Wegener Corporation F2Q09 (Qtr End 2/27/09) Earnings Call Transcript

Wegener Corporation (WGNR)

F2Q09 Earnings Call

April 13, 2009 4:30 pm ET

Executives

Robert A. Placek – Chairman and Chief Executive Officer

C. Troy Woodbury Jr. – Chief Financial Officer

Ned L. Mountain – Chief Operating Officer

Analysts

[Fred Foss]

Presentation

Operator

Ladies and gentlemen, welcome to the second quarter 2009 Wegener earnings conference call. My name is [Tonya] and I will be your coordinator for today. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Robert Placek, Chairman and CEO. Mr. Placek, please proceed.

Robert A. Placek

Good afternoon. I’m 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 the financial results for the second quarter of fiscal 2009. Following Troy’s discussion I’ll comment on our business and Ned Mountain will provide an overview of key new product and customer developments. Following the comments we will answer questions from participants.

Troy will now comment on our second quarter.

C. Troy Woodbury Jr.

Thank you Bob. This morning we announced the operating results for our second quarter of fiscal year 2009. This release has been posted on our company’s website.

This call may contain forward-looking statements within the meaning of applicable Securities 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 prospective. 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 Forms 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 February 27, 2009 decreased $2.2 million or 32.3% to $4.5 million from $6.7 million for the same period in fiscal 2008. Revenues for the six months ended February 27 decreased $4.9 million or 41.5% to $6.8 million from $11.7 million for the same period in fiscal 2008. The operating results for the three and six months ended February 27 were net earnings of $8 thousand or less than $0.01 per share, and a net loss of $1.2 million or $0.09 per share respectively, compared to net earnings of $336 thousand or $0.03 per share and $286 thousand or $0.02 per share respectively for the three and six months ended February 29, 2008.

Our revenue and bookings are subject to the timing of significant orders from customers and new product introductions, and as a result revenue levels may fluctuate from quarter-to-quarter. During the first and second quarters of fiscal 2009 our bookings were approximately $1.3 and $1.7 million respectively. Our fiscal 2009 bookings to date, as well as our fiscal 2008 bookings particularly during the fourth quarter of 2008, were well below our expectations and internal forecasts, primarily as a result of customer delays and purchasing decisions; deferral of project expenditures; foreign exchange rate fluctuations, particularly with the Mexican peso; and generally adverse economic and credit conditions. These low bookings had a direct impact on the revenues in the first half of fiscal ’09 and will be discussed in more detail later in this call.

Our backlog is comprised of undelivered, firm customer orders which are scheduled to ship within 18 months. The backlog is approximately $5.9 million at February 27, compared to $8.5 million at August 29, 2008 and $9.8 million at February 29, 2008. The total multi-year backlog at February 27 was approximately $9.7 million compared to $13.3 million at August 29 and $15.7 million at February 29, 2008.

The company’s gross profit margins percentages were 34.1% and 31.6 for the three and six month period ended February 27, 2009 compared to 38.1% and 39.4% for the three and six month period ended February 29, 2008. Gross profit margin dollars decreased $1.004 million and $2.442 million respectively for the three and six months ended February 27 compared to the same periods in fiscal 2008. The decreases in margin percentages and dollars for the three and six months ended February 29 were mainly due to the decrease in revenues which resulted in higher unit fixed costs. Profit margins for the second quarter of fiscal 2009 included an inventory reserve charge of $215 thousand and a reversal of an accrued warranty liability of $130 thousand for previously estimated provisions that were no longer required.

In addition, profit margins for the three and six month periods of fiscal 2009 were favorably impacted by decreases in capitalized software amortization expense of $79 thousand and $119 thousand respectively.

