Wegener Corporation F4Q08 (Qtr End 8/29/08) Earnings Call Transcript

Wegener Corporation (WGNR)

F4Q08 (Qtr End 8/29/08) Earnings Call Transcript

November 26, 2008, 4:30 pm ET

Executives

Robert Placek – Chairman, CEO and Co-founder

Troy Woodbury – CFO

Ned Mountain – President and COO

Analysts

Howard Board [ph]

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2008 Wegener Corporation earnings conference call. My name is Francine and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today's conference. (Operator instructions)

I would now like to turn the presentation over to your host for today's conference, Mr. Robert Placek, President and Chief Executive Officer. Please proceed, sir.

Robert Placek

Thank you. Good afternoon. I am Bob Placek, Chairman and CEO of Wegener. Welcome to today's call. With me are Troy Woodbury, our CFO and Ned Mountain, our COO. Troy will present financial results for the fourth quarter and fiscal 2008. Following Troy's discussion, I will comment on our business and then Mountain will provide an overview of key new product developments. Following the comments, we will answer questions from participants.

Troy will now comment on our fourth quarter and fiscal 2008 financial results.

Troy Woodbury

Thank you, Bob. This morning we announced the operating results for our fourth quarter and our fiscal year 2008. The press release has been hosted on our company's Web site.

This call may contain forward-looking statements within the meaning of applicable security laws including the Private Securities Litigation Reform Act of 1995 and the Company intends that such forward-looking statements are subject to the Safe Harbor created thereby. Forward-looking statements include, for example, statements relating to expectations regarding future sales, income and cash flows and are thus perspective.

Forward-looking statements are based upon the Company's current expectations and assumptions which are subject to a number of risks and uncertainties, many of which are beyond the Company's ability to control. Discussion of these and other risks and uncertainties are provided in detail in the Company's periodic filings with the SEC, including the company's Annual Report on Form 10-K and quarterly reports on Form 10-Q. Since these statements involve risks and uncertainties and are subject to change at any time, the Company's actual results could differ materially from expected results.

Revenues for the three months ended August 29, 2008 decreased $336,000 or 5.9% to $5.4 million from $5,745,000 for the three months ended August 31, 2007. Revenues for fiscal year 2008 decreased $52,000 or 0.2% to $21,494,000 from $21,546,000 for fiscal year 2007.

Net earnings for the fourth quarter and year-ended August 29, 2008, were $873,000 or $0.07 per share and $383,000 or $0.03 per share compared to net earnings of $142,000 or $0.01 per share and a net loss of $753,000 or $0.06 per share for the fourth quarter and year-ended August 31, 2007.

The fourth quarter and fiscal 2008 net earnings included a gain on sell out patents of $894,000. Our backlog is comprised of undelivered firm customer orders which are scheduled to shift within 18 months. The backlog is approximately $8.5 million at August 29, 2008 compared to $10.2 million at August 31, 2007.

The total multi-year backlog at August 29, 2008 was approximately $13.3 million compared to $17.1 million at August 31, 2007. Bookings for the fourth quarter of fiscal 2008 were $5 million compared to $7.4 million for the same period in fiscal 2007. Bookings for fiscal year 2008 were $16.4 million compared to $17.9 million for fiscal year 2007.

The Company's gross profit margins were 40.6% and 39.1% for the three months and 12 months ended August 29, 2008. This compares to 38% and 35.2% for the same period ended August 31, 2007. Gross profit margin dollars increased 9,000 or 0.4%, an increase $814,000 or 10.7% for the three month and 12 month period ended August 29, 2008 from the same period ended August 31, 2007.

Profit margins in fiscal 2008 were favorably impacted by the reversal of an accrued warranty liability of 310,000 or previously estimated warranty provisions that were no longer required, a reduced amount of warranty provisions, inventory reserve charges and capitalized software amortization expense than in 2007. The expenses affecting gross margin are discussed in the Form 10-K which we filed earlier today.

