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Executives

James Carbonara - Hayden IR

Ivan Braiker - Chief Executive Officer

Tom Virgin - Chief Financial Officer

Doug Stovall - Chief Operating Officer

Analysts

Darren Aftahi - Northland Securities

Gerard Hallaren - Janco

Augme Technologies, Inc. (AUGT.OB) F1Q 2014 Earnings Call July 10, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Augme Technologies' Fiscal 2014 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 opened for question. (Operator Instructions)

I would now like to turn the conference over to James Carbonara with Hayden IR. Please go ahead.

James Carbonara

Thank you. Good afternoon, and thank you all for joining us in today's conference call to discuss Augme's financial results for the first quarter ended May 31, 2013. By now, all of you should have had the opportunity to review the press release discussing the results, but if you have not, please call my office, Hayden IR at 646-419-4300 and we will immediately send it to you.

On the call with me today is Mr. Ivan Braiker, Chief Executive Officer of Augme Technologies and Hipcricket; Mr. Tom Virgin, Chief Financial Officer; and Mr. Doug Stovall, Chief Operating Officer. Before I ask our host, Mr. Braiker to discuss the particulars of this afternoon's news, let me take a moment to read the forward-looking statement.

Please note that information presented and discussed today includes forward-looking statements, which were made under the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. All forward-looking statements involve risks and uncertainties and contingencies, many of which are beyond our control, and may cause actual results, performance, or achievements to differ materially from anticipated results, performance or achievements. Risks and uncertainties that could cause our actual results to differ from those expressed or implied by forward-looking statements including those set forth in the risk factors section of the Annual Report on the Form 10-K and in other reports we filed with the SEC.

With that out of the way, let me turn the discussion over to Ivan Braiker, Chief Executive Officer of Augme Technologies and Hipcricket. Ivan, please proceed.

Ivan Braiker

Thank you, James and good afternoon everyone. Thank you for joining Augme's quarterly conference call to discuss the financial results for the first quarter ending May 31, 2013. I'm going to open my remarks by summarizing our key performance metrics in our fiscal first quarter. And then I will spend some time reiterating strategic objective and providing an update on our progress.

Following the overview, I will be turning it over to Tom Virgin, our CFO to review our financials and to talk about the progress we are making toward achieving cash flow profitability. We will conclude by opening it up for Q&A. Please note that anticipation in the company's formal name change we will be using Hipcricket throughout today's call.

Firstly, I'd like to welcome our new Chief Operating Officer, Doug Stovall to the call. Doug joined the company over three years ago to lead our sales team where excelled and consequently was promoted to EVP Sales and Services in July 2012. As Doug joined Hipcricket, our company grew revenue 218% and established an industry leading 250,000 campaigns --. Doug was a driving force behind Hipcricket's success over the last three years. Doug will participate in the Q&A at the end of the call.

In our first quarter of fiscal 2014 ending May 31, 2013, we grew sales 15.5% to $5.9 million compared to $5.1 million for the first quarter of last year. We also made significant progress during the quarter at solidifying management, improving operational efficiency and securing new customer and agency relationship. We have increased our sales force by three professionals at the beginning of the fiscal year. This is part of our plan to accelerate revenue growth in the second half of this year.

In the first quarter, we strengthened our balance sheet with a $5 million line of credit and we executed decisions related to previously stated direction to minimize our future spending on IP while protecting the value of our IP asset. Considering our increased initiative and momentum in sales, enhanced cost control and additional capital available as we head towards breakeven, we have laid a solid foundation to accelerate growth in the second quarter. As well as the second half of the fiscal year, we believe this solid foundation along with continuous execution against our key objective will accelerate our growth.

While the first quarter results were solid, our revenue was not as strong as we have forecasted due primarily to slower than expected growth in the mobile marketing industry. While the industry as a whole experienced the slow down, Hipcricket held its own and is maintaining positive revenue growth with respect to profitability, our revenue shortfall and some legacy cost associated with our restructuring resulted in a larger operating loss in plan, despite these facts, we have continued to increase our revenue and reduce our loss from operation compared to the same quarter last year.

