Wegener Corporation F1Q09 (Qtr End 11/28/08) Earnings Call Transcript

Wegener Corporation (WGNR)

Q1 2009 Earnings Call

January 12, 2009 4:30 pm ET

Executives

Robert Placek – CEO

Troy Woodbury – CFO

Ned Mountain - COO

Analysts

Howard Board – Unidentified Company

[Charles Cuskniar] – Unidentified Company

Presentation

Operator

Good day, ladies and gentlemen and welcome to the first quarter Wegener Corporation earnings conference call. (Operator instructions) I would now like to turn the presentation over to your host for today's conference, Mr. Robert Placek, Chief Executive Officer; please proceed sir.

Robert Placek

Good afternoon. I am Robert Placek, Chairman, and CEO of Wegener. Welcome to today's call. With me today are Troy Woodbury, CFO and Ned Mountain, COO. Troy will present financial results for the first quarter of fiscal 2009. Following Troy's discussion, I will comment on our business and Ned 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 first quarter financial results.

Troy Woodbury

This morning we announced the operating results for our first quarter of fiscal year 2009. This 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 Harbors 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 on 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 first quarter of fiscal 2009 decreased $2.7 million or 54% to $2.3 million from $5 million for the first quarter of fiscal 2008. During the first quarter of fiscal 2009 bookings consisting primarily of add-on orders from existing customers were approximately $1.3 million compared to $3.6 million in the first quarter of fiscal 2008.

Our first quarter bookings and revenue as well as our second half fiscal 2008 bookings were below our expectations and internal forecast primarily as a result of customer delays in purchasing decisions, deferral of project expenditures, foreign exchange rate fluctuations particularly with the Mexican Peso, and general adverse economic and credit conditions.

These low bookings had a direct impact on the revenues for the first quarter of fiscal 2009 and will be discussed in more detail later in this call. The operating results for the three-month period ended November 28, 2008 were a net loss of $1,193 million or $0.09 per share compared to a net loss of $51,000 or less then $0.01 per share for the three-month period ended November 30, 2007.

Our backlog is comprised of undelivered firm customer orders which are scheduled to ship within 18 months. The backlog scheduled to ship in the 18 months was approximately $8.1 million at the end of the first quarter compared to $8.5 million at the end of fiscal 2008 and $9.9 million at the end of the first quarter of 2008.

The total multiyear backlog at November 28, 2008 was approximately $12.5 million compared to $13.3 million at August 29, 2008 and $16.5 million at November 30, 2007. The company’s gross profit margin percentages were 26.9% for the first quarter of fiscal 2009, compared to 41.1% for the first quarter of fiscal 2008.

Gross profit margin dollars decreased $1.4 million for the three-month period ended November 28, 2008 compared to the same period ended November 30, 2007. The decreases in margin percentages and dollars were mainly due to the decrease in revenues.

Selling, general and administrative expenses or SG&A expenses, decreased $94,000 or 7.14% to $1,170 million in the first quarter of fiscal 2009 from $1,264 million in the first quarter of fiscal 2008. The decrease in SG&A expenses in the first quarter of fiscal 2009 was mainly due to decreases in sales and marketing expenses of $65,000, in-house commissions of $45,000, employee placement fees and related training of $22,000, and allowance for bad debts of $15,000.

These decreases were somewhat offset by an increase in professional fees. As a percentage of revenues SG&A expenses were 50.4% for the three-month period ended November 28, 2008 compared to 25.1% for the same period ended November 30, 2007. These expenses are discussed in more detail in the form 10-Q.

Research and development expenditures including capitalized software development costs were $863,000 or 37.1% of revenues in the first quarter of fiscal 2009 compared to $1,200 million or 19.9% of revenues for the same period in fiscal 2008. The decrease in expenditures in the first quarter of fiscal 2009 compared to the same period in 2008 was mainly due to lower consulting costs and recruiting costs related to new hires.

Capitalized software development costs amounted to $254,000 in the first quarter of fiscal 2009 compared to $193,000 in the first quarter of fiscal 2008. An increase in capitalized software costs was related to COMPEL network control projects. Research and development expenses excluding capital software development costs were $609,000 or 26.2% of revenues in the first quarter of fiscal 2009 compared to $809,000 or 16.1% of revenues in the same period of fiscal 2008.

The decrease in expenses in the first quarter of fiscal 2009 was due to the decrease in consulting costs and increase in capitalized software costs.

