Wegener F3Q09 (Qtr End 5/29/09) Earnings Call Transcript

Wegener Corporation (WGNR)

F3Q09 Earnings Call

July 13, 2009 4:30 pm ET

Executives

Robert A. Placek - Chairman of the Board, President, Chief Executive Officer

C. Troy Woodbury Jr. - Chief Financial Officer, Treasurer, Director; CFO, Senior Vice President - Finance of WCI

Ned L. Mountain - President, Chief Operating Officer of WCI, Director

Analysts

Fred Fauss - Shareholder

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q3 2009 Wegener earnings conference call. My name is Ophelia 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. Please proceed.

Robert A. Placek

Good afternoon. I’m Bob Placek, Chairman and CEO of Wegener. Welcome to today’s call. With me for today’s call are Troy Woodbury, our CFO; and Ned Mountain, our COO. Troy will present the financial results for the third quarter of fiscal 2009. Following Troy’s discussion, I will comment on our business and Ned Mountain will provide an overview of key new product and customer developments. Following the comments, we will answer questions from participants.

Troy will now comment on our third quarter of fiscal 2009 financial results.

C. Troy Woodbury Jr.

Thank you, Bob. This morning we announced the operating results for our third 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 upon the company’s current expectations and assumptions, which are subject to a number of risks and uncertainties, many of which are beyond the company’s ability to control.

Discussion of these and other risks and uncertainties are provided in detail in the company’s periodic filings with the SEC, including the company’s Annual Report on Form 10-K and quarterly reports on form 10-Q. Since these statements involve risks and uncertainties and are subject to change at any time, the company’s actual results could differ materially from expected results.

Revenues for the three months ended May 29, 2009 decreased $1.4 million, or 32.9%, to $2.9 million as compared to $4.4 million for the three months ended May 30, 2008. Revenues for the nine months ended May 29th decreased $6.3 million, or 39.2%, to $9.8 million, as compared to $16.1 million for the nine months ended May 30, 2008.

Operating results for the three and nine-month periods ended May 29th were a net loss of $883,000, or $0.07 per share, and a net loss of $2.1 million, or $0.16 per share respectively, compared to a net loss of $775,000, or $0.06 per share, and a net loss of $489,000, or $0.04 per share for the same periods ended May 30, 2008.

The three months and nine months ended May 29th included severance expense of $24,000 and $212,000 related to reductions in personnel. During the first, second, and third quarters of fiscal 2009, bookings were approximately $1.3 million, $1.7 million, and $1.1 million respectively. Our fiscal 2009 bookings to date, as well as our fiscal 2008 bookings, particularly during the second half of fiscal 2008, were well below our expectations and internal forecast, primarily as a result of customer delays and purchasing decisions, deferral of project expenditures, foreign exchange rate fluctuations, particularly with the Mexican Peso, and general adverse economic and credit conditions. These low bookings had a direct impact on the revenues for the first nine months of fiscal 2009 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. This backlog is approximately $5 million at May 29, 2009 compared to $8.5 million at August 29, 2008 and $8.2 million at May 30, 2008. The total multi-year backlog at May 29, 2009 was approximately $8.2 million compared to $13.3 million at August 29, 2008 and $13.6 million at May 30, 2008.

The company’s gross margin percentages were 29.8% and 31.1% for the three and nine months ended May 29th compared to 36.4% and 38.6% for the same periods ended May 30, 2008. Gross margin dollars decreased $720,000, or 45%, and $3.2 million, or 51% for the three and nine-month periods ended May 29th respectively, compared to the same periods ended May 30, 2008. The decrease is in margin percentages and dollars for the three and nine months ended May 29th were mainly due to the decrease in revenues which resulted in higher unit fixed costs. Profit margins in the three and nine month periods of fiscal 2009 included capitalized software amortization expense of $237,000 and $738,000 respectively, compared to $310,000 and $930,000 for the same periods in fiscal 2008.

Inventory reserve charges were $100,000 and $330,000 in the three and nine month periods of fiscal 2009 respectively, compared to none in the same periods of 2008. Severance costs included in the three and nine-month periods ended May 29th were $71,000 and $82,000 respectively.