Selling, general and administrative expenses increased to $141,000 or 11.2% to $1,393 million for the three months ended August 29, 2008 from $1,252,000 for the same period of fiscal 2007. For the year-ended August 29, 2008, SG&A expenses increased $376,000 or 7.3% to $5.5 million from $5.2 million for fiscal 2007.

As a percentage of revenues, SG&A expenses were 25.8% for both the three month and twelve month period ended August 29, 2008. This compares to 21.8% and 24% for the same period in fiscal 2007.

The increase in SG&A expenses in fiscal 2008 was mainly due to increases in corporate professional fees related to Sarbanes-Oxley compliance, sales, salaries and commissions, and related payroll costs, employee placement fees, some general overhead costs, and professional fees. These expenses were offset by lower sales and marketing expenses. These expenses are discussed in more detail in the Form 10-K.

Research and development expenses were $775,000 or 14.3% of revenues and $3,213,000 or 14.9% of revenues for the three month and twelve month ended August 29, 2008 compared to $732,000 or 12.7% of revenues and $3,033,000, or 14.1% of revenues for the same period of fiscal 2007.

The increase in net expenses in fiscal 2008 compared to fiscal 2007 was mainly due to salary increases, higher headcount and increased recruiting costs related to new hires, and lower capitalized software costs related to completed projects offset by lower consulting costs. These costs are discussed further in the Form 10-K.

At August 29, 2008, our primary source of liquidity was a $5 million bank loan facility, which matures on September 30, 2009 or on demand. Our line of credit provides for advances in excess of the availability formulas of up to $1 million during the term of the facility. During fiscal 2008, our line of credit net borrowings decreased to $132,000 to the outstanding balance of $1,883,000 at August 29, 2008 from $2,016,000 at August 31, 2007.

During fiscal 2008, the average daily balance outstanding was $2,086,000 and the highest outstanding balance was $3,274,000. At August 29, 2008, approximately $3,117,000 remained available to borrowing under the advance formula. At November 21, 2008, the outstanding balance of the line of credit increased to $3,268,000 and our borrowing availability decreased to $559,000.

The changes in our line of credit balances, available collateral, and cash flow from operations during our first quarter of fiscal 2009 have raised doubts about our ability to continue as a growing concern. I will address this in more detail later in my remarks.

Cash provided by operating activities was $771,000 in fiscal 2008, while operating activities used cash of $955,000 in fiscal 2007 and provided cash of $1,623,000 in fiscal 2006. Fiscal 2008 net earnings adjusted for expense provisions and depreciation and amortization provided cash of $1,090,000. Increases in inventories and other assets used cash of $2,932,000, while changes in accounts receivable and customer deposits provided cash of $2,266,000.

Changes in accounts payable, accrued expenses and deferred revenues provided cash of $346,000. Cash used by investing activities in fiscal 2008 was $537,000 compared to $1,970,000 in fiscal 2007. In fiscal 2008, investing activities consisted of capitalized software additions of $1,214,000, equipment additions of $336,000 and $62,000 for license agreements and legal fees related to the filing of applications for various patents and trademarks.

Proceeds from the sale of patents and patent applications provided $1,075,000 of cash. Fiscal 2009 expenditures for investing activities are expected to approximate fiscal 2008 levels.

Financing activities in fiscal 2008 used $132,000 of cash to reduce net line of credit borrowing and $100,000 of cash for loan facility fees. Financing activities in fiscal 2007 provided $2,016,000 of cash from the net of credit borrowings, and $557,000 from exercised stock options and used $100,000 of cash for loan facility fees.

Our outlook section, significant fiscal 2009 shippable bookings are currently required to meet our financial projections for fiscal 2009. As of November 21, 2008, bookings and revenues to-date were insufficient to provide adequate levels of cash flow from operations, or adequate levels of collateral to support required borrowings during the second quarter of fiscal 2009.

As a result, we need to raise additional capital or obtain additional credit facilities during the second quarter of fiscal 2009. To continue is a growing concern and to execute our business plan. Although we are in discussions with potential financing sources, there is no assurance that such financing will be available or that we will be able to complete financing on satisfactory terms if at all.