At November 28, 2008 our primary source of liquidity was a $5 million bank loan facility which is subject to availability advance formulas based on eligible accounts receivable, letters of credit, commitment balances, and inventories. The loan facility consists of a term loan and a revolving line of credit with a combined borrowing limit of $5 million bearing interest at the bank’s prime rate.

Our line of credit provides for advances in excess of the availability formulas of up to $1 million during the term of the facility. The bank retains the right to adjust the interest rate subject to the financial performance of the company. The loan facility matures on September 30, 2009 or upon demand and requires an annual facility fee of 2% of the maximum credit limit.

Subsequent to November 28, 2008 the bank notified Wegener of its intent not to renew the loan facility upon maturity. Although we are in discussions with potential financing sources there is no assurance that such financing will be available or if available that we will be able to complete financing on satisfactory terms.

During the first three months of fiscal 2009 our line of credit net outstanding borrowings increased $1.4 million to $3.3 million at November 28, 2008 from $1.9 million at August 29, 2008. During the first quarter of fiscal 2009 the average daily balance outstanding was $3,262 million and the highest outstanding balance was $3,694 million.

At November 28, 2008 approximately $462,000 remained available to borrow under the advance formulas. The loan facility is also used to support import letters of credit issued to offshore manufacturers. At the end of the first quarter no letters of credit were outstanding.

During the first quarter of fiscal 2009 operating activities used $1.2 million of cash. Net loss adjusted for expense provisions and depreciation and amortization used cash of $796,000 while changes in accounts receivable and customer deposit balances provided $979,000 of cash. Changes in accounts payable and accrued expenses, inventories, deferred revenue, and other assets used $1.4 million of cash.

Cash used by investing activities was $260,000 which consisted of capitalized software additions of $254,000, and legal fees related to the filing of applications for various patents and trademarks of $6,000.

Financing activities provide a $1.4 million of cash from net line of credit borrowings. Now for my outlook comments.

We believe that our financial performance in the second quarter of fiscal 2009 will be a significant improvement over the first quarter. Our backlog going into the second quarter was quite strong and a reasonable amount of shippable bookings are required in order to make our forecasted revenue for the quarter.

Significant bookings are required to obtain the revenue forecast for the third and fourth quarters of the year. We are working diligently to obtain the financing that is required to meet our working capital needs during this fiscal year. While no assurances can be given we believe that we will be successful in obtaining that required financing.

Our relationship with Banc of America continues to be very good as we work through this process. This concludes my comments on our operating results.

Robert Placek

Thank you Troy, as we had previously indicated revenue in the first quarter was down substantially from prior quarters. This was due to both a declining business environment and the ongoing cyclical nature of our large project business.

The second quarter continues to look much more favorable then the first as we had a strong beginning order backlog and we continue to build on that with shippable new order bookings. We have been managing cash flow very carefully and will continue to do so in the coming months.

During our last conference call we indicated we needed to find a new source of working capital. We are actively working with multiple sources and continue to be optimistic that we will obtain a suitable facility. We will keep you updated on our progress.

Also in the last conference call we indicated that we were reevaluating our fiscal 2009 business plan. Reevaluation has been completed and based on the results we have introduced cost cutting measures to reduce the impact of the difficult business environment on Wegener’s profitability.

Cost reductions do not include measures that will have a negative effect on our future capacity. We will obviously continue to monitor this situation to determine if further actions are necessary as the year progresses.

On a positive note there are indications from key customers that spending will improve from current levels. We expect our customers to continue spending for strategic necessities and increase other spendings as conditions in the credit markets allow them.

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

Ned Mountain

Thank you Robert, these are indeed challenging times for companies that support the distribution of content and this applies to their networks of all sizes and structures. Like Wegener our customers and prospects have been in a state of reevaluation to determine how best to spend their capital funds based on the new realities that we all face today.

Solutions that Wegener offers network operators are in many ways poised to receive more serious consideration then before. Specifically Wegener products have a long history of supporting advertisement-based networks. While we are hearing much in the news about media and their loss of advertising dollars, Wegener COMPEL based solutions allow networks to more effectively use these dollars to efficiently target their messages.

With more finely targeted messages, advertisers realize increased value per ad and have additional flexibility in their messaging. By offering these benefits networks can gain additional ad dollars and retain opportunities which might otherwise shift to online advertising budgets.

We continue to believe strongly in the future of [file] based advertising as a means for network operators to more efficiently use the bandwidth available to them, whether it be satellite, broadband, or a hybrid combination. Our investment in COMPEL control solutions for broadband and hybrid networks will become increasingly meaningful as network structures continue to evolve.

