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GlobalSCAPE, Inc. (NYSEMKT:GSB)

F3Q08 Earnings Call

November 13, 2008 4:30 pm ET

Executives

Mendy Marsh – Chief Financial Officer, Vice President & Treasurer

James R. Morris – President & Chief Executive Officer

Jeffrey Gehring - Vice President, Sales

Douglas Conyers - Vice President, WAFS Products

Gregory Hoffer - Vice President, Chief Technology Officer

Analysts

[Greg Newman – Newman Agency]

[Michael O’Malley – Private Investor]

Operator

My name is Lisa and I will be your conference operator today. At this time I’d like to welcome everyone to the GlobalSCAPE third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Miss Marsh, you may begin your conference.

Mendy Marsh

This is Mendy Marsh, Chief Financial Officer for GlobalSCAPE. Joining me on the call this afternoon is Jim Morris, GlobalSCAPE’s President and CEO. Also present here in San Antonio are other members of our leadership team, Craig Robinson, Chief Operating Officer; Jeff Gehring, Vice President of Sales and Marketing; Tim Barton, Vice President of Server Products; Doug Conyers, Vice President of WAN Acceleration Technologies; Greg Hoffer, Vice President of New Products; and Ted Marchut, Vice President of Consumer Products.

Before we begin I would like to remind everyone that today’s call including the question-and-answer session may include forward-looking statements regarding expected revenue, earnings per share, future plans, opportunities and expectations of the Company. These precautions, estimates and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the call.

These risks are detailed in the company’s Form 10-K. The statements included in this conference call were based upon the information known to GlobalSCAPE as of the date of this call and GlobalSCAPE assumes no obligation to update the information contained in this call.

With those Safe Harbor statements presented I’ll continue with summarizing our financial results for the quarter. As covered in our press release today we are very pleased to announce 18 consecutive quarters of positive net income. Our revenue for Q3 was just over $3.74 million. Our net income for Q3 was $227,207 which represents 6% of revenue.

The corresponding revenue for Q3 2007 was $3.9 million. The corresponding net income for Q3 3007 was $702,875. We also have sustained a strong balance sheet with no long term debt and over $5.5 million in cash on hand. Our cash position is up over $1 million from the same period in 2007 an increase of 25%. Our EPS and fully diluted EPS for this quarter is $0.01 per share.

I’d like to turn the program over to Jim Morris. After Jim’s initial comments we will then open up the line for questions and answers.

James R. Morris

I’m pleased to be participating in my first earnings call as President and CEO of GlobalSCAPE and I thank all of you for your interest in joining this call. With these basic financials I’d like to present some summary comments and perspective from my position as CEO. First, we are very pleased with our financial performance in the current market environment. Our financial performance in this turbulent market has been both solid and stable.

Our revenue is within 4% of the revenue for the same period in 2007. We continue to fund our ongoing operations and expenses from regular sales activity thereby conserving cash and we have no plans to change this working strategy. Second, I’d like to briefly discuss the decrease in our net income compared to the same period in 2007.

As Mendy mentioned earlier our net income of $227,000 is down compared to the same period in 2007 when net income was almost $703,000. This lower net income is the direct result of our strategic decision to invest in improved product features, developing new products, receiving industry certification and a continued non-cash amortization of assets acquired in the 2006 acquisition of Avail.

I’ll briefly address both of these issues. Earlier in 2008 including on our last earnings call in August for Q2 we announced our strategic intent to hire more engineers and other critical staff to drive our product roadmaps, research and development, sales and delivery. We have done this hiring 13 net new staff in 2008 as of 30 September. Also during 2008 we delivered new and enhanced solutions.

Tim Barton’s team delivered a FIPS validated release of Secure FTP Server in the first half of 2008. This version of Secure FTP Server uses the FIPS validated GlobalSCAPE cryptographic module to provide secure transfer of information. The FIPS module is a critical feature for doing business in all sectors of the government to include Federal, state and local governments. Tim’s team also delivered an AS2 module for our EFT Server.

This modules gives EFT Server the ability to transfer data using AS2. The AS2, Applicability Segment 2, protocol is widely used worldwide to transfer electronic data interchange or EDI messages. These EDI messages are the backbone of business-to-business transactions between the world’s largest retailers.

Doug Conyer’s team focused on improving the WAFS product line by enhancing performance and product compatibility during the third quarter. WAFS 3.5.2 added support for Microsoft’s 64-bit operating systems and AutoDesk AutoCAD Architecture 2009. These efforts confirm our commitment to support state-of-the-art platforms in use today.

Doug’s team is also looking forward to unveiling support for the Revit Architecture design software at the upcoming AutoDesk University show in early December. AutoDesk is a world leader in design software for architecture, manufacturing, construction and engineering. Our participation in the AutoDesk show allows us to demonstrate the applicability of our WAFS solution within these vertical markets.