Our ability to continue as a growing concern will depend on our ability to obtain additional capital or financing in the very short-term and to subsequently increase our bookings and revenues in the longer term to attain profitable operations.

During the fourth quarter of fiscal 2008, and subsequent to August 29, 2008, we made reductions in headcounts when the current number of employees to 84 and reduced engineering consulting and other overhead expenses. Should adequate capital or financing not be available and if increased revenues do not materialize, we are committed to further reducing operating cost to bring them in line with reduced revenue levels. No assurances can be given that operating cost can be sufficiently reduced to allow us to continue as a growing concern.

The audit report relating to the consolidated financial statements for the year-ended August 29, 2008 contains an explanatory paragraph regarding the Company's ability to continue as a growing concern.

With the continuing slowdown of the economy and with low bookings and revenues in the first quarter of fiscal 2009, we anticipate an operating loss for the first quarter, but expect improved revenues and operating results in the second quarter.

Bob, this concludes my comments on our operating results.

Robert Placek

Thank you, Troy. Fiscal 2008 held many obstacles, not the least of which was a very difficult business environment. Despite the challenges, Wegener reported a profit for both complete fiscal 2008 year as well as the fourth quarter of fiscal 2008.

As the new fiscal year begins, we are experiencing historic disruptions in the financial markets, which should cause many financial activities to slow dramatically. As a result, we believe some customers are deferring spending decisions until financial markets are functioning better. These factors are contributing to lower revenues and an operating loss for the first quarter of fiscal 2009, which ends this Friday.

Our Form 10-K filed today expresses an unqualified audit opinion from our independent registered public accounting firm, BDO Seidman, but as Troy mentioned contains an explanatory paragraph relating to the Company's ability to continue as a growing concern this matter we discussed in greater detail in the Form 10-K.

To bridge this challenging period, we are in active discussions with multiple sources to obtain additional working capital that will be needed during the second quarter of fiscal 2009. Cash flow will be stressed in the near-term. However, we are optimistic that we will be successful in obtaining additional working capital.

Wegener Corporation has many valuable assets such as outright ownership of buildings and land as well as substantial saleable current inventory that are not effectively monetized into our current credit arrangements. Once the required capital is secured, we expect BDO Seidman to remove the growing concern paragraph in the audit opinion and we will make an announcement to publicly communicate that information.

In light of the current economic conditions, we are in the process of revaluating our fiscal 2009 business plan. As you know, many companies in our industry and many other industries have announced lowered expectations for the next year and we will probably not be an exception, based on the results of our planned revaluation, we will determine the extent which further cost reductions in company resizing might be necessary.

On a positive note, we do expect revenues and operating results for the second quarter to improve substantially over the first quarter's results. As we are about to begin the second quarter of fiscal 2009, backlog for the quarter is much stronger than that of the first quarter and we will obviously be building firm backlog with new orders bookings during the quarter.

That concludes my comments. Ned Mountain will now provide an update regarding our products and customers.

Ned Mountain

Thank you, Bob. We continue to focus on strategies that enable our customers to save bandwidth or otherwise increase efficiencies for their networks. As an example, during the fourth quarter, we released the updated Unity 4600 Satellite Receiver with DVB-S2 demodulation support. This new feature is specifically designed to increase the efficiency and flexibility within any satellite-enabled media network. Upon its release, we received orders from both radio network and video network customers.

The Unity 4600 has been a Wegener core product for many years and the addition of DVB-S2 capabilities allows our customers to continue their Compel based networks and switch to S2 as a logical step in their network evolution.

The fourth quarter saw strengthened partnerships with two of our key customers, Dial Global formerly Jones Media America and the Nielsen Company. Following the acquisition of Jones Media in June of this year, Dial Global purchased our iPump Media Servers to upgrade and expand the Wegener file-based broadcasting platform that Jones Media had already established. This multiyear project will ultimately expand Dial Global's file-based distribution of programming, advertising and related services to over 6,000 radio affiliates.

