Rimage Q1 2009 Earnings Call Transcript

|
 |  About: Qumu Corporation (QUMU)
by: SA Transcripts

Rimage Corp. (RIMG) Q1 2009 Earnings Call April 22, 2009 10:00 AM ET

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Rimage Corporation's First Quarter Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Wednesday, April 22, 2009.

I would now like to turn the conference over to Mr. Bernie Aldrich, Chief Executive Officer. Go ahead, sir.

Bernard P. Aldrich

Good morning, and thank you for taking the time to participate in our first quarter earnings conference call. Joining me today is Sherman Black, our new President and Chief Operating Officer, and Rob Wolf, our Chief Financial Officer, who will review our recent operating results. Also with us is Manny Almeida, our Executive Vice President of Sales and Marketing.

We will be pleased to take your questions at the conclusion of our remarks. Regulation FD prohibits us from providing any forward-looking statements, unless they are released simultaneously to the public. It is important to understand that any forward-looking statements are subject to a number of risks that could affect our anticipated performance. These risks are set forth in our filings with the Securities and Exchange Commission, which we urge you to review.

Turning now to the subject of this conference call. Our first quarter sales came to $18.4 million, compared to $22.7 million in the year earlier period. First quarter earnings of $1.2 million or $0.13 per diluted share were down from $1.8 million or $0.18 per diluted share in the same period of 2008.

These operating results reflect the fact that many perspective customers have adopted an extremely cautious posture towards capital expenditures. This hesitancy has caused many customers to defer purchasing our equipment, which has significantly lengthened selling leads times.

In addition, our customers are conservatively managing their inventories of consumable supplies, reflecting reduced consumption of blank discs and replacement printer ribbons and cartridges, used in retail and other applications.

In a positive development, Rimage's first quarter gross margin benefited from a shift in product mix, as well as reduced costs, stemming from service related improvements to our products.

Our first quarter earnings also benefited from the actions we have taken in recent quarters to streamline our cost structure. Due to our focus on cost control, selling, general and administrative expense has been reduced by approximately $1.3 million in comparison to last year's first quarter.

However, we have increased spending on product development, reflecting our commitment to further strength Rimage's position for future growth. We will be able to maintain our strong emphasis on R&D, thanks to Rimage's exceptionally strong financial condition.

We ended the first quarter with cash investments of nearly $97 million, and virtually a debt-free balance sheet. As a result, we have ample resources and financial flexibility for supporting our various growth initiatives.

Speaking of growth, interest in our CD, DVD and Blu-ray disc publishing capital equipment remains encouraging across a wide range of applications.

For example, all levels of the government market have been generating solid demand for our products. And we intend to intensify our sales efforts in this huge market. We also are optimistic about the future of electronic medical records, a field that is gaining traction, particularly in Europe and Asia.

Having established a strong position in the medical market as the digital output solution for imaging systems at GE, and every other major manufacturer, we are well-positioned to capitalize on medical documents, which represent a much larger long-term opportunity.

Various archiving and video applications also hold considerable potential for us going forward. At the same time, we are continuing to evaluate new business opportunities. Spearheading this process is Sherman Black, who will play a key role in formulating a long range strategic plan for Rimage.

Our current and future opportunities coupled with our ongoing commitment to R&D, make us optimistic about Rimage's future. So, while our near-term performance may lag our historic norms, we have a great deal of confidence in Rimage's prospects over the long haul.

Now, I would like to introduce Sherman Black, who started in his capacity as President and Chief Operating Officer earlier this month. Prior to joining Rimage, Sherman mapped a wide range in experience in a highly successful career with Seagate Technology, where he most recently served as Senior Vice President, Marketing and Strategy of the Core Products Business Group. During his 20 year career with Seagate, Sherman also held a range of other executive management positions in business development, sales, and marketing.

Given his experience and leadership capability, his appointment as President and Chief Operating Officer will significantly strength our management team. We'll now ask Sherman to share his initial impressions about Rimage.

Sherman L. Black

Thank you, Bernie. It's a genuine pleasure to be with you this morning as part of Rimage's first quarter conference call. I'm really enthused by the opportunity to work with this strong company, and its highly capable management team.

As I've been on this job for just a little over two weeks, I'm still on a learning curve about Rimage's operations, markets and products. However, would like to share with you just a few of initial impressions about what I've seen and learnt so far.

First, the quality of people throughout all levels of this organization is exceptional. Rimage's employees are highly skilled and I believe fully committed to meeting the needs of our customers. All-in-all, Rimage's foundation of human assets is very sound.