Selling, general and administrative expenses decreased $379 thousand or 27% to $1.026 million for the three months ended February 27. This from $1.4 million for the three months ended February 29, 2008. For the six months ended February 27, SG&A expenses decreased $473 thousand or 17.7% to $2.196 million from $2.669 million for the same period ended February 29, 2008. The decrease in SG&A expenses for the three and six months ended February 27, 2009 was primarily due to decreases in professional fees, salaries, sales and marketing expenses, general overhead costs and bad debt provisions. As a percentage of revenues, SG&A expenses were 22.8% and 32.1% for the three and six month periods ended February 27, 2009 compared to 21.1% and 22.8% for the same periods in fiscal 2008. These expenses are discussed in more detail in the Form 10-Q.

Research and development expenditures including capitalized software development costs were $756 thousand or 16.7% of revenues and $1.6 million or 23.7% of revenues for the three and six month periods ended February 27, 2009. This compares to $1.1 million or 16.8% of revenues and $2.1 million or 18.2% of revenues for the same periods in fiscal 2008. The decreases in expenditures for the three and six months ended February 27 compared to the same periods of last year were mainly due to lower salaries as a result of reduced headcount, and a reduction in company wide paid working hours, and lower consulting costs.

Capitalized software development costs amounted to $250 thousand and $539 thousand for the second quarter and first six months of fiscal 2009 compared to $352 thousand and $545 thousand for the same periods in fiscal 2008. The decreases in capitalized software costs were related to completed projects.

R&D expenses excluding capitalized software expenditures were $770 thousand or 10.4% of revenues, and $1.6 million or 15.8% of revenues for the three and six months ended February 27, 2009. This compares to $770 thousand or 11.5% of revenues, and $1.6 million or 13.5% of revenues in the same periods of fiscal 2008. The decreases in expenses for the three and six month periods of fiscal 2009 compared to the same periods in fiscal 2008 were mainly due to the decrease in salaries and consulting costs.

Significant fiscal 2009 shippable bookings are currently required to meet our financial projections in the third and fourth quarters of ’09. Our bookings and revenues to date have been insufficient to provide adequate levels of cash flow from operations or adequate levels of collateral to support our estimates of required borrowings during the remainder of fiscal 2009 and fiscal 2010.

At February 27 our net inventory balances were $6.2 million compared to $6.3 million at August 29, 2008 and $3.4 million at August 31, 2007. The increase in inventories during fiscal 2008 was primarily due to our new product introductions of the iPump 562 Enterprise Media Server, the Unity 552 Receiver and the Encompass LE2 Audio Receiver. In addition, inventory levels were increased for the iPump 6400 Media Server and Nielsen Media Research products. These inventory purchases were made based on existing orders and expected future bookings.

During the fourth quarter of fiscal 2008 and the first six months of fiscal 2009, we made reductions in headcount to bring the current number of employees to 81 and reduced engineering consulting and other overhead expenses. Beginning in January, 2009 we reduced paid working hours company wide by approximately 10%. Subsequent to February 27, 2009 additional reductions in headcount were made.

In order to stay within our borrowing availability limits subsequent to February 27, we negotiated extended payment terms with our offshore vendors and have been extending other vendors beyond normal payment terms. In addition, subsequent to February 27 we retained a financial advisor to assist us in a possible refinancing of our debt and our continuing efforts to raise capital and explore possible strategic alternatives. Should adequate capital or financing not be available, and should increased revenues not materialize, we are committed to further reducing our operating costs to bring them in line with reduced revenue levels. No assurances can be given that operating costs can be sufficiently reduced to allow us to continue as a going concern. If we are unable to continue as a going concern, we will likely be forced to seek protection under federal bankruptcy laws.

During the second quarter of fiscal 2009, our bank notified Wegener of its intent not to renew our loan facility upon maturity. As a result we need to raise additional capital or obtain additional credit facilities during the remainder of fiscal 2009 to continue as a going 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 if available that we will be able to complete financing on satisfactory terms. Our ability to continue as a going concern will depend on our ability to obtain additional capital or financing in the very short term and subsequently to increase our bookings and revenues in the longer term to attain profitable operations.