Wegener expanded its relationship with the Nielsen Company through the recent launch of the SpoTTrac Digital Encoder. As you may notice, we are watching television more and more advertisements are in true high definition. The SpoTTrac Digital encoder is a device used by advertising agencies to code these high definition advertisements in a manner to support Nielsen Tracking services.

Bob, this concludes my remarks.

Robert Placek

Thank you, Ned. That concludes our presentation. We will now take questions from participants.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Howard Board [ph], a private investor. Please proceed.

Howard Board

Hello.

Robert Placek

Hey, good afternoon, Howard.

Ned Mountain

Hey, Howard.

Howard Board

I have a few questions here. I'll try and roll through them as fast as possible, but. I guess the first question I might have is, I believe your second quarter starts Saturday.

Robert Placek

This Friday is the end of our first quarter.

Howard Board

This Friday. So, Saturday starts your first quarter.

Robert Placek

That's correct.

Howard Board

But that's the second quarter, I am sorry.

Robert Placek

Second quarter, that's correct.

Howard Board

So, basically you've given a three days notice that you may run out of money and I would think that you are no long before this, but you were getting that best foot for fund. I just think it's highly unusual to give us only three days notice that you may run out of funds. Now having said that, you neglected to put in your press release which you did put it in your SEC filing that you had a pending contract on the land adjacent that you own. There was a conditional contract, but nevertheless it was a nice contract over $800,000 good for you I re call. And I think that would have helped had you had it in the press release, but in any event, it was in the filing only. And then a follow-up to that question is has anything changed as far as my understanding was this your building and your lot where your building fits is unencumbered, is that correct?

Robert Placek

That is correct.

Howard Board

Alright, so you have assets that could become encumbered and those assets I'm going to collectively guess they are about three, three and a half million, now that you would encumber them for the full extent. But certainly you are not as desperate as it sounds. Am I correct or am I incorrect?

Robert Placek

Let me – Howard, let me appreciate your questions and let me address them. As far as the timing of our announcement as you know we have been going through a period with our auditors, going through our audit. And as we come through the first quarter it's become clearer and clearer as we got into the end of it that how low the bookings end revenue are and exactly what our flat roll basis are. We felt that we need it to waive until our audit was concluded and our Form 10-K was ready to file before we made this announcement. I don't find anything unusual about that at all. It's just very much in keeping with the policies and procedures that we followed in previous years of waiting to put our earnings announcement once we are ready to file those, the 10-K and the BDO Seidman has in fact signed off.

As far as the lien [ph] contract, that's been in previous filings that we were selling that and as you stated it's clearly pointed out in the filing that we do have a signed contract, that signed contract was of the effective date or today and we believe it's a very good contract. It will take sometime for us to go through the process, but we believe that it is a very good contract for the company. As you've mentioned, we do have land and buildings aside from the parts of land that we're selling that is unencumbered. We are looking at various avenues for attaining working capital, the potential of monetizing that land and building is certainly one of those options that we're reviewing. So, we're looking at this thing from a very broad perspective and I think with a proper perspective.

Howard Board

Alright, well, and regards to bringing expenses in line with revenue. What was your payroll cost? I'm not talking about just your payroll cost and the carrier cost for payroll, not consultants, et cetera. What was it in 2007 versus 2008? Was it up or down?

Robert Placek

Yes, as we've stated the headcount is down. We –

Howard Board

Are you talking about the – just the monetary cost?

Robert Placek

I'm getting to that. If you look at our breakeven point, back over time, back during FY'08 depending on the mix of business and the contribution margin, our breakeven hovered the $25.6 million and $6 million per quarter. We've now lowered our breakeven to approximately $5 million per quarter. The cost of the payroll is – we have two payrolls per month and we're a little over $500,000 for those two payrolls on a monthly basis.

Howard Board

You've indicated that you're taking additional steps or you did take in the fourth quarter, additional steps in regards to I guess you probably said was the light amount of restructuring, but I wanted to know whether in fact, it was significant or insignificant and what you did in the fourth quarter? What is your opinion, was it significant or insignificant?