Secondly, the more I become grounded in the current business of Rimage, the more opportunities I see around our core. The opportunities facing this company are far from exhausted, which is why I'm currently spending a great deal of time, exploring how we can maximize our products, our global distribution channel, and the other capabilities both here and in overseas markets.

As we get further into this process, we may come across two potential areas that could extend beyond the current scope of our operations. We'll study any such opportunity, and if it makes good economic and business sense, we'll prioritize those that are complementary to our core.

We have no intention of going on an acquisition spree, buying a wide array of unrelated businesses. Rather, we will remain a highly focused organization, functioning as an integrator of technologies that are appropriate to the opportunities we will be pursuing. This is a challenging period for Rimage, and for most other providers of capital equipment. But despite the impact of sluggish economic conditions, Rimage continues to be a profitable cash generator. That in itself, I believe, offers ample testimony to the underlying strength of this business.

In the end, let me say it's a pleasure to be with you today. And I look forward to speaking and meeting many of you as I become more thoroughly grounded in this business.

Now, I'll turn the call over to Rob Wolf, our CFO, who will review our first quarter operating results. Rob?

Robert M. Wolf

Thanks Sherman. First, I will run some through some first quarter sales highlights. Sales of digital publishing hardware declined 23% in the first quarter of 2009, and accounted of a 36% of total sales, compared to 36% in last year's fourth quarter, and 38% in the first quarter of 2008.

Recurring revenues, including sales of printer ribbons and cartridges, parts, blank CD/ DVD media, and maintenance contracts, declined 17% in this year's first quarter in comparison to the year earlier period.

Recurring revenues accounted for 64% of sales in this year's first quarter, compared to 64% in the fourth quarter and 62% in the first quarter of 2008.

Consumable supplies, and services have accounted for higher than normal proportion for total sales over the past year, due to the economy-related slowdown in sales of disc publishing hardware.

International sales declined 10% in this year's first quarter, and accounted for 48% of total sales, compared to 43% in the year earlier period. Our lower international sales reflect the impact of foreign currency effects, which decreased worldwide sales by 5% in the first quarter of 2009.

Rimage's gross margin rose to 47% in the first quarter from 39% in last year's fourth quarter, and 43% in the first quarter 2008. As we said this morning's release, our first quarter gross margin benefited from a shift in product mix and reduced costs related to product improvements that have further strengthened their performance and reliability.

We anticipated gross margin in the 40% -- low 40% range in the second quarter.

Moving down the P&L. Our overall cost structure in the first quarter continued to benefit from the expense reduction measures that we have instituted over the past several quarters.

Reflecting the impact of workforce reductions and other cost control measures, selling, general, and administrative expense totaled $5.3 million in this year's first quarter, down from $6.6 million in first quarter of 2008.

First quarter SG&A was up modestly from $5.1 million in the fourth quarter of 2008. We believe SG&A will remain, at or near, the current level in this year's second quarter.

R&D expense partially offset the improvement in SG&A, rising to $2 million in the first quarter from 1.2 million in the fourth quarter, and 1.4 million in this year's -- last year's first quarter.

The increase in R&D expense resulted from a higher level of investments in new product development, in addition to important enhancements to our current product line.

R&D expense is expected to continue at a relatively high level in the second quarter.

Our operating margin was 7% in the first quarter, compared to 9% in last year's fourth quarter, and 7% in first quarter of 2008. We were taxed an effective tax rate of 33% in this year's first quarter, and believe our full year tax rate will be in the range of 34 to 35%.

Turning now to our balance sheet. Cash and investments totaled $96.7 million at March 31, 2009, up from $95.4 million at the beginning of this year. We made no share repurchases in the first quarter, and approximately 423,000 shares remain available for repurchase under an uncompleted authorization.

Finally, stockholders equity came to $110.3 million at the end of the first quarter, up from $109 million at the beginning of the year. And that wraps up our formal remarks. Now, the conference call operator will poll you for any questions.

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes from Mr. Greg McKinley with Dougherty & Company. Go ahead, sir.

Greg McKinley - Dougherty & Company LLC

Yeah, good morning. Guys, I would like to ask you a couple of questions. First of all in gross margin, I know you provided some color around what the drivers of the change were, essentially around the cost control, and a little bit around, some product mix. But, could you be more specific? I think in general with consumables representing a larger share of total sales here of late, we wouldn't have expected such strong margin performance. So, little better understanding of that would be appreciated.