We continue to actively pursue our key objective for the year and confident that we are making sound progress towards those goals. Our key objectives for the year are to drive revenue by adoption of our industry leading mobile engagement platform and to achieve operating cash flow profitability. We are growing revenue by one, hiring more seasoned sales people, two, acquiring new customers and three, selling more products and services to our existing customers.

On the last call, I stated that our goal is to hire 10 new sales professionals this fiscal year. Since the beginning of the year, we have added three sellers to our sales force and have five positions currently open. These hires will enable us to further capitalize on the interest in mobile engagement and equally important, build their knowledge as mobile sales executives who can help our clients engage with the customers and help us drive revenue for the second half of the year.

One of our new hires was Michael Weaver. Michael was hired last month as Vice President of Sales and Strategy focusing on mobile advertising, to capitalize on the large demand and opportunity in this area. As an industry leader and innovator for more than a decade, Michael has helped shape both desktop and digital advertising as an early member of Bluestreak and founder of Third Screen Media. He was also a key player in driving advertising revenue at other companies such as Microsoft, Crisp, and Phluant Mobile. His proven expertise in desktop and mobile advertising and ability to anticipate and leverage business trends will be instrumental in guiding Hipcricket's product strategy and driving revenue growth.

In addition to hiring sales professionals, we are very focused on acquiring new customers and building new partner relationships. During Q1 about a third of our bookings came from new customers. During this period, we added a multibillion dollar consumer package goods client. This new CPG client (partnered) with us to enable mobile advertising. We are also increasing the work we are doing with leading advertising agencies adding six new advertising agencies this quarter as clients. Advertising agencies are important relationships for us because they offer us the opportunity for exposure to multiple clients and brands.

We are also focused on introducing and selling more products and services to existing customers. Hipcricket, we believe – at Hipcricket we believe that providing one single platform that offers mobile marketing, advertising and analytics together is the key to future success in mobile for brands and agencies. Only with a single platform can brands and agencies manage, meter and optimize all forms of mobile engagement in real-time in one unified view.

Hipcricket's goal is to provide a holistic view into all parts of the mobile ecosystem. No longer requiring brands and agencies to partner with multiple mobile partners and constantly interpret the variety of data sets, instead by providing them all in one place from a single global dashboard in real-time, it enables clients to be flexible, to make dynamic data driven decisions and then ensure their campaign success.

We achieve this by actively cross-selling our products and services and focusing on customer retention. One of our largest consumer package goods client is one recent example of this cross-selling. This client had traditionally been a strong mobile marketing client board. In Q1, they ran their first mobile advertising campaign. We believe using both side of the platform is the feature of mobile engagement and are introducing the full capabilities of our platform to an entire installation base.

Over the last 12 months, approximately 50 of our clients expanded their use of the AD LIFE platform from one to multiple products, of these clients, four of them are Fortune 100 brands. We won these contracts because of the capabilities of our AD LIFE platform and our experience in the suite of services that we offer. A large percentage of our revenue come through repeat sales for this client base which is why growing these installations can have a substantial impact on the top-line growth.

We are also concentrating on increasing revenue per customer. I'd like to highlight that the average annual revenue per customer increased 49% to approximately $101,000 during the fiscal first quarter of 2014, up from $68,000 in the same period last year. This was achieved by growing the number of products adopted by existing customers expanding the number of campaigns run throughout the year by existing customers and increasing the number of brands we are working with for customers.

And lastly in fiscal 2014, we are focused on enhancing our AD LIFE platform to support (driven) consumer insight and higher ROI for our client. Our initial third party data integration is now complete and ready for full scale deployment. This release is adding new capabilities to the AD LIFE platform allowing brands and agencies to better profile and segment consumers. This is part of our mobile fingerprint, the strategy which combines client, organic and third party data to recognize and respond to consumers across various interaction mediums in a highly personalized manner.

We also recently released AD LIFE SiteBuilder version 5.5, part of the AD LIFE platform SiteBuilder offers brands and agencies a robust set of easy-to-use tool to build mobile site. These new features allow for rapid creation and deployment of mobile sites with simple drag and drop modules increasing ROI.

