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GlobalSCAPE, Inc. (NYSEMKT:GSB)

Q1 2013 Earnings Conference Call

May 14, 2013 16:30 ET

Executives

Craig Robinson - President and Chief Executive Officer

Jim Albrecht - Chief Financial Officer

Analysts

Tom McDonald - Private Investor

Greg Newman - Newman Agency

Operator

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to your host, Mr. Jim Albrecht. Sir, you may begin.

Jim Albrecht

Thank you, operator. Good afternoon and thank you for joining our earnings call today. With me this afternoon is Craig Robinson, GlobalSCAPE’s President and Chief Executive Officer.

Before we begin, just a reminder that today’s call including the question-and-answer session might include forward-looking statements regarding expected revenue, earnings per share, future plans, opportunities, and expectations of the company. These estimates and plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on the call. These risks are detailed in our latest 10-K filed with the Securities and Exchange Commission on March 28, 2013, and in other statements made by the company. The statements made during this conference call are based upon information known to GlobalSCAPE as of the date and time of this call. GlobalSCAPE assumes no obligation to update the information we present in this call. With those Safe Harbor statements presented, I will move to summarizing our latest financial results.

We are pleased to report Q1 ‘13 up $5.9 million, which is a 9% increase over Q1 ‘12 revenue of $5.4 million. This Q1 ‘13 revenue was the highest revenue for a first quarter in GlobalSCAPE’s history. We believe our preferred revenue which results primarily from advanced bookings of maintenance and support services is a key indicator of our potential future revenue trends. Our deferred revenue at March 31, 2013 remained at the $9.8 million level we also reported at December 31, 2012, but more notably increased $2 million or 26% from the $7.8 million balance a year ago at March 31, 2012.

As you can see, our revenue profile continues its upward momentum. This growth is a result of the competitive strength of our EFT product lines and a continuing high level of customer satisfaction with the services we provide under maintenance and support contracts that is yielding higher renewal rates for those services. Our net income for Q1, ‘13 was $517,000 or $0.03 per share, which is a notable improvement compared to our net loss of $253,000 or $0.01 per share in Q1 ‘12. This Q1 ‘13 net income also compares favorably to our Q4 ‘12 results which were breakeven after excluding the infrequent item that occurred in that quarter, which we discussed with you during our previous visit.

Our adjusted EBITDA for Q1 ‘13 was $1.2 million compared to $929,000 for Q4 ‘12 and $180,000 for Q1 ‘12. Our cash balance at March 21, 2013 including our investment in a certificate of deposit pledged as collateral for one of our notes payable brought $11.1 million, which is substantially unchanged from our balance at December 31, 2012. That result was after the effects of a $500,000 payment to the former owners of TappIn to complete a milestone payment to them related to the release of our TappIn Professional Edition last year. Excluding that non-recurring payment, our operating, investing, and financing activities yielded positive cash flow of $477,000 for Q1 ‘13. We are pleased with these financial results and the continued strength of our financial position. They provide a solid foundation upon which to build for the remainder of the year.

I will now turn the call over to Craig Robinson.

Craig Robinson

Thank you, Jim. Good afternoon everyone and thank you for joining the call today. On our last earnings call in March I’ve stated that we look forward to sharing our progress for delivering significantly more to the bottom line, while continuing to grow the business. As Jim mentioned we had record revenue for a first quarter. I also want to point out that we had new record net income for the first quarter and as well delivering the largest earnings for that period in the last seven years. The first quarter gets us off to a great start for the year that we will continue to focus on profitable growth during the remainder of 2013. At this point I want to give you my great perspective on our operational performance in the first quarter and provide a few new examples of how customers are using our solutions worldwide.

Our EFT solution continues to lead the way in the first quarter growing by 8% and accounting for just over three quarters of our total revenue. We released the latest version of the EFT platform in the first quarter and two weeks ago announced that we are partnering with Hortonworks to provide file transfer solutions to customers embarking on big data and Hadoop projects.

Our professional services also grew during the quarter increasing by more than 20% compared to a year ago. CuteFTP revenue also increased by more than 20% powered by our release of Version 9 late in the fourth quarter of last year. These increases were offset somewhat by 10% decline in revenue from our Wide Area File Services, or WAFS product lines. We are continuing development of the WAFS solution, so that it functions effectively and efficiently in additional environments, which will allow us to broaden its market opportunities. We believe that initiative combined with our ongoing commitment to customer satisfaction and support could yield increased WAFS revenue in the future.

