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Executives

Douglas Sherk - Founder and Chief Executive Officer

Sherman L. Black - Chief Executive Officer, President and Director

James R. Stewart - Chief Financial Officer and Principal Accounting Officer

Analysts

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Rimage (RIMG) Q1 2013 Earnings Call April 24, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Rimage First Quarter 2013 Financial Results Conference Call. [Operator Instructions] Today's conference is being recorded, April 24, 2013.

I would now like to turn the conference over to Mr. Doug Sherk of EVC Group. Please go ahead.

Douglas Sherk

Well, thank you, Alicia, and good afternoon, everyone. Earlier this afternoon, Rimage issued a press release announcing its first quarter 2013 financial results. The release is available on the company's corporate website at www.rimage.com.

Before we get started, during the course of this conference call, the company will make forward-looking statements about its future plans, objectives, beliefs, expectations and prospects. For this purpose, any statements made today that are not statements of historical fact may be deemed to be forward-looking statements. These forward-looking statements are not guarantees of future actions, outcomes, results or performance. By their nature, these forward-looking statements are subject to many risks and uncertainties that could cause actual results to differ materially from the results discussed in or implied by the forward-looking statement. A discussion of the risks and uncertainties that affect Rimage's business is contained in the company's SEC filings, particularly under the heading Risk Factors and in the press release issued this afternoon. Copies of these documents are available online from the SEC or on the Rimage website. These forward-looking statements are made only as of the date of this conference call, and the company assumes no obligation and does not intend to update these forward-looking statements after the date of this conference call, whether as new -- excuse me, whether as result of new information, future events, developments, changes and assumptions or otherwise.

In addition, to supplement the GAAP numbers, we have provided non-GAAP information that excludes the amortization of Qumu acquisition intangibles, we believe that these non-GAAP numbers provide meaningful supplemental information that are helpful in assessing our historical and future business performance. A table reconciling the GAAP loss per share information to the non-GAAP information is included in our release.

And now I'd like to turn the call over to Sherman Black, President and Chief Executive Officer of Rimage.

Sherman L. Black

Good afternoon, and thank you for joining us on our first quarter 2013 conference call. With me today is Jim Stewart, our Chief Financial Officer.

This afternoon we issued our first quarter press release. The results continue to demonstrate the strong potential of Qumu and its solutions for secured enterprise video communications. The strength in Qumu was partially offset by the results from our disc publishing business which continues to be impacted by the transition to alternative technologies.

I will begin with a review of our operating performance in the quarter, including the progress we're making at Qumu and the outlook for that business, as well as an update on disc publishing. Jim will provide a more detailed look at the first quarter 2013 financial results. Following our remarks, we'll be happy to take your questions.

Qumu posted solid quarterly results following the seasonally strong Q4. Revenues totaled $4.3 million, more than double the revenues in the first quarter of last year and slightly better than seasonally strong fourth quarter revenues. Qumu contracted commitments totaled $4.4 million, again, more than double the level a year ago. Our Qumu contracted commitments were driven by key contracts with 3 global enterprise customers: a technology retailer, a top 5 financial institution and a large engineering and construction company. Qumu's backlog of contracted revenue was $12.4 million at the end March, compared with $12.7 million at the end of December.

Qumu's solution continues to attract customers across the wide spectrum of industries and geographies as adoption of video content as a key communication tool continues to grow rapidly. Large enterprises are using video more and more to enhance employee communications and collaboration. Qumu's solution captures video from any source, automates a secure distribution to a variety of platforms including mobile and enables complete control of the content from creation to consumption.

Qumu is viewed as a cost effective solution because it utilizes existing legacy IT investments reducing the need for expensive reconfigurations.

We are very pleased to have Qumu named as one of the top 2 leaders in video communications in a report published by Forrester in March. The designation was based on Qumu's feature-rich applications including live webcasting in Internet video solutions, integrations of standards base hardware, partnerships with CDNs and strong mobile applications. To quote from the Forrester report, "Qumu scored highest due to its complete application features set, availability of video distribution, current routing application and its recent introduction of speech search capabilities."

This third party validation is very important to our company and has helped us as we pursue new enterprise customers. We've been focused on positioning Qumu for the growth opportunity we see in the large and growing enterprise video communications market. We've made significant progress. Beginning 6 months ago, its strengthened under the leadership of Vern Hanzlik, who joined us as General Manager in December. We have focused intensely on building a more effective, efficient sales and marketing organization. We've expanded our presence internationally, we've made improvements to our service capabilities. We have a robust pipeline of new features under development that will provide us with future differentiation in the marketplace. For example, there's a new cloud version of Qumu's software that we expect to launch this quarter. This offering will expand our market as enterprises move more and more of their content storage and distribution to the cloud.