During the first six months of fiscal 2009 our line of credit net outstanding borrowings increased $1.6 million to $3.472 at February 27 from $1.9 million at August 29, 2008. During the first six months of fiscal 2009 the average daily balance outstanding was $3.390 million and the highest outstanding balance was $4.042 million. At February 27 there was approximately $1.2 million available to borrow under the advance formulas. At March 20, 2009 approximately $387 was available to borrow under the advance formulas. The loan facilities also used to support import letters of credit issued to offshore manufacturers. At February 27, 2009 no letters of credit were outstanding.

At February 27 we had land and buildings with a cost basis of $4.457 million. This includes the land held for sale of $354 thousand. Although land and buildings are subject to a lien under the loan facility they’re not currently used in the existing loan facilities availability advance formulas, and they have no mortgage balances outstanding. We are pursuing ways to utilize these assets to support additional overall borrowing capacity.

During the third quarter of fiscal 2007 the company’s board of directors authorized and approved the listing for sale of the 4.4 acres of undeveloped land located adjacent to the company’s headquarters facility in Johns Creek, Georgia. This is described in Note 5 of the consolidated financial statements. On November 26, 2008 we executed a contract to sell the land for approximately $840 thousand, less commission and closing costs. The contract contained various contingencies including an inspection period for determination of suitability for intended use and rezoning of the property. On March 23, 2009, pursuant to terms of the contract, the buyer terminated the contract. We intend to continue to market the property for sale. Proceeds from the sale of the land will be used to reduce any balances outstanding on the revolving line of credit.

Now for my outlook and comments. Significant bookings are required to obtain the revenue forecast for the third and fourth quarters of this fiscal year and we do expect an operating loss for the third quarter. We have made significant cost reductions in the third quarter and we will continue to control our expenses and will monitor them very closely. We are very focused on booking new orders, lowering our inventory levels and obtaining the financing that is required to meet our working capital needs for this year and next. While no assurances can be given, we believe that we will be successful in obtaining the required financing. We continue to work closely with Bank of America as we work through this process.

Bob, this concludes my comments on our operating results.

Robert A. Placek

Thank you Troy. Revenues for the second quarter were almost double those of the first quarter and we don’t anticipate returning to the first quarter revenue levels. We broke even in the second quarter despite the challenging economic conditions. At the beginning of the third quarter, based on the current business environment, we revised the fiscal 2009 business plan and subsequently restructured our costs.

Combined with the cost reductions that occurred in late fiscal 2008 and Q1 of fiscal 2009, we have reduced our quarterly breakeven revenue level by more than $2 million or approximately one-third lower than fiscal 2008 levels. Adjustments will essentially be complete by the end of the third quarter so the new breakeven level can be attained starting with our fourth quarter of fiscal ’09. Based on the timing of the cost reductions and the expenses involved in executing them, as well as the anticipated revenue levels, we do expect an operating loss in our third quarter.

It’s important to note that many of our larger sales are capital expenditures for our customers and the difficult state of the credit markets right now is impeding sales of our products. In response, we are launching a new service called CompelConnect which allows customers to use their operating budgets as opposed to capital budgets to utilize our products and launch new networks. Ned will describe the new service in more detail later in this call.

We continue to explore strategic alternatives for the company, and it is an active ongoing process. As we previously stated, we will communicate any information about this process as it becomes available and can be publicly disclosed. Also during the second quarter we were granted another patent which strengthens our intellectual property portfolio.

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

Ned L. Mountain

Thank you Bob. As Bob mentioned, later this month we are launching a new software for service offering our flagship network control system Compel. The new service called CompelConnect.com allows customers to access Wegener receivers and media players via the Internet for network control of video and media at remote locations throughout a customers’ network. The service is applicable to digital signage customers, faith-based networks and other organizations interested in distributing and playing targeted video and other media rich content at multiple facilities simultaneously.

With CompelConnect customers can log on the Internet and control their remote media players to play video files, overlaid graphic images and display quick changing, relevant textual information such as exchange rates, sales prices, sports scores and gaming odds. Each facility can have a unique message with the site specific controls that are available so that the organization can market or communicate one-on-one with their local viewers.