Overall, M&S revenue continued its trend over recent years of becoming an increasing percentage of our total revenue, now accounting for more than 55% of total revenues, up from 49% a year ago. On M&S revenue growth, that’s increasing percentage of our total revenue are primarily due to first, our recent emphasis on maximizing revenues from M&S contract renewals, and second, the growing installed base of our software products in the marketplace. As the installed base growth creates a compounding effect for M&S renewal, because the cumulative number of licensed software installations sold over multiple years yields M&S renewals in any single year that predictably exceeds the number of new software licenses sold in a single year. We expect this compounding effect to continue to grow and view this M&S revenue increase as a positive indicator of our customer’s ongoing satisfaction with our products purchased in past years. Customer satisfaction of end users and partners alike is an area of focus for us.

At this point I’d like to share some partner and end user updates and examples. The first example is Seagate. Our TappIn solution has been integrated into the Seagate BlackArmor Network Attached Storage or NAS device at the Seagate Central sharing access, storage and backup product. We earn a per device royalty with each unit Seagate ships with the royalty factoring into revenue over predetermined support period. The Seagate OEM relationship also gives us the opportunity to up-sell Seagate users to the TappIn Pro edition and to reach other potential customers as Seagate users share content being adapted with others. Seagate began shipping Seagate Central in the first quarter. So, we are in the early stages of the revenue buildup from this relationship, but we appreciate the confidence of Seagate and other OEMs in the TappIn solution.

On the end user side, Enbridge Gas Distribution has worked with us to publish a case study on their positive experience with EFT and Mail Express. Enbridge owns and operates Canada’s largest gas distribution network. They exchange files between their internal systems and various third-party vendors involved in billing and payment collection. Manual process is inadequate, unreliable, and labor incentive. Therefore, Enbridge began looking for secured FTP solution to automate these files exchanges. After evaluating multiple alternatives, Enbridge selected GlobalSCAPE’s EFT enterprise solution is a bit of a mature managed file transfer system that integrates easily with enterprise back-end system and supports customization and automation. Having developed the strong relationship with GlobalSCAPE to evolve its critical file transfer process, Enbridge turned yet again to us when it needed to solve a problem with materially transferring large e-mail attachments. The company’s in-house system imposes the 35 megabyte limit on e-mail attachments. Generous permitting e-mail system is still a problem for large files. To send CAD files or video presentation Enbridge employees had to write data on the CDs or USB drives and then ship or courier them to be recipient. Our Mail Express solution now enables Enbridge users to send large files up to 25 gigabyte within the standard Microsoft Outlook e-mail client without requiring any special end user training.

The senior IT risk management analyst with Enbridge stated and I quote “once we showed people how Mail Express worked within Outlook, we had people lining up to pilot it, engineering teams want the ability to transfer large CAD files while people in legal and HR want the extra security for transferring confidential information.”

As another brief example, Denmark based FDC, the Scandinavia’s major supplier of IT solutions for the insurance and pension sector and supports the region’s leading insurance providers. These providers must manage daily file exchanges with partners and customers because these files often include financial data, privacy and security are critical. And we believe that customers and partners using different file transfer protocols, FDC’s developers that write secured FTP processes for each customer implementation. FDC setup to find a better solution for handling secured file transfers as part of an insurance and pension-related solution platform.

After evaluating several secured FTP solutions, FDC chose our EFT platform. Specifically, EFT addressed the company’s strict security requirements, which supports the multiple protocols, encryption at risk, and the transit, and audit and reporting. By implementing automated workflows using EFT, FDC reports that they have seen improvement in security, resiliency, and agility of their file transfers. These examples show how we grow with existing partners and end users to work with new customers who address the revolving needs for secured file transfers.

Our focus on customer satisfaction and extending prior customer relationships supports our continued drive towards growing the business and delivering significantly more to the bottom line as we did in the first quarter. I am very pleased with our first quarter earnings and fiscal 2012 start.

At this point, I’ll turn the call back over to Jim.

Jim Albrecht

Thank you, Craig. We filed our form 10-Q for the first quarter shortly before this call began. That report will provide you a comprehensive look at the financial results we just reviewed as well as a discussion of the various elements of our business. We are now pleased to take your questions, so operator please open the call for questions-and-answers.

Question-and-Answer Session

Operator

Thank you sir. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) And our first question is from the line of Tom McDonald, Private Investor. Please go ahead.