We also believe we're in an excellent position to grow our business overseas. During the first quarter, we announced our expanded global footprint, leveraging the existing Rimage business locations with sales presence now in Frankfurt and London in Europe, Dubai in the Middle East, in Singapore and Tokyo in Asia. We remain very confident about the growth prospects for Qumu and we look forward to continued momentum. Our goal is to position Qumu for sustained growth and profitability and we anticipate progress on this during the remainder of 2013.

Turning now to disc publishing. Revenues in the quarter fell by 16% from the first quarter last year, a larger decline than expected. The first quarter of last year included a large refresh order from a major retailer that we did not have this year. We also saw a demand in other market segments of our business fall off more sharply than we anticipated. Some of the decline was the result of continued funding challenges for some of our government and commercial customers. However, the shift to alternative technologies across industry segments continues to significantly impact the business.

We will continue to see the benefit of the actions we took in 2012 to reduce costs in future quarters. In addition, you can expect to see further cost reductions as we rightsize the cost structure in disc publishing to anticipated revenue levels.

As we said in the past, we do expect to see a continued demand for disc publishing services in use cases like medical imaging, financial statements, media and entertainment, law enforcement applications, where high switching cost or other factors making technology transition unattractive.

Our challenge is to optimize the cost structure against the revenues of this business to maximize the cash flow it generates and entertained [ph] it striving to meet that challenge.

In summary, I remain extremely optimistic about the prospects for Qumu. It's clearly the growth driver for our company. Qumu is well-positioned to go after this rapidly-emerging market and we're focused on execution in 2013. In disc publishing, we're going to take the actions needed to maximize cash and appropriately manage this declining business over time.

With that, I'd like to turn the call over to Jim.

James R. Stewart

Thanks, Sherman. I will begin with a review of our P&L. Revenues in the first quarter were $19.5 million, the same as revenues in the first quarter last year. The positive business momentum we established for Qumu in the second half of 2012 continued in the first quarter, with Qumu revenues totaling $4.3 million, up 216% from $1.4 million in the first quarter a year ago.

The first quarter contracted commitment backlog of $12.4 million was approximately the same level as of the end of last quarter with new contracted commitments of $4.4 million at about the same level as our first quarter revenue.

Disc publishing sales in the first quarter were $15.2 million, a 16% decrease from the prior year. This decline was driven by a significant reduction in disc publishing hardware revenue with our recurring revenue of consumables and service showing a relatively minor decline of 2%.

Disc publishing Hardware revenues in the first quarter of last year included a large refresh order for a major retailer that did not recur this year. Excluding this refresh order, disc publishing first quarter sales were down about 11%.

In addition, some of our government and commercial customers continue to face funding challenges in the quarter. Finally, as Sherman mentioned, we continue to see the shift to alternative technologies significantly impacting the disc publishing business.

Disc publishing hardware sales fell 41% from last year's first quarter and represented 20% of total sales in the quarter, compared with 33% in the first quarter of last year. Slipping the 2012 large refresh order for a major retailer, first quarter Hardware revenue was down 30% from last year. Disc publishing recurring revenues held pretty steady in the first quarter. Recurring revenues defined as sales of premium ribbons and cartridges, parts and optical media, as well as service contracts declined 2% from last year. Disc publishing recurring revenues represented 58% of total company revenue in the recent first quarter, compared with 59% in the prior-year first quarter.

First quarter sales of consumables supplies decreased 4%, while service revenues increased 4% from last year's first quarter. Strong maintenance renewals and an increase in maintenance attach rate drove the increase in service revenues.

Disc publishing international sales were down 14% from the first quarter of 2012. These international sales represented 33% of total sales in the recent first quarter, compared with 38% in the first quarter of 2012. Foreign exchange impacts were minimum in the quarter.

Including Qumu, sales in Europe were flat, with sales in the first quarter of 2012. Excluding Qumu, Europe sales fell 10%, with demand remained sluggish due to the economic conditions in the region. Sales in Asia Pacific were down 10%, compared with the prior year.

Moving down to the income statement. The gross margin was 47% for the first quarter of 2013, compared with 49% last year. The decline was largely due to an unfavorable mix of disc publishing sales with lower sales of high margin hardware and the effect of under absorption of fixed manufacturing costs of disc publishing equipment.