Profit margins in the nine-month period of fiscal 2009 were favorably impacted by a reversal of an accrued warranty liability of $130,000 for previously estimated warranty provisions that were no longer required. Profit margins in the three and nine-month periods of fiscal 2008 included a reversal of an accrued warranty liability of $210,000 for previously estimated warranty provisions that were no longer required. Warranty provision expenses were $50,000 in the three and nine-month periods of fiscal 2008 compared to none in the same periods in fiscal 2009.

Selling, general, and administrative expenses decreased $257,000, or 17.4%, to $1.2 million for the three months ended May 29th, compared to $1.5 million for the same period of fiscal 2008. For the nine months ended May 29th, SG&A expenses decreased $730,000, or 17.6% to $3.4 million compared to $4.1 million for the same period of fiscal 2008. The decrease in SG&A expenses for the three months ended May 29th was mainly due to decreases in salaries, sales and marketing expenses, general overhead costs, and in-house commissioned expenses. The salary expense decreases in the three and nine month periods were offset by increased severance cost of $49,000 and $62,000. As a percentage of revenues, SG&A expenses were 41.3% and 34.9% for the three and nine month periods ended May 29th, compared to 33.6% and 25.8% 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 $760,000, or 25.8% of revenues, and $2.4 million, or 24.3% of revenues for the three and nine-month periods ended May 29th, compared to $1.2 million or 27% of revenues and $3.3 million, or 20.6% of revenues for the same periods of fiscal 2008. The decreases in expenditures in the three and nine month periods ended May 29th compared to the same periods of fiscal 2008 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. The salary expense decreases in the three and nine month periods were offset by increased severance cost of $68,000.

Capitalized software development costs amounted to $246,000 and $785,000 for the third quarter and first nine months of fiscal 2009, as compares to $325,000 and 869 for the same periods of fiscal 2008. The decreases in capitalized software costs were related to completed projects and reductions in headcount and consulting costs.

R&D expenses excluding capitalized software expenditures were $514,000, or 17.4% of revenues and $1.6 million, or 16.3% of revenues for the three and nine months ended May 29, 2009, compared to $859,000 or 19.6% of revenues and $2.4 million or 15.2% of revenues for the same periods of fiscal 2008. The decreases in expenses in the three and nine month periods of fiscal 2009 compared to the same periods in fiscal 2008 were due to the decreases in salaries and consulting costs discussed above.

Significant fiscal 2009 shippable bookings are currently required to meet our financial projections for the fourth quarter of fiscal 2009 and fiscal 2010. 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 acquired borrowings during the remainder of fiscal 2009 and into fiscal 2010.

At May 29th, our net inventory balances were $5.3 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 in 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 first nine months of fiscal 2009, we made reductions in headcount to bring the current number of employees to 63 and reduced engineering, consulting, and other overhead expenses. Beginning in January 2009, we reduced paid working hours company wide by approximately 10%.

Our low level of revenues to date has been insufficient to generate positive cash flow from operations. In addition, the resulting low levels of accounts receivable, which serve as collateral under our line of credit, has limited our level of borrowings during the second and third quarters and subsequent to May 29, 2009. As a result, to stay within our borrowing availability limits, we negotiated extended payment terms with our two offshore vendors and have been extending other vendors beyond normal payment terms.

Until such vendors are paid within normal payment terms, no assurances can be given that required services and materials needed to support operations will continue to be provided. Any interruption of services or materials would likely have an adverse impact on our operations.

During the third quarter, we retained a second 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 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 the 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 additional credit facilities -- or obtain additional credit facilities during fiscal 2009 to continue as a going concern and to execute our business plan. Although we are in discussions with potential financing sources, there’s no assurance that such financing will be available or if available that we would be able to complete financing on satisfactory terms. Our ability to continue as a going concern would depend on our ability to obtain additional capital or financing in the very near-term and subsequently to increase our bookings and revenues in the longer term to obtain profitable operations.