Hipcricket is also about to release a new AD SERVE template enabling brands and agencies to unleash their creative power to enhance the mobile advertising experience on smartphones because gamification is a growing trend among our clients, we recently started delivering exclusive in game sponsorship packages to brands and agencies throughout relevant popular mobile games.

Our endeavor towards expanding our product base further amplified by our most recent hiring of Dave Hostetter, Senior Vice President of Engineering and Tony Kippen, Vice President of Analytics. The collection analysis and application of data to enhance the relevance in ROI of mobile engagement is the single biggest value-add in the mobile ecosystem both today and in the foreseeable future.

Hiring proven technology executives of the caliber of David and Tony, who have decades of innovation at the nexus of technology and applied data to illustrate the strength of our position in the market and our absolute commitment to providing our clients with mobile engagement solutions which fully capture the value of each and every consumer mobile engagement. We are well positioned to accelerate growth this year in a very promising market.

During this quarter, we secured new clients increased revenue per customer, maintained our high retention rate and invested in our new advertising vertical. We have launched new products, enhanced our technology expanded our engineering team added more sales personnel and also bolstered RFP production. We have set a strong ground work in the quarter and are excited with what lies ahead. As a result, we are reiterating our guidance towards 30% to 35% increase in mobile revenue for fiscal 2014 compared with fiscal 2013.

At this point, I'd like to turn the call over to our CFO, Tom Virgin. He will comment on progress made to our financial objective as well as results for the quarter. Tom?

Tom Virgin

Thanks, Ivan. Good afternoon everyone.

In our pursuit of reaching operational cash flow breakeven, we are increasing sales as Ivan highlighted while rigorously managing expenses. We continue to focus on operating efficiencies, including headcounts. Since Ivan became CEO on March 1, we have reduced non-core headcount by 24, primarily in G&A including the previously announced divestiture of our patent factory. The annual savings from these cuts is over $2.5 million. Additionally, we are pursuing further operating cost cuts such as sub-leasing unused available space.

With that said, we will be making strategic hires over the next 12 months, particularly to build out our sales team while we run a lean operation. Our stated direction has been to minimize our future spending on IP while protecting the value of our IP assets. Consistent with this plan, during the quarter we divested our Tucson division, which was primarily involved with the development and monetization of our IP portfolio. Today, we have settled a majority of our patent litigation cases to reduce our ongoing legal cost, through these settlements we have entered into licensing agreements with LucidMedia, Gannett, Velti, Pandora and AOL.

We believe there is merit to continuing to pursue the Yahoo case in order to protect the value of our IP. In this case, we have filed two appeals before the U.S. Federal Circuit Court with respect to certain patent judgment both consolidated appeals remain pending before the Federal Circuit.

We are also being selective in our spending on new patents. We are investing in new patents only to the extent that they protect the value of our IP. We're also working to find a strategic partner to monetize our patents they are not currently in litigation while retaining the right to use these patents in our technology. The actions we have already taken are expected to bring our operating burn down to approximately $750,000 per month and dropping as these savings are realized with expected revenue growth. This means our quarterly operating cash flow breakeven revenue number is in the range of $9.5 million to $10 million.

We expect revenue to accelerate in the back half of the year. This revenue range takes into account the strategic hires we plan to make over the next several quarters. This leads me to liquidity. As previously announced, we have a non-dilutive line of credit in place with Silicon Valley Bank for up to $5 million. The availability on this line is based on a predetermined formula based on our outstanding accounts receivable. As of May 31, 2013, we have drawn $1 million from the line and had approximately $1.9 million available. We will continue to evaluate our progress against our objective and closely monitor our liquidity.

Based on Q1 results, we are now expecting to achieve operating cash flow profitability by the end of the calendar year as Ivan stated, we are reiterating our guidance towards 30% to 35% increase in mobile revenues for fiscal 2014 compared with fiscal 2013. At this time, I would like to walk through our quarterly financial results in greater detail.