Robert Placek

It was relatively significant, Howard. It was about a 12% – 10%, 11%, 12% decrease in headcount as well as a decrease for full time consultants. So it was significant.

Howard Board

I believe you said in the third quarter due to the second quarter or the third quarter 2008 that you are going to be watching expenses. I think you even said on a daily basis revenue and expenses. Is that still going on?

Troy Woodbury

Absolutely. Howard, I approve personally every purchase right before purchase orders were cut upon every purchase order and I sign every check and I don't just rubberstamp checks, I sign them very carefully with examination of backup documents. I prepare very detail reports on a weekly basis to the staff as to what our bookings and revenue are and what our cash position is.

Howard Board

Yes, I appreciate that you are doing that. The issue is extrapolating that 45 days out, 60 days out, so you are making adjustments as needed on your expense side.

Troy Woodbury

The other thing that we do is we are constantly looking at cash flow and what our rolling collateral schedule is. That something that Jim Tricoff, the Corporate Controller and I work with on a daily basis.

Howard Board

Well, let's jump to another topic then and that was, I was curious as to why your current inventory is so high?

Troy Woodbury

Well, if you go back and look at how our inventory increased, it did increase sharply in the fourth quarter. In the third quarter, we had some shipments slip out of the third into the fourth. That was turned around. We had the shipments that moved out of the third quarter into the fourth, were in fact, shipped in the fourth quarter and we were able to actually collect on them right at the end of the fourth quarter, which really helped our DSO.

Howard Board

The contract you did for the set-top boxes, has that been like 25% shipped, 50% shipped, or – ?

Troy Woodbury

Let me finish answering the first part of your question.

Howard Board

Okay. Good.

Troy Woodbury

We have seen a real change in the lead times from our offshore manufacturers. They have come down dramatically. I know you are well aware what's going on economically in the credit markets. So the demand on our Taiwan and our offshore manufacturers has been reduced. So their lead times have reduced. And we've also had some orders that have moved out, have not been lost, but orders have been moved out. And so, we made some purchasing decisions that now is on a look back basis you would rather you had not brought in that much inventory. But this is very good inventory. It's very current inventory. It's our most current products. So, it's just a matter of timing. We've got a bit of an inventory bulge at this point, but it's something we clearly believe we'll work through.

Robert Placek

I would add something to that, and that's the fact that Troy mentioned lead times coming down from our manufacturers, but in fact, earlier in the year, lead times have gone over six months and our ability to forecast inventory requirements diminishes with that much forward visibility required in. And so that partially contributed to the present inventory levels.

Troy Woodbury

Yes, that's a key point. That's correct.

Howard Board

Is the SpoTTrac – then you have digital SpoTTrac, is that something that is can be not inventoried and turnaround in a week or two or is that something you have the inventory. I know that's an expensive unit.

Robert Placek

Yes, that is an inventory, we – that is a product we do have to inventory and have on the shelf, although it's offset by customer deposits.

Troy Woodbury

As a large customer deposit on that.

Howard Board

Yes. Digital SpoTTrac as oppose to the first SpoTTrac you came out with, I assume, I think you said this digital one is for HD advertising.

Ned Mountain

Yes, digital and primarily HD advertising. That's correct, Howard.

Howard Board

Alright. So, what is – when you develop a product, you generally have in mind the potential of that product. What would you say in units or sales dollars is the potential for the next couple of years for the product like that?

Ned Mountain

Howard, it's really hard to judge that. One of the things is that, I think you need to realize about the Nielsen projects that these are projects done, custom projects for Nielsen which is really based around their proprietary code. We are the manufacturing arm for that product and rely on them for the visibility on what the ultimate market potential and the rate or the take rate of that product will be. We're relying mostly on Nielsen for the marketing of that product.

Howard Board

Now, Nielsen is the leader at least in television and – but the question is they are coming. Lot of cable companies as you know have used others to try and muscle into that thing that Nielsen does, which is a rating. Not that they have any clout yet, but this SpoTTrac, you expect it to – do you anticipate that it will add significantly to your sales or slightly?