Robert Wolf

Yeah Greg, Hi, this is Rob. The main -- the priority -- the primary reason behind the increases, if you look in a recurring revenue stream that we experienced in first quarter, a good portion of that we saw in increase is related to maintenance contracts, which do carry slightly better gross margins than we would see with, say, our media kit purchases or sales.

Greg McKinley - Dougherty & Company LLC

Okay.

Robert Wolf

The media kit sales that we had were down. So, with those gross margins being lower than our equipment sales, we realized stronger gross margins overall.

Greg McKinley - Dougherty & Company LLC

Okay. What about margins, if it's the actual duplication hardware. Have those been holding steady? How have those been performing?

Robert Wolf

They have been. We've seen slight degradation in terms of where the systems have come from. So, we've been selling systems, let's say, where we may have normally sold an 8100; they might fall to a 7100. But overall gross margins on the equipment themselves have stayed steady.

Greg McKinley - Dougherty & Company LLC

Okay.

Bernard Aldrich

I think another thing Greg, that's gone on and it was mentioned, we are continually making improvements and enhancements to our equipment. We've always had a reputation for building very solid equipment. We've significantly strengthened the quality of our line, our cost of warranty, our cost of repair has dropped. And that also contributes, because that all gets rolled into your cost of sales.

Greg McKinley - Dougherty & Company LLC

Okay. Is the maintenance contract a higher margin item than the regular disc publishing system or not?

Bernard Aldrich

No.

Greg McKinley - Dougherty & Company LLC

No, okay. And then second question, Sherman, I'm wondering if you could talk a little about, I know Bernie started the call giving us a little background on your history. But, wondering if you could expand on that a little bit. What you think your work experience today brings to the table, with your leadership role at Rimage? And then, what attracted you to join Rimage?

Or what specific opportunities did you see in the company in terms of new product opportunities or leveraging the existing product into new markets. Maybe just give us a lot of bit more color as to what were those couple of things that brought you here, and what do you expect your high priorities to be?

Sherman Black

You bet. So, Greg let me try and get that. So, let's just kind of background and how that might relate to the opportunities here at Rimage. I spent the majority of my career in the date storage industry in two main companies Hitachi and Seagate Technology. I took a pretty familiar track inside that business, which has started off in engineering. I did various design manufacturing quality type jobs. Learned the business from the ground up. I picked up an MBA along the way, wormed in my way into marketing, and really found what the things I truly enjoyed, which were sales in product line management.

I did numerous roles inside of Seagate in that area. And then ran one of Seagate's business units as the General Manager. So, I've got a full P& L background as well. And some of the things and challenges I've dealt with over my career is coming in and taking a business that's long introduced, and figuring out how do you -- how you best come in and optimize the business model around where that technology sets today. And then along the way I determined okay, where the opportunities, where are the hidden assets that you could go and grow, new adjacencies and extensions off of that.

I had numerous successes. I'm used to dealing with the threat of substitute technologies. That's something that I've got a lot of understanding around. And really have an appreciation for what's going on in the ecosystem around us, and how could that effect our business, as well as, from a threat perspective, but more importantly, from a opportunity perspective.

As I look at the Rimage opportunity, I really enjoyed my role as a General Manager. And I did want an opportunity to lead an organization (ph) companies that are out there. I believe there are a tremendous amount of hidden assets. There is a legacy of success with this company. And the desire to create something new and great. And that's what attracted me here. And that, coupled with of course, just the phenomenal balance sheet that Bernie and the team have put together. Well hopefully, that answered your question?

Greg McKinley - Dougherty & Company LLC

Yeah. Thank you.

Sherman Black

You bet.

Operator

And our next question comes from the line of Rick Doty with Columbia Management (ph). Go ahead, sir.

Unidentified Analyst

Yeah. My question is also for Sherman. And not completely unrelated, but a few years back the company spent, what seemed like an egregious amount on a consulting assignment that seemed to me, was very much related to some of the things you're talking about, looking for potential growth opportunities, extensions, adjacencies. And as a long-term shareholder, I don't think we've seen any return on that. I don't know if you've had chance to review those findings. And did you have any thoughts from reviewing those? That's my first question.

Sherman Black

Yeah, I have. And it is a very exhaustive study. I will tell you that there were a couple of very fundamentally flawed assumptions that the consulting team brought to the table around the ecosystem. Just what do you believe about technology costs? What you believe about bandwidth? What do you believe about longevity of different types of technology? And there was some fundamentally flawed things in that area.