This service is a departure from our typical product sale, and we are anticipating interest from a wide range of new customers that have typically not been a good fit for our Compel control system which required an up front capital expenditure to launch the network. From our classic business during the last quarter, some of our long term customers invested in upgrades to their Compel Network Control Systems which provide improved the future operations for the network. Customers include NBC Digital Health, through their satellite service provider USSI, and the Christian Radio Consortium, through their satellite service provider, Microspace.

In addition, a large digital signage customer, Santander Bank, in conjunction with their service provider, SSL, completed the launch of their digital signage and employee training network at over 1,000 banking facilities throughout Mexico. At each facility, our iPump media service receive live messages from the bank’s president as well as file-based videos containing consumer marketing information and entertainment. During off hours the network is used for employee training at the branches. This system is now operation throughout the Santander Bank footprint, and joins the Citigroup owned Banamex banking network, with a similar Wegener system which is also operated by SSL, providing full service integration and operations.

We believe that our satellite network based digital signing solutions, such as those used by the Mexican banks, coupled with our new CompelConnect service offering, place us in a good position to grow as the digital signage industry grows.

Bob, this concludes my remarks.

Robert A. Placek

Thank you Ned. This concludes our presentation, and we’ll now take questions from participants. I would ask that each participant ask no more than two questions to give everyone a chance to ask their own questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Fred Foss].

Fred Foss

Yes. Hi. This is Fred Foss. I’ve spoken with Troy a few times.

C. Troy Woodbury Jr.

Hi Fred. How are you?

Fred Foss

I’m fine. I just wanted to ask a question about the maybe the perceived value of the rotational use of memory patent that you published that information, I think, in January. When I saw that it struck me as something of significant value, you know, for licensing or some other use by flash memory makers or something. Is this the way its’ being perceived by the company or am I not understanding it?

Robert A. Placek

The patent, I think, has a fair degree of value. It’s in one of those areas where there’s a number of ways to skin a cat, and so there are, you know, other alternative means of accomplishing it to the same end. But I think as part of our overall intellectual property portfolio it’s a good piece. Exactly how and when we’re able to monetize that is unclear.

Fred Foss

Okay. Another question I have is, you know, there’s been mention maybe this is the first time you’ve talked about the possibility of being forced into restructuring under the bankruptcy laws, and in that regard I’m just curious as to whether or not a sale of a company would be a possibility or an alternative to, you know, bankruptcy.

C. Troy Woodbury Jr.

Yes. Fred that comment is a cautionary comment. It’s certainly not meant to imply that we believe that’s what’s going to happen at all. If you think about this and say if we do not obtain financing and are unable to continue as a concern, we could go into bankruptcy. And that’s all that statement is saying. It’s not intended to be a bright light saying that that’s what we really think will happen. As to your other comment, the strategic alternatives process is alive and is quite active and is ongoing. When we started that process we talked about the fact that we would not be providing periodic updates so I can’t really, you know, give you detail there, but I can tell you that that process is very much alive.

Fred Foss

Okay. And just in a follow up to that, I’m curious whether the company has been approached by potential acquirers and if you don’t want to release that information I don’t understand why the shareholders wouldn’t be entitled to something along – you know, some information in that regard. Maybe not specifics, but just yes, we’ve been approached by numerous people or whatever. Something along those lines.

C. Troy Woodbury Jr.

Well again, you know, we talked about that we were not going to be giving updates or not giving details, but the process has been going on for, you know, for some time, and it has not been an inactive process. But past that we can’t really give any details. I understand what you’re saying and I do hear that, but that’s really the extent of what we can say at this point.

Operator

And there are no further questions at this time.

Robert A. Placek

Okay. Well, that concludes our conference call. Thanks to everyone for participating and we look forward to you joining our next call. Thanks.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the

presentation. You may now disconnect and have a great day.

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