Greg Hoffer’s team delivered a software as a service solution called CuteSendIt. CuteSendIt is a software service hosted by GlobalSCAPE that allows customers to easily send large files without using email attachments. Greg’s team also developed a new product, GlobalSCAPE File Express which we announced yesterday.

GlobalSCAPE’s File Express is a plug-in for Microsoft Outlook that allows users to send large files transparently from within Outlook. We will examine and pursue other email related solutions for File Express in accordance with our product roadmaps. The release of these two new product lines demonstrates our capability to provide information exchange products drive by market demands.

Ted Marchut’s Consumer Products team developed a new version of our CuteFTP product called CuteFTP Lite. CuteFTP Lite adds an entry level file transfer product into the GlobalSCAPE portfolio. This new product has a very simple user interface for customers who may not need the more advanced features of CuteFTP Home and CuteFTP Pro. In addition Ted’s team delivered five additional localized versions of our CuteFTP product line in the third quarter.

These localized versions added Spanish, French, German, Portuguese and Turkish language versions to our CuteFTP product line. These five languages were chosen based on international market demands for our CuteFTP products. In addition to these product developments we announced earlier this month that we had received a Certificate of Networthiness known as the CoN from the US Army for two of our products, Secure FTP Server, FIPS, and CuteFTP Pro.

This CoN enhances our ability to deliver solutions to the US Army and potentially other Department of Defense and Defense contractors worldwide. So the research and development investments are bearing fruit. Our strategic intent is to continue investments in high payoff solutions to sustain the roadmap and capture even greater share in our current and adjacent markets.

The second item I mentioned was discussing our net income concerning the non-cash amortization relating to intangible assets from the 2006 acquisition of Avail. Amortization of these intangible assets added $134,000 to our SG&A compared to the same period in 2007. Together increased R&D, investing in product certifications and amortization of the Avail intangibles account for the majority of the reduction in net income in Q3 compared to the same quarter in 2007.

Again we are pleased that we kept our strategic investments in focus while conserving our strong cash position in the current economy and market conditions. With my arrival and the promotion of Mendy Marsh to CFO and the arrival of Craig Robinson as COO we have strengthened our leadership team and look forward to Q4 and the coming years. As we enter Q4 I also want to mention our previously announced new channel relationships.

The most recently announced activity in this area came after Q3, in fact in October and in a major announcement earlier this week. Last month we announced that we had established a QBS Distribution as a significant channel partner for the United Kingdom and Ireland. Over time this relationship will help us increase international sales. Earlier this week we announced that we have joined a Cisco Technology Developer Program.

This certification program unites Cisco with companies like GlobalSCAPE so we can deliver interoperable solutions to joint customers. Our Secure FTP Server has completed interoperability testing with a Cisco unified communications manager and GlobalSCAPE now has a direct link from Cisco’s Technology Developer Program web page.

We are obviously very excited about the new relationship with Cisco and look forward to exploring all the ways to leverage this for greater mutual benefit on a worldwide basis. In summary we are laser focused on serving our existing customers, winning business from new customers, enhancing our product lines and launching new products. The analyst community has already identified us as a market leader.

We are committed to pulling even further ahead of our competition. Our balance sheet is strong and gives us confidence. We have consistently delivered quarter after quarter positive earnings. Our products have been tested and certified as the best of the best. More than 90 of the Fortune 100 have bought our products to date. Our team is ready. We are in this business to last and deliver shareholder value over the long term.

With that I’ll turn it back over to InterCall for instructions relating to the Q&A session.

Question-And-Answer Session

Operator

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Our first question will come from Greg Newman – Newman Agency.

Greg Newman – Newman Agency

Congratulations to everyone at GlobalSCAPE for doing a cracker jack job and steadily making news in the face of economic turmoil, remaining debt free, good cash reserves in the bank and a lot of quality results out of engineering. I’m sure Jeff Gehring and the sales team appreciate having the fine roster of products to present to customers across the board and you’ve got my attention with all the news that you put out the last few months.

I had a question, if Jeff could tell us how the Sales Department is moving along with all the increase in products and partners. I know there’s an increase in software engineers and at some point, it seems to me that’ll translate into a need for more salesmen.

Jeffrey Gehring

We just made an announcement on File Express this week. We have already hired a new sales manager for that product line and one new sales rep and we are continuing to look for quality salespeople to enhance that team.

Greg Newman – Newman Agency

If you could address how the sales team would work with QBS because they’re going to be handling their own sales from what I understand, they have their own department that’ll handle that, learn the products and as sort of a delegation. Do you work with them or who works with them on that?