I think they had some good ideas around driving after various vertical markets. And I think this company has gone off and done that. I think the other thing that they suggested was a very stronger focus on consumables. I believe that was also been played out in the financials over the last couple years.

I won't go back into disparage, disparage that consulting firm that wasn't around at that time. But, I do think there were some -- the framework was good. And I think there is -- we're going to have to go figure, okay, if that study was done I believe, Bernie 2005 timeframe.

Bernard Aldrich

Right.

Sherman Black

The world's very different today in 2009. And what we got to go figure out is what's the world going to look like in 2012, 2013. And what do we do between now and then to harvest and get the most out of this existing business we have? And what are the angles we go down and approach.

So, definitely, I've looked at it. There is a framework that most consultants bring to the table. I think they did that. But, I do think there was some very fundamentally flawed assumptions around technology.

Unidentified Analyst

Okay. I appreciate that response. Now, your role is -- I heard you say you were attracted to the balance sheet as one of the things that made you accept this position. But, the cash out there, or the capital out there, do you have any thoughts on capital allocation? And the company just mentioned it has a buyback that's open, and nothing was repurchased in the quarter.

What are you thoughts on buyback versus clearly, you're looking to spend the money on some extensions and adjacencies?

Sherman Black

Yeah, I'd say, I wish I was smart enough to have that figured out after two weeks. But, Rick, I'm not there yet. I want to -- I think it's a very fair question to ask me. I'd ask that you give me a little more time to understand what we have, and really get to know this team a lot better.

As I said in my remarks, I truly believe there is still a lot of opportunity in this core business. If you look across just our level of penetration across equipment, consumables, service, it is not the same across the whole world. There are regions of the world that we have got a lot of penetration even within a given region.

And we have certain vertical markets we have not fully tapped out. And so, I think just going in and replicating the successes we have had, and getting that full penetration around all corners of the world, I think there's a lot of growth there. And as we go through the exercise, that's when I hope to find these hidden assets to go after. And that will determine what we do with our capital. And do we -- the organic, inorganic or what may it be.

Unidentified Analyst

And to geographically become stronger, do you need -- can you do that with a partner, or do you need to do to know overall kind of spending?

Sherman Black

So, if you look at our sales model today, it's a mixed bag. And we certainly have -- we have direct accounts as well as partners. And I believe like, we will definitely need partners. There are regions in the world where we'll absolutely have partners. And if there is a direct opportunity that's large enough, we will go after that in a direct fashion of the economics mix. But, I would say, expect us to utilize partners as well.

Unidentified Analyst

Okay. Thank you.

Sherman Black

You bet.

Operator

Thank you. And our next question comes from the line of Chuck Murphy with Sidoti & Company. Go ahead, sir.

Chuck Murphy - Sidoti & Company

Good morning, guys.

Bernard Aldrich

Good morning.

Chuck Murphy - Sidoti & Company

Just one quick question. I got on late. So hopefully, I it hadn't already been asked. But, is there a specific area that you are channeling your R&D dollars today that you weren't before?

Bernard Aldrich

We continue to do a product line extension and product line enhancement. And that's really about as much as we would comment at this time.

Chuck Murphy - Sidoti & Company

Okay. And just kind of any sense, are we near a bottom here, are you feeling any better about next quarter versus the first quarter?

Bernard Aldrich

That would require that we have insight that's far greater than the world (ph). So, I think again, it's -- we attack this on a daily basis. We're out there, right in the same battle everyone else is. And again, I tell people, we will -- we expect to be here a month from now, a year from now, three years from now.

And what's the timing of the economy building and growing again? That's anybody's guess. But we are certainly, in spite of the challenges that are out there, I think as Sherman's mentioned, there is lots of opportunities. Not only at various applications, but in different geographies. And that's why we're really making sure that we're allocating our dollars in the right place. And that's also why we continue to invest in ongoing product development. Because we're going to capitalize on this.

Chuck Murphy - Sidoti & Company

Okay. Let me ask it this way. I mean, looking at kind of the second half of March and the first half of April, is that worse than like a January and February, or does it seem any better?

Bernard Aldrich

Yeah. We can't talk about anything beyond what we've just gone through Chuck. So...

Chuck Murphy - Sidoti & Company

Okay.

Bernard Aldrich

All right.

Chuck Murphy - Sidoti & Company

Sounds good. Thanks guys.

Bernard Aldrich

Yeah.