For the first quarter ended May 31, 2013, Augme reported revenue of $5.9 million, an increase of 15.5% was compared with revenue of $5.1 million for the first quarter last year. The revenue mix for the first quarter, 64% mobile marketing and 36% from mobile advertising, mobile marketing revenues or platform revenues including messaging, mobile web and apps.

Last year's first quarter was 73% mobile marketing, 27% mobile advertising. Bookings for the dollar value of contract signed, which includes new orders and renewals totaled $6.4 million for the first quarter essentially flat with last year's first quarter. About 30% of bookings with new customers, 40% new sales to existing customers and 30% were license renewals.

As we said in the past, bookings fluctuate from quarter-to-quarter and renewals will vary primarily due to the timing of contract renewal days. We ended the quarter with a backlog of signed contracts totaling $19 million. This is up 9.4% over last year. With the mix of sales shifting towards mobile advertising, mobile revenues were on shorter term contracts and as a result, the backlog will not be increasing with the same pace with revenues. Mobile advertisings are generally looked on shorter term contracts, we experiencing a very high level of repeat business.

The first quarter, we regenerate a gross profit of $3.3 million, up 4% over first quarter last year. The gross margin for the quarter was 56% of revenue compared to last year's first quarter which was 62%. The decrease in the margin results from the shift of revenue mix to a larger percent of mobile advertising. Also, some of the costs of sales are semi-fixed in nature and as we've grown capacity in our delivery system, we are expecting to gain efficiencies with revenue growth.

As a reminder, in the cost of revenues, we include (short code) related costs, hosting of our cloud-based platform and other third-party costs, primarily mobile ad deliveries.

Operating expenses for the first quarter were $9.3 million compared to $10.7 million for the prior year first quarter. Excluding non-cash charges for stock options and warrants, depreciation and amortization, the non-GAAP operating expenses were down 11% to $7 million from $7.8 million last year first quarter.

During the quarter, we recorded approximately $550,000 expenses related to severance and legal and other fees related to legacy and other non-core matters were approximately $350,000. We recorded a net loss of $6 million or $0.05 per share for the first quarter of fiscal 2014. This compares to a net loss of $5 million or $0.05 per share for the first quarter of fiscal 2013, including the net loss for the first quarter of fiscal 2014, non-cash stock options and warrant expense of $1.1 million, depreciation and amortization expense of $1.3 million. After adjusting each period for the non-cash item, the non-GAAP net losses improved to $3.7 million for the first quarter of fiscal 2014 compared to $4.7 million for the same period last year.

Days sales outstanding or DSOs were 81 days at quarter end. This compares to 69 days at the end of fiscal 2013 and 59 days within the first quarter last year. We think this number will vary around this range and we believe that reflects our monthly billing practices and the quality of our customers.

With that, I'll turn the call back to the operator. We'll open it up Q&A. Douglas?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions)

Our first question is from the line of Darren Aftahi with Northland Securities. Please go ahead.

Darren Aftahi - Northland Securities

Hi, guys. Just a few here. On new customers, can you guys talk about the number of new customers in the quarter between ad networks and global marketing and in a good handful (inaudible)?

Ivan Braiker

Yes, I think it’s an appropriate time to introduce Doug Stovall into the mix and he will address that question. Doug?

Doug Stovall

Yes. And hey Darren, how are you doing?

Darren Aftahi - Northland Securities

Good, thanks.

Doug Stovall

In our mobile advertising, our average mobile advertising grew in the first quarter about 55% year-over-year there. The number of new customers, I don't know the exact number of exact customers on top off my head that equates to but we get that part.

Darren Aftahi - Northland Securities

Okay. And then, if you say grew 16% in the first quarter relative to sort of implied lower end of your guidance, it kind of implies got to grow year-on-year and rest of the year about 34%. So, you are about half-way through the second quarter. If you are kind of give us a little bit of chance of terms of your confidence and the ability to accelerate growth and then what you are kind of seeing in what verticals in particular or perhaps across promotion and cross sell that gives you the confidence that you kind of hit the guidance?