Operating expenses in the quarter totaled $13.2 million, a 5% increase from the $12.5 million in the same quarter a year ago. Included in the recent quarter operating expense was approximately $500,000 of nonrecurring segments and legal costs. In addition, Qumu commission costs were higher due to the increased Qumu revenues.

First quarter 2013 SG&A expenses totaled $9.7 million versus $9.2 million a year ago. Excluding the nonrecurring costs, SG&A expenses were about the same as last year with lower disc publishing SG&A costs offset by the investment we have made in Qumu sales and marketing.

R&D expenses were $3.4 million in the quarter, compared with $3.1 million last year, higher due to the carryover impact of Qumu R&D hiring in the second half of 2012. We generated a net loss of $4 million in the recent first quarter, or $0.46 per share. This compares with a net loss of $1.7 million in the first quarter last year or $0.17 per share. Excluding the amortization related to the Qumu intangibles, our first quarter 2013 loss was $0.42 a share.

Now turning to our cash balance. Cash and marketable securities totaled $48.4 million at the end of March, compared with $50.1 million at the end of December. During the quarter, we used approximately $1 million in cash from operations. Capital expenditures totaled $232,000 in the quarter. We did not buy back any shares of Rimage stock during the period. The company has approximately 778,000 shares remaining on its repurchase authorization and may repurchase shares from time to time during the year, depending on market conditions.

Turning now to our outlook on revenues for the second quarter and total year 2013. We expect revenues for the second quarter to be between $18 million and $20 million. For the full year, we continue to believe the revenue guidance we provided on our fourth quarter 2012 call is still achievable. We expect consolidated revenues to grow compared to 2012. Qumu revenues are expected to grow at a rate greater than 50%. This Qumu revenue growth will be partially offset by the decline in disc publishing revenues.

That concludes our formal remarks. Now Sherman and I would be happy to answer any questions.

Operator, please open up the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Greg McKinley with Dougherty & Company.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Yes. I'm wondering if I could just help me better understand the margin degradation. We talked about some revenue mix shifts driving lower margins, but aside from your prepared commentary that the rate of declines in disc publishing hardware was maybe the greatest rate of decline and, as a result, Qumu, which produces higher margins would have represented a larger share of total revenue. So that, to me, seems to be a margin mix positive, not a negative. Could you help me understand that?

James R. Stewart

Yes, Greg, this is Jim. There's a couple of impacts going on there. One of them is the lower revenue in disc publishing hardware, which is a negative. And the second part of the disc publishing piece is the under-absorbed manufacturing cost. So both of those impacted our disc publishing margins negatively, compared to historical. If you look at that, combine them with Qumu, Qumu margins are definitely higher than disc publishing, so there is a margin benefit there and the Qumu margins, though, were a little bit less than what we had expected because of the mix of license and maintenance revenue versus appliance. But if you look at where we were last quarter with Qumu margins up around 70%, they weren't quite as high as 70% in the first quarter.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And so within Qumu, you sort of split that revenue stream up between licenses and service; is that correct?

James R. Stewart

Yes, the revenue stream is licensed, new license revenue, maintenance revenue, professional services, maintenance renewals, yes.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And then, so can you help me understand again, how did the revenue mix within Qumu result in lower Qumu margins?

James R. Stewart

We -- it was some deals that we sell with Qumu. We also provide appliances.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay.

Sherman L. Black

And those appliances have a lower margin than the software that we sell in that Qumu bundle.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. Are you guys willing to share what your Qumu consolidated margins were for the quarter?

James R. Stewart

Yes. I mean, we do report those in the 10-Q. Our Qumu margins were right at 60%.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

60%?

Sherman L. Black

Yes.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And then I guess my other question was, you highlighted some of these issues around may be deferred government spending that pressured the disc publishing business. I guess, what gives you confidence that we're not going to see that, absent the big retail order last year, I think you said disc publishing is maybe down 30% or so, what gives you confidence that, that rate of decline won't be as severe the next 3 quarters as it was in Q1? And then, even excluding these restructuring costs, the total P&L expenses seemed fair amount higher than I would have expected; how should we think about that going forward?

James R. Stewart

So if you exclude that retail order, our disc publishing total revenues were down about 10% in the quarter. So again, that's a little bit greater than what we had expected. In our recurring revenues, as we said in the comments, held up, I think, pretty well. In terms of hardware revenues going forward, we do have -- I think we are dealing with an uncertain environment in government. As we've said on prior calls, we've won deals that the funding has been delayed. We think those at some point in the next few quarters will come to be wins for us. But right now, it's really hard to handicap which quarter that they will show up in. And that's one of the main reasons we're confident yet in our total year guidance in terms of revenue. But on a quarterly basis, we're being a little bit more conservative.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Okay. And then from a expense standpoint, even if we exclude those nonrecurring charges, or just the G&A and R&D expenses were just a fair amount higher than I had been expecting, given that, I think, the company started taking some steps to rightsize costs to match its declining disc business. Are we going to see those normalize sooner as than later? How do you view that? A lot higher in Q1 than they were in Q4.

