say. Number one, we do expect to drive some revenue although rapidly defining over to the CapEx business, we should start there and most of that is in the form of maintenance support services that we continue to deliver to customers that have been launched for some period of time. So, that’s one piece but clearly the real engine for growth here we described is the managed services revenue growth. We do have – we will be going exclusively to market in North America, we do have a few customers outside North America today who we will continue to support and ideally grow but the growth structure [ph] is in North America and as I said it really comes from the product of the revenue per user that we are able to drive for our services and the number of active users. So, by both bringing new users online through a couple of additional launches, our services next year primarily by growing the number of active subscribers on our launch services we are able to grow that factor, and then we have seen in the last two contract extensions that we have incurred [ph] with existing customers, we have actually been able to raise our pricing. We have seen our ARPU from those contracts going forward we can see an uplift there. So, the recent certainly news is somewhat promising on working after a quite a small base, that is how we view the 100% growth in managed services that is really the engine inside next year’s forecast. The other thing I would say is that the vast majority of the revenue forecast for ’09 is from existing customers. So, there is a single digit percentage of revenue expected from customers who aren’t stable already today. So, it is really again primarily from existing services that have been launched and a couple of new launches at existing customers that we believe will do with that revenue. So, that goes [inaudible] risk around new customer acquisition which we have had. Clearly we have had problems throughout the way particularly in the European region that is one of the reasons we are taking the actions we are taking today. Finally, I think you were asking what about the potential impact in macroeconomic environment, I think it is too early to say for us there, I think that we are a bit hopeful that there will not be a major negative impact on these kinds of consumer entertainment and music personalization services that we deliver. There won’t be a fundamental decline in people’s ability to buy and pay for those services and I would say we haven’t seen any sort of forecasts on that and we don’t have a view on whether that will have a significant impact at this point or not.

Kevin Dede – Morgan Joseph

Have you seen any change in trends in say mid September?

Joel Hughes

The trends in our launch services have not been negatively impacted since let’s say September, no.

Kevin Dede – Morgan Joseph

Okay, thanks to the added detail and good luck.

Joel Hughes

Thank you.

Operator

That concludes our question-and-answer session. I would like to turn the conference back to our speakers for any additional or closing remarks.

Joel Hughes

Thank you for joining us for the call today. We appreciate your time during the preliminary results and the LiveWire Mobile’s business update. As we said, the presentation will be posted on the Web site later this evening for your review and we look forward to our next call. Bye-bye.

Operator

Thank you everyone. This does conclude today’s conference, you may now disconnect.

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