Doug Stovall

Yes, great question. Yes, so we thought we laid a solid foundation to accelerate growth in the second quarter as well as the second half of fiscal year. We believe this foundation along with our continuous execution toward our key objectives will allow to accelerate our growth throughout the year.

Second quarter is also strong start from our fee size and dollar volume related to those our fee, in fact it reached a record high. Additionally, the additional hiring we talked about that Ivan talked about earlier is important. Our renewal rates staying solid at 95%. Additionally, we are seeing the mobile market industry accelerates, we are excited about that.

So with all that said, we believe we are real positioned – very well positioned to increase our sales as we move on throughout the year.

Darren Aftahi - Northland Securities

Okay. And then I could ask maybe some tougher questions to Tom. So it looks like OpEx picked up sort of a non-cash number from 6.7 to 7 quarter-to-quarter. I think you said there was 550 in severance and then 350 related to something else. Is that all non-recurring?

Tom Virgin

Yes, it is Darren.

Darren Aftahi - Northland Securities

Okay. So sort of a baseline number, it’s closer to the lower 6s in terms of OpEx on a non-cash basis?

Tom Virgin

Yes, that continues to be our goal to get down to 6 or somewhere around that maybe below that that would be consistent with the range of revenues that we talked about to 9.5 to 10 to get ourselves to operate profitability.

Darren Aftahi - Northland Securities

Okay. And then lastly just on liquidities, so with your line of credit, you drawn a million and just to be clear, you are able to draw an aggregate of 1.9 or an additional 1.9?

Tom Virgin

An additional 1.9.

Darren Aftahi - Northland Securities

Additional 1.9.

Tom Virgin

Okay.

Darren Aftahi - Northland Securities

All right. Thank you.

Ivan Braiker

Thank you, Darren.

Operator

(Operator Instructions)

Our next question is from the line of Gerard Hallaren with Janco. Please go ahead.

Ivan Braiker

Hello, Gerard.

Gerard Hallaren - Janco

Hello. How are you guys doing?

Ivan Braiker

Doing good. Thank you, sir.

Gerard Hallaren - Janco

Good. It seems like costs are finally coming into line. Do you feel that the cost reductions hurt the ability to generate revenue?

Tom Virgin

No. We really and truly don't – as an executive team we are very careful of what we are doing and where we cut and how we cut. And in addition to cutting, we also announced that we are adding on the sales side. So we don't let anything that we have done that all its going to hurt sales. And as Doug mentioned, we couldn't be more excited about the way the second quarter is starting to shape up. It's very strong.

Gerard Hallaren - Janco

Good, good. And in terms, do you have any kind of a statistic you can share with us for customer retention rates?

Tom Virgin

I believe as Doug as mentioned we are maintaining that 95% retention rate.

Gerard Hallaren - Janco

Okay. And as an outsider looking and how do I calculate that – how do I understand that number?

Ivan Braiker

Yes.

Doug Stovall

I will take that Ivan. Thanks. What we look at is, on our contracts, we look at how much we have on our renewal compared to the prior contracts. For every time contracts we renew, we're looking what it was for the past year or past period comparing that to the new period and from that we derive whether it's -- the retention rate and its 95% plus, it's always run at that rate.

Gerard Hallaren - Janco

Yes, I know that's one of the amazing things about the company and should be proud of that. So, thank you very much.

Ivan Braiker

Thank you, sir.

Operator

(Operator Instructions)

At this time, there are no further questions in queue. I would like to turn the call back over to Mr. Braiker for closing.

Ivan Braiker

Well, thank you for your questions. In closing, I will summarize the five highlights of today's call. One, we are growing sales as highlighted; two, we are driving adoption of our industry leading mobile engagement platform; three, we are rigorously managing expenses; four, we've secured a $5 million line of credit through Silicon Valley Bank; five, we are reiterating our guidance to 30% to 35% increased mobile revenue for fiscal 2014 compared with fiscal 2013. Thank you very much everyone for joining us today and we look forward to talking to you again then. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. We would like to thank you for your participation. And you may now disconnect.

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