Tom McDonald - Private Investor

Yes, hi, good afternoon. Craig and Jim, congratulations on a profitable quarter.

Jim Albrecht

Thank you, Tom.

Tom McDonald - Private Investor

I want to know, can you provide some more information around the royalties from Seagate. And I guess specifically one of the questions that I have is I guess on the BlackArmor product and potentially the Seagate Central, I guess there is a initial license term for the end user, I think it’s three years. Can you kind of talk through at the end of the three years what that revenue might look like?

Craig Robinson

Yeah. Tom thanks. This is Craig. First of all, thanks for the question. The BlackArmor we sold is one, two and four day units and the pricing varies. As I think you likely know there are five users on a one and two day and there are 10 users on a four day. So, with that framing thought, we actually can’t really disclose the terms for a number of reasons, and these pertain both to Seagate and to broader competitive reasons also.

Tom McDonald - Private Investor

Okay. And just maybe just a follow-up there, is it fair to say that you would anticipate more revenue from those relationships going three years out?

Craig Robinson

Well, I think the answer to that is yes. I think that as users receive the PV product, like it, use it, share using it I think that we would likely see growth cost.

Tom McDonald - Private Investor

Okay, thank you.

Craig Robinson

Sure. You are welcome.

Operator

(Operator Instructions) And our next question comes from the line of Greg Newman from Newman Agency. Please go ahead.

Greg Newman - Newman Agency

Hi congratulations also on a profitable quarter.

Craig Robinson

Thank you, Greg.

Greg Newman - Newman Agency

You’re welcome. I had couple of questions. One is on marketing in your plan to proceed into other areas besides storage, you had stated before such as from companies, internet service providers, etcetera, etcetera, could you speak what we might look for next or give us some color around that and a little bit for us on that?

Craig Robinson

Sure, Greg. So, we certainly want to cast a rather broad net, I think but if you look at our business, if you look at file transfer that is you have laid out here, there are certainly many, many used before that. In terms of particular market, I am really not a liberty tax to allow where we are targeting, but I would say your list of the good one.

Greg Newman - Newman Agency

Okay, thank you. And let’s see would it be safe to assume that I would be going possibly through partners, a lot of the partners that you have not only earned storage, but they are in some of the other markets that you have already identified? Are there open doors that way where you can at least discuss that or bring that up in meetings to further reject what’s happening?

Craig Robinson

Sure. Well, I think clearly partners help us scale, and I think you know Greg, we have actually five multiple partners, and so I think you can definitely expect us to focus there also.

Greg Newman - Newman Agency

Alright. And then I got a board member that ask Tom you said can you update us on the appShield, is that gone or is there a research and development being spent to continue there, or the development partnership, for example, like what you said any of ours be a possible option you might be looking into….

Jim Albrecht

Greg, its Jim I will provide you. Thanks for that question.

Greg Newman - Newman Agency

Thanks Jim.

Jim Albrecht

We certainly as you know we own the rights to the appShield code. And we are constantly looking for opportunities to continue development of that product from where it left off at the time we don’t have any active efforts underway, but we continue to look in the marketplace for people who might be interested in assisting us with that.

Greg Newman - Newman Agency

Okay, thank you very much.

Operator

And our next question is a follow-up from the line of Tom McDonald, a Private Investor. Please go ahead.

Tom McDonald - Private Investor

Hi, thanks again for the opportunity for the question. Can you guys give us an idea how many TappIn licenses are now issued in outstanding?

Craig Robinson

We can’t quantify that for you. We can definitely qualify it. So, the cap and license growth start again, Q1 is healthy. So, it’s growing.

Tom McDonald - Private Investors

I just had noted at some point I am just thinking that might be even if we don’t know kind of that number now might be a nice measurement success kind of see how many licenses are out there issued in outstanding as well as ultimately the revenue that’s generated from those licenses?

Jim Albrecht

Tom, it’s Jim, I’ll provide here. Thanks for that observation. I think that’s a good point and I have made a note to that effect and certainly we’ll take that in consideration on our future calls and thanks for that suggestion.

Tom McDonald - Private Investors

Thank you.

Operator

And Mr. Albrecht, there are no further questions at this time.

Jim Albrecht

We want to thank everybody for joining us today. We are pleased with the success we have enjoyed in this first quarter look forward to continuing that trend through the year and visiting with you at the end of our second quarter. Everybody have a great afternoon. Thank you.

Operator

Ladies and gentlemen, this concludes the conference for today. We thank you for your participation. You may now disconnect.

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