Robert Placek

I think our view is it would add slightly. Again, as Ned said, we do not have great visibility into demand and it is a new product that is just becoming available for shipment. So, we function strictly as the manufacturing and distribution arm for that product and the company places orders with fiscal inventory. And essentially covers the cost of that inventory when you place the orders.

Howard Board

Thank you for your response. I'll close with one last statement – question actually. And that is what other steps are going to be taken in this quarter, let's say your second quarter to bring your stock over the $1 threshold and how committed are you – how committed is your management to accomplish that issue, because that is a great concern to your investors or stockholders, the $1 threshold on the NASDAQ?

Troy Woodbury

Yes, Howard, it's a very good point that you made. Yes, we are very concerned over that. As you know, there is a lot of share ownership in the management of Wegener. We recognize the importance of getting the stock. We're closing bid back up over a $1 and remaining on NASDAQ. I think the way to look at this is what we are doing on a daily basis to make sure that we have the company sized properly, that we understand exactly what's going to happen with us in this economic time. The first major hurdle that we've got right now is to really understand our future for the balance of 2009, to obtain adequate working capital as we work through the second quarter. Those are the basic blocking tackling things that we are focused on. As we do that properly, as we understand our customers, and as we are very careful in our expense control and are bringing our inventory and that type of thing, we will be making the right steps to improve our bookings, and revenue, and operating results, which are the things that are going to impact our stock value. We cannot do anything magic to make the stock go back over a $1 other than perform as best that we can. And that's exactly what we are focused on, but we are totally committed to doing just that.

Howard Board

Well one thing that would help, would be earlier reporting, it's like – and I've said this before. When the news, the stock moves on anticipation of six months, to a year, to 18 months, but that's anticipation on current news, and so what happens is, we're into this issue of news either being 90 days late or not 90 days late, but 90 days into the end of the year in this case or approximately 45 days into the next quarter. And that issue is just not – I think that your stock would be better if we were attracting more investors, but those investors they are not tuned in to news that late. And I think that, that is just my opinion that I think that there is some hesitation of some investors to get involved because the news is that late. It's like its past tense.

Troy Woodbury

Well, I appreciate your comment, Howard. And I think you know that Wegener is a small company, but it's not a – we have transactions that are not necessarily simple. And so, it does require lot of time from our auditors with Sarbanes-Oxley regulations, their quarterly reviews have got more expenses. The testing is done on internal controls. They've gotten more extensive on our part, and of course, the year-end audit again with Sarbanes-Oxley does include lot of additional testing and review. So I understand what you are talking about as far as early reporting. We closed out very, very quickly. As we close the quarter and go into the next, we have our preliminary and even final numbers certainly within days.

Howard Board

Well, some companies under the same type of constraints will put out unaudited preliminary release and saying in effect it could change, but –

Robert Placek

I'm saying that, and you've not this discussion over the years and we've chosen not to do that. I understand your position.

Howard Board

Well, I think in light of where the stock price is, you should get strong consideration (inaudible).

Robert Placek

Well, I appreciate your comment. I would offer to you that I think the thing that will really change our stock price and our acceptance by shareholders is our performance.

Howard Board

Well, that's true, but if you think 45 days out from the end of this current quarter, we are going to be in that window of the six months of the issue idealistic. And so I would strongly advice you to think about your obligations there to try and get that stock back up over a $1. Now, I am going to go ahead, and let someone else pick up and I think I appreciate courtesies and the questions answered.

Robert Placek

Well, I appreciate your calling in and I would love to talk to you more. So, give me a call sometime. But thank you for your questions, they were all good ones.

Howard Board

Right. Thank you.

Operator

(Operator instructions) I am showing we have no further questions. I would like to turn the call over to Mr. Robert Placek for closing remarks.

Robert Placek

Okay. Thank you. That concludes our conference call for today. I would like to thank everyone for participating and look forward to your joining on next call. Thank you.

Operator

Thank you for your participation in today's conference. This concludes our presentation. You may now disconnect. Have a great holiday.

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