Jeffrey Gehring

When we acquired Avail we hired a gentleman by the name of [Charlie Maglioto] that is now heading up our Channel Department. Charlie is the one that helped enhance this QBS relationship and what he has one in the last couple of weeks, we have done four training classes with their sales reps over in the UK and we’ve also spent a little time and effort in doing some cross promotions with their, I can’t even tell you how many customers they have, but we’ve done a lot of cross promotions with QBS.

Greg Newman – Newman Agency

I have a question on the GlobalSCAPE home page, it says the WAFS product dramatically improves, as of today it says this, talking about the AutoDesk University. It says it improves the Revit project team collaboration and to visit you guys at Booth 214. The home page is looking really nice with all the certifications, everything that you all are doing there and can’t put that up without having the meat.

It’s great to look and see it. I’m not familiar with Revit. Could possibly Doug Conyers explain that? Give us a summation on things in his department with WAN acceleration technologies?

Douglas Conyers

In short, revenues in engineering design school, AutoDesk previously had the AutoCAD product line and they continue to have the AutoCAD product line. They are pushing many of their customers to use the new Revit technology. In short, it allows engineers to do their development more efficiently and effectively, therefore saving their company’s money.

We had invested a large amount of development into making sure that our WAFS product line works seamlessly with the AutoDesk Revit product line. One of the things that Revit does very, very well is that it’s a powerful, cumbersome, huge tool. One of the things that it doesn’t do well is work over a wide area network. We are working in concert through a Beta program with a number of companies to implement our technology and the results are fabulous.

People are very excited about how well it works. In short, we’re taking a product that fails to work in a WAN environment and allowing that product to work and work very, very well. So we’re super excited and putting a lot of momentum behind it.

Greg Newman – Newman Agency

Engineers, you’ve announced the new product File Express this week. Could Greg Hoffer possibly explain how that product is different from the other products and maybe brief us our summarize us on his department, new solutions?

Gregory Hoffer

We’re very excited to bring the File Express Solution to market. As Jim had mentioned, we have been recognized by analysts as being a leader in the industry for managed file transfer and there’s a partial redefinition in that market going on that brings people back into the managed file transfer environment, not just systems.

So we’re proud of the File Express technology as being a way to facilitate communication of large files securely in a fashion that’s easy for people, not just for systems.

Greg Newman – Newman Agency

I had just three more questions, one on certifications. Today you all brought the total number of certifications to five, six counting the PCS DSS Compliance Software. You all added the American Society of Crime Lab Directors to the list I see on the home page. Could Tim Barton possibly give us an update on future FIPS certification possibly for EFT or [QDFP] and what to expect timeline maybe also relationship with the Armed Services, what we might see going forward, what he might be able to tell us?

James R. Morris

Tim had to step out. As far as FIPS certification, other certifications, as far as working with the US Government and National Security community, we certainly have a very robust funnel as far as things that we are doing and want to do. As you can imagine, every time we get a certification, which we now have a total of six, five are reflected with the update of the website today, that requires an investment.

We’re working off of our quarterly cash, we have not dipped into the $5.7 million of cash reserve. Every time we make a decision whether or not we pursue or don’t pursue a particular certification is a business decision that we put a lot of rigor around and we have a milestone process that we all follow whether or not to make that strategic investment.

Greg Newman – Newman Agency

As far as the global partnerships you all announced with QBS and Cisco, I’m assuming that there’s a lot of other news that will come forth, new companies that you all will partner with.

James R. Morris

Absolutely, Greg, we are in conversation and have business roadmaps being developed with not only those two particular organizations, but also people in the system integration business both for commercial and government clients.

Greg Newman – Newman Agency

One question for Mendy Marsh, if there would be any further amortization of the Avail intangibles, what she sees on that?

Mendy Marsh

Any time you add an intangible asset to your balance sheet you give it an estimated useful life like it was any other kind of fixed asset. So yes, that intangible asset will continue to be amortized over its useful life.

Operator

Our next question will come from Michael O’Malley – Private Investor.

Michael O’Malley – Private Investor

My question is in regards to the stock buy back and I believe you guys still do have one in place. With the stock price as depressed as it is, were there any purchases made in the third quarter and are there any intentions to move forward on the buy back in the fourth quarter?

Mendy Marsh

Yes, we do have a stock buy back program. There were no buy backs of the stock in the third quarter. I do believe when the stock buy back program was initially announced, there was a set number of shares that we could buy back. We have not reached that maximum amount yet and as for any future purchases, that has not yet been discussed internally, but we will make any future announcement about that as we make that determination.

Operator

We will pause for just a moment to compile the Q&A roster. At this time there are no further questions.

James R. Morris

Thank you very much everybody.

Operator

This does conclude today’s conference call. You may now disconnect.

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Source: GlobalSCAPE, Inc. Q3 2008 Earnings Call Transcript
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