Wegener’s cost savings solutions will allow our customers to remain strong and viable as they more efficiently [derive] their advertising dollar based revenue. Simply put file based broadcasting allows for extremely efficient content distribution and targeting of program elements that are not required to be distributed live or on real time.

From a customer perspective during the first quarter we released the SpoTTrac Digital Encoder which is the most recent product for The Nielsen Company. SpoTTrac Digital allows advertisers to watermark their television ads with Nielsen codes during the creation process ensuring that the ads are properly counted by Nielsen when they are run.

The new SpoTTrac Digital Encoder supports high definition as well as standard definition television. Our multiyear partnership with The Nielsen Company has created multiple new products and we look forward to continuing the mutually beneficial relationship as the years come.

Once again this specific product emphasizes our intimate connection with the efficient distribution of advertising messages and the data necessary to determine the effectiveness of such advertising.

This concludes my remarks.

Robert Placek

That concludes our presentation, we are now ready to take questions from participants.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Howard Board – Unidentified Company

Howard Board – Unidentified Company

I have to ask this question because I read the 10-Q, and there were sufficient warning in there about success as understandable, if you started to liquidate today, what would you estimate your net would be.

Troy Woodbury

I’m not sure I want to comment on a hypothetical question like that. We are working very, very diligently to obtain financing as we’ve talked about. Our balance sheet is, its very clear what we have in real estate, we talked about the fact that we have a contract to sell the land, you can see what our receivables and inventories are and that type thing.

But we’re working very hard on the financing issue which I think is the critical point.

Howard Board – Unidentified Company

I asked the question because I think your net would support a much higher price then your stock if it was known. So you can give some thought about giving that out.

Troy Woodbury

No, I think that people, astute people can read our financial statements and they understand the real estate numbers, they know where that market is, that type thing and they can come to I think probably a very clear and accurate estimate of that.

Howard Board – Unidentified Company

How much do we have in accrued tax losses?

Troy Woodbury

Its in the 10-Q, at the end of the first quarter we had a net operating loss carry forward of $10.8 million and net deferred tax assets was $6.3 million, note 10 in the 10-Q.

Howard Board – Unidentified Company

So you had tax losses after the first quarter, accrued tax loss of about $10.8 million.

Troy Woodbury

Net operating loss carry forwards, $10.8 million at the end of the first quarter. The net deferred tax asset is $6.3.

Howard Board – Unidentified Company

There used to be, I don’t know if its still possible, but years ago that you could actually sell your tax losses, is that true today?

Troy Woodbury

Well certainly in an acquisition it becomes a very important piece of data. There are limitations on that from the acquiring company. Its governed by, I’m not sure of the exact tax codes, 309 or 209, but there’s a specific section in the tax code that governs that.

Howard Board – Unidentified Company

This is just a thought for you because I believe, many years ago, I believe you could sell it to a third party without an acquisition, you might look into that. That’s a quick way to raise several million dollars. The land sale, is that moving on, I know its conditional upon some zoning issues, but is that moving as you expect?

Troy Woodbury

Yes it is, its moving along quite well. They’re almost complete with their due diligence phase of testing the soil and looking at that and so that’s moving along quite well.

Howard Board – Unidentified Company

On the proxy that came out, you had a headcount of 84, so I went back and looked historically and if you go back over the last six or seven years, that’s a pretty close average to your headcount over the last many years, and that’s as of the date the proxy was sent out, maybe that’s not correct. Maybe that’s what it was three months ago, but you had a headcount of 84 on your proxy that you just sent out.

Troy Woodbury

The date on the proxy is accurate.

Howard Board – Unidentified Company

So as far as cutting costs, you could if it was necessary go a lot further because you’re operating with a headcount basically where you were when you were doing $20 to $25 million and—

Robert Placek

I think the headcount is somewhat reduced from—

Howard Board – Unidentified Company

It is reduced from this past year.

Robert Placek

Also a great deal of full time consulting expense has been eliminated as well as other consulting. There has been substantial reduction is—

Troy Woodbury

There’s been a lot of reduction of cost and to really understand the headcount you need to—

Howard Board – Unidentified Company

I wasn’t aware you put consultants in the headcount.

Troy Woodbury

They aren’t, that wasn’t Robert’s point, the point is is that we had a lot of consulting that was in R&D cost that have been cut. All that’s very clear in our filings.

Howard Board – Unidentified Company

Of the excess inventory from the prior year that was above the year before, how much did that take off the bottom line, obviously you had to pay for it so that’s where a lot of your cash went but, how much did it take off your bottom line per share profit that you showed for this past fiscal year.

Troy Woodbury

Why do you think that would impact the bottom line?