Operator

And we have a follow-up question from Mr. Rick Doty with Columbia Management. Go ahead, sir.

Unidentified Analyst

Yeah. The question actually is drilling down on what Chuck just asked. So, one of the things you said, in my understanding of the capital equipment side and not having visibility on that. But, some of your business is consumables. And you mentioned specifically that customers are managing their inventories cautiously. To me that means, anything in excess they had, they are using first, and then they order. And, if you guys are -- I guess, tracking your customers, like you should, you should have a sense of where they are with their inventory. And if we're back to end usage being equal to your shipments. So, where do you stand on that?

Bernard Aldrich

Okay, I don't know. Manny, I don't know if you want to comment on some of the...

Manuel Almeida

Yeah Rick. We -- what we see is the usage in the medical market certainly has not declined. Usage in markets where it's a requirement for the business payroll processing, statement imaging, banking and finance is not declining. Where customers have started to manage the inventories much, much better is where might be discretionary. Production of marketing materials for example. And we all know that there've been significant cut backs, right across the board in many different companies.

So certainly, we're seeing softness in certain market segments. But, continued strength in other market segments. And that's one of the key strengths to Rimage, is we serve so many different market segments that we're able to very broadly look at the market and balance it. So, we're not looking at softening of consumables. I think where we have to be careful is, as equipment sales decline, obviously, you sell less consumables into the future. So, that's something we keep a very close eye on.

Unidentified Analyst

Okay, I guess I misunderstood then what you were saying with the customers cautiously managing their inventory. What it sounds more like is that, customers' business has gotten soft, so they're ordering less. That's different than managing their inventories. Go ahead.

Sherman Black

This is Sherman. I'm sorry to interrupt. I think there's two things here. One is, yeah, there is probably just an element of total demand around consumption. But also buying practices. Every company out there today has said, you will manage expenses. And that's either going from the top. And I can tell you that if something like a consumables broader product is probably on C, D or E list for a lot of companies in terms of how they would manage their expenses. And as these orders come down, you will manage tighter. The person that maybe would have ordered -- I'm not sure what the total right (ph) increments are, but the larger amounts, they're going to say Look, how can I buy fewer. How I hold less inventory inline? And whether that's going to, I just want to manage it tighter. I don't know that -- I think there is both inventory management, as well as potential consumption involved here.

Unidentified Analyst

Okay. Again, going back to my first question is, once we -- you just said a guy used to order 10 at once and used them over two months. And now he is ordering five at a time and using them monthly. You're caught up after one month, and are meeting his end demand.

So, that's what I'm kind of getting at. Have you seen -- I guess, customers can work -- if you were a Bank of America, they're incredibly cautious or not cautious. But frugal with their inventory. So, our printers get some sort of read out 10 states south of us, and they tell you when you can order another printer ribbon or a cartridge. And you have to be two-thirds or three quarters of the one, done with the one you have before you can get a another one. And so -- but the point is, we're not -- our demand for those hasn't changed. It's just that they manage, you never have any surplus around.

So, once the customers have used up their surplus that you're back to the end demand. And, I'm asking you, are you seeing that yet?

Bernard Aldrich

No, I think Rick, it's a combination. I mean, there is no secret. We sell consumables. To use consumables, you have to sell hardware. And so, when hardware sales are down, ultimately you will see some drop in consumable sales.

But also, on the other side, on some these markets, there is less usage just due to the fact that their business is down. And I mean, that's what we see. I think, if you look, our consumable sales are down, percentage wise, somewhat similar to what we see in hardware sales. And so -- and there is just -- it's just all part and parcel of what's been happening out there. But, I'll go back to the point. So that's why to me, it's always important that we keep our eye on hardware sales, and we have to continue to drive hardware sales. Because ultimately, that's what will drive consumable sales.

Unidentified Analyst

Yeah. I understand that, okay. And then, again, another comment on a question that Chuck had. He asked how sort of the trends were in at the end of March and into April. And your response was, we can't answer that. This is a public forum. You can answer that. You choose not to answer that. That can be your prerogative. But, you can answer that. This is a public forum. And others do answer that. So, I just want to make that clear.

Robert Wolf

Yeah, we have chosen not to answer that.

Unidentified Analyst

Sorry.

Unidentified Analyst

Fine.

Bernard Aldrich

Yeah.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). And it appears there are no further questions at this time. I will turn it back to management for any closing remarks.

Bernard Aldrich

Okay. Well again, thank you for joining us today. And we look forward to speaking with you in another three months. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!