At May 29, 2009, our primary source of liquidity was a $5 million bank loan facility, which is subject to availability advanced formulas based on eligible accounts receivable, import letter of credit commitment balances and inventories. During the third quarter of fiscal 2009, the bank informally capped the loan facility at $4 million. The loan facility consists of a term loan and a revolving line of credit with a combined borrowing limit of $5 million, bearing interest at the bank’s prime rate.

The bank retained the right to adjust the interest rate subject to the financial performance of the company. The loan facility matures on September 30, 2009 or upon demand and requires an annual facility fee of 2% of the maximum credit limit. During the second quarter of fiscal 2009, the bank notified Wegener of its intent not to renew the loan facility upon maturity. Although we are in discussions with potential financing sources, there is no assurance that such financing will be available or if available, that we will be able to complete financing on satisfactory terms.

During the first nine months of fiscal 2009, our line of credit net outstanding borrowings increased $1,452,000 to $3.3 million at May 29, 2009 from $1.9 million at August 29, 2008. During the first nine months of fiscal 2009, the average daily balance outstanding was $3.4 million and the highest outstanding balance was $4.1 million. At May 29, 2009 approximately $197,000 was available to borrow under the advanced formulas. At June 26, 2009, approximately $185,000 was available to borrow under the advanced formulas.

At May 29, 2009 we had land and buildings with a cost of $4.5 million. Although land and buildings are subject to a lien under the loan facility, they are not currently used in the existing loan facility’s availability advanced formulas and have no mortgage balanced outstanding. We are pursuing ways to utilize these assets to support additional overall borrowing capacities.

During the first nine months of fiscal 2009, operating activities used $642,000 of cash. Net loss adjusted for expense provisions and depreciation and amortization used $754,000 of cash.

Changes in accounts receivable and customer deposit balances used $209,000 of cash while changes in accounts payable and accrued expenses, inventories, deferred revenue, and other assets provided $321,000 of cash.

Cash used by investing activities was $804,000, which consisted of capitalized software additions of $785,000, legal fees related to the filing of applications for various patents and trademarks of $17,000, and equipment additions of $2,000.

Financing activities provided $1.4 million of cash from net line of credit borrowings.

Now for my outlook comments -- significant bookings are required to obtain the revenue forecast for the fourth quarter this year and we do expect an operating loss for this fourth quarter. We 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.

Our ability to continue as a going concern will depend upon 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.

This concludes my comments.

Robert A. Placek

Thank you, Troy. Our third quarter revenues were down from prior years but were in line with our expectations for the quarter. Based on the prevailing economic and market conditions, we implemented cost reductions in the third quarter to better align our cost structure with currently achievable revenue level. The cost reductions involved a staff reduction of approximately 20%, combined with other long-term operational changes to reduce quarterly break-even levels. However, due to ongoing low revenue levels, we expect an operating loss in the fourth quarter of fiscal 2009.

The strategic alternatives review process continues to be active and we are committed to giving our shareholders and other stakeholders an update on the process as soon as there is firm information to share.

We continue to see strong interest in our file-based broadcasting and radio network solutions. During the third quarter, we sold a new file-based broadcasting network, adding a new Compel user to our client list. This network utilizes our iPump 562 and Compel products to distribute video files to broadcasters for insertion on their programming. We also sold over $0.5 million into the radio broadcasting market. These sales helped expand the reach of Wegener's network solutions on a worldwide basis.

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

Ned L. Mountain

Thank you, Bob. During the third quarter of fiscal 2009, Wegener launched several new products. Compelconnect.com and the iPump 525 IP media player provide a new scalable solution for digital signage, corporate communications, and subscription based services.

Compelconnect.com is a web-based version of our next generation Wegener network control system and is offered as a software-as-a-service. This Compel-based product is particularly attractive when video services require customization on a site-by-site or regional basis.

Compelconnect.com represents a new business opportunity for Wegener. It provides a new business model where customers can pay a recurring monthly fee for bandwidth to distribute their video and audio products from two remote locations rather than making an up-front infrastructure capital investment.

We expect Compelconnect.com to resonate especially well with small and medium-sized project video networks.