Howard Board – Unidentified Company

Well you had to pay for it number one, and it is excess. In other words if you end a year with $3 million in inventory and the very next year your ending was $6 million, you had to have expensed a lot more money.

Troy Woodbury

I’m not sure who you’re getting your advice from or your knowledge of how the P&L and the balance sheet work but if the increase in inventory has impacted the balance sheet its impacted cash. It is not impacted the bottom line. We’re not writing off inventory, we’re not [obsoleting] inventory, this inventory is very good, its from our new products.

Howard Board – Unidentified Company

You made that point the last call but you had to spend an extra $3 million to get that inventory, right?

Troy Woodbury

In cash, not in earnings.

Howard Board – Unidentified Company

What are you doing right now, is the issue is you’re borrowing money because you don’t have enough cash.

Troy Woodbury

The only impact on the P&L is a minor impact on the interest number but I know what you feel about this because you’ve written about it and your opinion on this is very backward.

Before you make accusations you need to really check your facts.

Howard Board – Unidentified Company

I may have been half-right. But I did give an opinion. I may have been half right in that issue but the fact of the matter is you spent $3 million more in inventory that you ended the prior year.

Troy Woodbury

And did not have an impact on earnings, had an impact on cash and the balance sheet.

Howard Board – Unidentified Company

Right, which right now is part of the issue that you’re addressing in these warnings which is essentially a stock down to unbelievably low levels.

Troy Woodbury

It has no impact on earnings. You need to really think about that, other then the small amount in interest. But its not what you’re implying at all.

Howard Board – Unidentified Company

Has it impacted the availability of cash?

Troy Woodbury

Its fairly obvious I would think.

Howard Board – Unidentified Company

Yes, it is. You said you were looking at the income and expense daily, so just wondering just how did we get into so much excess inventory?

Robert Placek

At the beginning of last calendar year and sometime prior to that we were seeing very much increased lead times from our offshore manufacturers such that we had to forecast inventory requirements seven months or more in advance and obviously visibility of future orders is very limited when you have to forecast that far out.

Customers may tell you their plans but their timing and a lot of other things can change. It was the excess of inventory, was directly to a large extent, related by that period of time when we had to make forecasts for our new products very much in advance of receiving orders for those products and—

Howard Board – Unidentified Company

That’s a better answer then I got three months or 45 days ago.

Troy Woodbury

It’s the exact same answer.

Howard Board – Unidentified Company

I don’t recall that. I recall—

Troy Woodbury

You need to go back and listen to the tape.

Howard Board – Unidentified Company

I recall the issue even you commented that it was, in other words you agree with the conversation that you, and obviously if you forecasted and you forecasted wrong, you ended up with an extra $3 million in inventory then what you started with in that fiscal year and its impacting your cash flow as you already said.

Robert Placek

No doubt about that and as mentioned it is good inventory and we’ll work it down and get it sold.

Howard Board – Unidentified Company

Getting on to the proxy issue, I as well as many people would like to know a bit more specifics about the issuance of 10 million more shares which impacts us dramatically, which could impact us positively or negatively. For instance if you want to use them for warrants why don’t you say that or whatever you want to use them for, you’ve had five months to work on this problem. I assume you know it at least in mid-August. You’ve had about five months of lead time here and I just don’t understand why if you want the 10 million extra ceiling why you don’t give specifics as to how its going to be used so we know, we can vote intelligently.

Troy Woodbury

I don’t know if you’ve read the proxy or not but if you look on page 16, where we talk about those increases, the increase in the shares, its in the fourth paragraph down about—

Howard Board – Unidentified Company

I’ve been out of state and I haven’t been home in months but—

Troy Woodbury

You might want to read our public document because we do comment and answer that in that fourth paragraph. I’ll read it to you, I would have thought you would have read it before you asked the question, but “the purposes for which additional authorized common stock could be issued include but are not limited to, general corporate purposes including funding our capital needs and financings that would include the issuance of equity, debt, or convertible debt and/or warrants.”

That’s what’s it for.

Howard Board – Unidentified Company

That’s very vague. You already gave that information out. That was in your press release I think.

Troy Woodbury

I think its very specific. How can you be more specific?

Howard Board – Unidentified Company

Because if you’re going to do warrants, the strike crisis, critical.

Troy Woodbury

What if you haven’t struck the deal yet?