James R. Stewart

Right. What we had, as we mentioned, we had about $500,000 of what I would term, have nonrecurring types of costs. If you exclude those, our expenses were, I would say, pretty flat with where we were a year ago. As I mentioned on the R&D front, they're a little bit higher due to some carryover hiring that we did at the end of last year. I think on the SG&A front, if you exclude those nonrecurring costs, again they were flat, we have taken declines on the disc publishing side, we've reduced expenses there with some of the moves that we've made in 2012 that are going to continue to bear fruit for us. But we also recognize we need to do more and so we're in the planning stages of making that happen, rightsizing those expenses against the current revenue levels that we're seeing.

Operator

Our next question comes from the line of Zee Ryan [ph] with Sabra Capital [ph].

Unknown Analyst

I wanted to drill more on the cross side but not year-over-year, more on a sequential basis. And I know you're talking about there's $500,000 of nonrecurring severance cost in Q1. Wasn't that the case in Q4 last quarter, as well? As I recall $500,000 of severance costs, and that number is [indiscernible].

James R. Stewart

That's correct, Zee [ph].

Unknown Analyst

So help explain the sequential increase in cost, like, what's driving that? I mean, we -- there's supposed to be a decline in the publishing side of the business, offset somewhat by an increase in expanding your presence on the Qumu side of the business. Can you quantify what the drivers are on both sides of the equation there to get to the resulting increase? I mean, I'm looking at, at least like a $700,000 sequentially.

James R. Stewart

Again, I would say it's due to a couple of things. We are seeing reductions on the disc publishing side, again, with the moves that we made in 2012, where we've made some moves to consolidate management, made some reductions in sales and marketing and we've also, for example, consolidated the back office of Qumu now into our total company ERP system. So we are seeing those improvements, but they are being offset by investments that we're making on the Qumu side. As I mentioned, again, in R&D, we've made some investments towards the end of last year, and in sales and marketing we've made some significant investments. And I don't -- and you shouldn't underestimate the amount of additional commissions we're having to pay on the higher-level Qumu revenue year as well. That is also having an impact.

Unknown Analyst

But that, that wouldn't have had -- would that have much of a difference between Q4 and Q1 because it's the same level of sales, right? So shouldn't the commission sequentially been about even?

James R. Stewart

Well, the commissions actually are a little bit higher due to the fact that there were some accelerators due to the strong Q4. But that revenue that was sold in Q4 didn't get recognized as revenue in Q4. So the actual commission rate is a little bit higher on the revenue that we're recognizing here in Q1 versus Q4.

Unknown Analyst

So going forward, how should we be looking at the cost structure? I mean, I noticed, and I'm sure everyone noticed, that you didn't provide guidance for earnings next quarter. What's the reasoning behind that?

James R. Stewart

Well, I think a couple of things. I think there's some uncertainty in terms of the sales mix. I think, to be honest, we were surprised a little bit with the impact of what we saw in disc publishing hardware in the first quarter. And I think, I mentioned we are going to be making some additional cost reductions and the timing of those haven't been exactly nailed yet. And so, I think with the uncertainties around mix and the fact that we are going to be making some additional cost reductions, and there is going to be some costs related to that, we just felt that it wasn't wise to make earnings -- or provide earnings guidance for this quarter.

Unknown Analyst

So for Q2, there's going to be another one-time charge for severance and related activity?

James R. Stewart

We don't know that yet.

Sherman L. Black

We're not making any announcements on that at this time, and we need to get those -- get our plans firmed up on that before we comment on that.

Operator

Our next question comes from the line of Greg McKinley with Dougherty & Company.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Just a quick follow-up. Has there been, in terms of Qumu, have you retained key people and key talent in the organization or has there been any significant personnel losses that you view as a meaningful departure from the company of late?

Sherman L. Black

No.

Operator

[Operator Instructions] And I'm showing no further questions in the queue. At this time, I'd like to turn the conference back to management.

Sherman L. Black

All right, thank you, operator. I appreciate everyone dialing in today, and I appreciate the comments back, and we will be updating you guys in July. Thank you.

Operator

Ladies and gentlemen, this concludes our conference for today. Thank you for your participation, you may now disconnect.

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