The new iPump 525 media player extends our iPump file-based broadcasting product lines to networks with only terrestrial IP connectivity. Many digital signage and file-based networks fall into this category. The iPump 525 can be used in conjunction with Compelconnect.com or with any IP or Internet delivery capable version of our Compel network control system.

With the iPump 525, network operators can create high definition video playback with localized graphing insertions to integrated targeted messaging relevant to a particular location.

We also released two optional features for our file-based radio broadcasting solution, micro-casting and show shifting. These two new features are tools that greatly improve our radio network’s ability to localize the broadcast, all from a central location.

Micro-casting allows large radio broadcasters to generate a unique play-out schedule for an affiliate, all through automation as completely controlled [to minute-work] operation center and requires no human interactions to local affiliate sites.

Show-shifting provides automated tools for easily controlling this play-out timing and syndicated programs to different time zones as scheduled.

In summary, we continue to see opportunities with our file-based broadcasting solutions in all of the markets that we serve. Having a service-based model with compelconnect.com will expand our addressable market while providing targeted media and messaging network.

Bob, this concludes my remarks.

Robert A. Placek

Thank you, Ned. That concludes our presentation and we will now take questions from participants.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Fred [Fauss]. Please proceed.

Fred Fauss - Shareholder

Good afternoon, gentlemen. This is a shareholder in the company, Fred Fauss. Basically, my question is with -- it looks like there is no good news to report in this current third quarter report, so my question is basically what is the plan to keep Wegener afloat as a going business or to salvage some value to the investors in the company, the shareholders?

C. Troy Woodbury Jr.

I’ll start off on that question. Basically, as we talked about in our prepared comments, we have a financial advisor that we are working with that is assisting us in obtaining a new line of credit. Our approach on this is several fold. One of the things we want to do is monetize our real estate assets, both this building and we have an adjacent parcel of land. We had a contract on that land. We got it last -- in the fourth quarter of last year. That contract did not -- we were not able to conclude, sell the property. The buyer backed out of that contract within the terms of the contract but we are still very interested in selling that parcel of land and also are working hard to obtain a mortgage on this building. None of our real estate has any mortgage balances outstanding.

The other thing we’re doing is working with other asset-based providers to obtain a new line of credit that will replace Banc of America. Our line of credit with Banc of America expires on September 30th of 2009, so we’re working on that and there’s several opportunities there. And as I’ve stated earlier, there’s no guarantees in this but we’ve got very competent people working with us and we are dealing with very good firms on a obtaining additional financing.

Now, whether we can do that, whether the terms will end up being satisfactory or not, those are other questions. I will add, and Bob has commented in his, that the strategic alternatives process is still very active and when there’s firm data to report, we will be reporting that to the shareholders. But that process is very much ongoing.

We are working hard on bookings. There’s a lot of activity, a lot of push in the sales department and those are the different types of things that we have to do and are doing to remain as a going concern.

Fred Fauss - Shareholder

It sounds like the first part of your answer was essentially dwindling away the remaining assets of the company, such as the real estate or mortgaging the buildings or whatever and I don’t see that giving any long-term value to anybody. I mean --

C. Troy Woodbury Jr.

Well, it only provides long-term value if we are able to book orders and generate revenue and you are correct in that part of the statement. If you take it a piece at a time, number one, selling the parcel of land is not terribly attractive. That market is very, very, very quiet as you well can imagine. There’s just no real buyers out there other than people that would want to buy the land in inventory and we’d have to sell it at a price that’s not really attractive to us.

Obtaining a mortgage on the building is not necessarily a bad move. It’s an asset that really has not been monetized. I think it’s a better transaction than a sale leaseback. The sale leaseback market is really, really, really tight and at any point at this time.

So I understand your point and your point is we’ve got to book orders and we understand that.

Fred Fauss - Shareholder

Okay. That’s the only question I had. Thank you.

C. Troy Woodbury Jr.

Well, it’s good to talk to you.

Fred Fauss - Shareholder

Thank you.

Operator

(Operator Instructions) There are currently no additional questions in queue. I would now like to turn the call over for closing remarks.

Robert A. Placek

Okay, well, that concludes our conference call. We thank everyone for participating and look forward to joining our next call. Thank you.

Operator

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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