Howard Board – Unidentified Company

Well its like, the issue is you probably, I’m assuming in the last five months you’re talking and you a range that you’re going to work in and it could be conditional upon the people voting for this. But just not to be exactly specific as to how its going to be used, you mentioned several options there. If you’re asking us to increase by 50% the outstanding limit on shares that can be issued which right now given our stock price can be a positive and it can be an extreme negative, make us worthless. So the issue is very important to us that it be the right deal and be a strike price that we can all live with, that if it were issued that it met the strike price, we would all be happy. In any event I would urge you to put out a more specific reference to it. I have one more comment in reference to the proxy and that is the incentive plan. In the incentive plan if I read it correctly, you’re not going to see $100,000 to any one individual in any one year. Is that correct?

Troy Woodbury

That’s what the proxy states.

Howard Board – Unidentified Company

Why don’t you consider putting shares in instead of dollars because a $0.10 a share that’s a million shares and you’re low this year, actually its lower then $0.10 but in any event, its like I would rather have you deal in shares then in dollars because of where the stock is. I just want you to give some consideration to that.

Troy Woodbury

How many options have been issued to employees in the last few years?

Howard Board – Unidentified Company

Well there is not much of a track record of them being exercised in the past five years.

Troy Woodbury

I’m asking what has been issued.

Howard Board – Unidentified Company

Well the issue is the current stock price versus the incentive program. In other words you got there and yes we know people need incentives to do better but I’m simply saying $100,000 will buy you, depending upon where the stock market closes, [inaudible] it closed at $0.10. That’s a million shares.

Troy Woodbury

The answer to my question to you is that there have not been options issued to employees in quite a number of years. This is very standard. If you look back at our prior plan you’ll see the very, exact same wording.

Howard Board – Unidentified Company

Well you have much that are priced back then. I’m just simply pointing out the issue of the number of shares that could be issued if we continue in this price range that we’re currently in and as far as being issued you have had options before and lots of them in my opinion, but they’ve never been exercised. I shouldn’t say never, they have been, some have been, but more have been gone under the water etc. and not in a position to be exercised.

Troy Woodbury

And what’s your point?

Howard Board – Unidentified Company

Well my point is, just what I was trying to make and that is why not use a share base rather then a dollar base because of your stock fluctuation. We want them to have incentives but should the incentive be, you’re asking us to trust you in that regard as well, but you wouldn’t issue 100,000 shares as an example or $100,000 at $0.10 a share, that would be a million shares, can you tell me you won’t do that?

Troy Woodbury

Our Board of Directors which is governed by a majority of independent Directors have to approve any issuance of options. I think it’s a pretty safe bet that those options are not going to be granted.

Howard Board – Unidentified Company

I’m aware that you have more independents on the Board then you have management members, but you historically don’t put out the vote as to what, how many independents voted against this proxy?

Troy Woodbury

We don’t put that out but I don’t see any harm in telling you that nobody voted against it.

Howard Board – Unidentified Company

Well that’s very valuable for me.

Troy Woodbury

You sent me an email and asked if Directors could vote as they pleased and—

Howard Board – Unidentified Company

That was in reference to the annual vote.

Troy Woodbury

The answer is yes, Directors vote—

Howard Board – Unidentified Company

You voted as to what you were going to put in the proxy and that’s not the question I asked you about, but in any event what you’re telling me is that all the independents voted for this proxy to go out.

Troy Woodbury

That’s correct.

Howard Board – Unidentified Company

Well that’s important to me and I appreciate that.

Operator

Your next question comes from the line of [Charles Cuskniar] – Unidentified Company

[Charles Cuskniar] – Unidentified Company

On the incentive plan voted in, when will the awards be granted, the first awards?

Troy Woodbury

They are no awards planned other then the independent—

Robert Placek

Our annual small awards to the independent Directors.

Troy Woodbury

Beyond that, there’s nothing planned. Like we were talking about, the purpose of this is to have shares available as we’re very deep into this refinancing looking for another lending loan facility and so it may be needed there or it may be needed if we have to issue, if we raise cash, raise money through equity, it would be needed there.

[Charles Cuskniar] – Unidentified Company

That’s the shares, I was talking about the incentive plan itself, for employees and such.

Troy Woodbury

There’s none planned for employees.

[Charles Cuskniar] – Unidentified Company

The COMPEL 2 product that you announced about April of last year, is that in production and being shipped?

Ned Mountain

It is not in production yet, its undergoing extensive preproduction work and a lot of customer involvement but it is not shipping yet.

[Charles Cuskniar] – Unidentified Company

Do you expect that to be shipping this quarter?

Ned Mountain

No.

Operator

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

Robert Placek

This concludes our conference call. I want to thank everyone for participating and we look forward to you joining our next call.

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