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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

Kevin Liu - B. Riley Caris, Research Division

Rimage Corp (RIMG) Q2 2013 Earnings Call July 24, 2013 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Rimage Corporation 2Q 2013 Conference Call. [Operator Instructions] This conference is being recorded today, Wednesday, July 24, 2013.

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

Douglas Sherk

Thank you, George, and good afternoon, everyone. After the close of the market today, Rimage issued a press release announcing its second 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 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 was initially held 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 a result of new information, future events, developments, change in assumptions or otherwise.

In addition, to supplement the GAAP numbers, we have provided non-GAAP information that excludes severance expenses and the amortization of Qumu acquisition intangibles. We believe that these non-GAAP numbers provide meaningful supplemental information and 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 financial release.

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

Sherman L. Black

Thank you, Doug. Well, good afternoon, and thank you for joining us on our second quarter 2013 conference call. With me today is Jim Stewart, our Chief Financial Officer.

Today, we announced strong second quarter revenue growth, up 16% from the second quarter of last year. At $21.2 million, the second quarter revenue exceeded our guidance and reflects the excellent growth potential we expect from Qumu and its enterprise video services platform. In addition, we generated higher consumables revenue from our disc publishing operation than we initially anticipated.

Today, I'll begin with a review of our operating performance in the quarter, focusing on Qumu and its outlook. I will also discuss some of the actions we took in the quarter to right-size our disc publishing business. Jim will provide a more detailed look of the second quarter and the first half financial results.

Following our remarks, we'll be happy to take your questions.

Qumu posted another great quarter with revenue of $4.8 million, an increase of 250% from the second quarter last year and 11% above the first quarter revenue. Qumu contracted commitments totaled $3.4 million. For the first half of 2013, contracted commitments were $7.8 million compared with $6.5 million in the same period last year.

There were 4 significant new customers included in the second quarter commitments. The new customers included a worldwide consulting firm, a global engineering and a construction company, an engineering risk management software company and a broadband infrastructure provider, representing a breadth of industries and a win in the Asia-Pac region.

Three of these new customers contracted for our new cloud offering, which was just released in second quarter. Our cloud product is an engineered solution that enables rapid deployment at the client and the flexibility of a hybrid offering of public and private clouds. The product has been well-received, and I believe our team will be able to deliver deals with faster selling cycle and create land and expand opportunities with new accounts.

In addition, the subscription model will create a more predictable revenue stream and is another growth opportunity for us.

Qumu's backlog of contracted revenue was $11.1 million at June 30 compared with $12.4 million at the end of March. Video continues to gain traction, as the new document for communication within the enterprise. It enables communications on an emotional level and can more easily explain visually complex subjects, which lead to more and better employee engagement and collaboration.

Interest in Qumu is growing, as a result of our enterprise integrations, our rich mobile applications and our attention and service to the needs of end users as well as IT professionals.

In recognition of the importance of Qumu to the future of the company and to drive awareness, we announced that we'll be changing our corporate name to Qumu in this third quarter. As part of this initiative, we'll have a new visual identity and a great website that unifies our web properties across the company. As a video-focused company, you can expect our new website to heavily use rich video content, demonstrate our thought leadership and insight around use cases, vertical markets and technology. And also, in support of international growth plans, we'll localize the content around key languages.

Additional details on this change will be announced when we launch Qumu Corporation in the next couple of months.

Looking ahead, I'm confident that our engineering investments are aligned to market needs and to maintain leadership. Our roadmap themes are usability, localization, mobility, collaboration and analytics. Our customers can invest in a Qumu solution and be confident that it is future proof. Our customers have made significant investments in enterprise collaboration portals. And as video adoption grows, those investments can be leveraged as the Qumu video services platform supports video delivery inside the portal to any endpoint and allows for utilization of much of the customer's existing IT infrastructure.

We're making key hires to support business development efforts around enterprise portals, and expect that to be a key growth driver for us.

We remain confident in the outlook for growth at Qumu. Our pipeline of opportunities has grown significantly since the beginning of the year. Based on the year-to-date results and our expectations for the remainder of the year, we now expect Qumu revenues to grow at a greater than 70% rate in 2013 as compared with 2012.

Turning now to disc publishing. We had a stronger than expected performance from disc publishing in the second quarter. Revenues in the quarter fell by just 3% from the prior year, largely because of higher consumable sales than we anticipated from the total [ph] retail segment. While we are pleased with the second quarter results, we don't expect the growth in consumable orders to continue. Hardware sales continue to decrease as cloud-based, file-sharing products and mobility technologies gained ground. However, we're confident that demand for disc publishing will continue in several markets, including surveillance, media and entertainment, medical and financial services.

Our objectives are to maximize cash generation for disc publishing operations to support the investments we're making in the software side of our business. In the second quarter, we took actions to reflect a continued decline, and we reduced the cost structure of this business. We implemented a reduction in force as expected to deliver cost savings of approximately $700,000 over the remainder of 2013, and approximately $2.8 million next year. With these actions, the disc publishing business still has the necessary infrastructure to continue to close sales transactions and service customers in our target markets while generating an optimal return to the company and our investors.

To date, in 2013, the disc publishing operation has generated almost $4 million in cash from operations. That's defined as net income plus noncash expenses less capital expenditures. We anticipate that with these recent actions, cash generation will be substantially enhanced.

In closing, I'm very excited about the transformation of our company. Social business and video adoption in the enterprise are creating rapidly growing markets for our products and I'm confident that we have the product differentiation necessary to succeed. And with our recent cost reductions in disc publishing, we're now better positioned to generate the cash needed to support our growth objectives.

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 second quarter were $21.2 million, a 16% increase from the second quarter of last year. The growth reflected continued strong momentum for Qumu, and higher consumables revenue in our disc publishing business.

Qumu revenues totaled $4.8 million, 250% above last year's revenue, continuing the strong growth we saw in our first quarter results. Qumu contracted commitments were $3.4 million compared with $5.2 million last year, which included a large subscription contract of greater than $4 million from a single customer.

Disc publishing revenues were $16.4 million, a decrease of 3% from last year. These revenues included a significant consumables order from a retail customer in North America. Retail consumable orders are usually larger orders and their timing is difficult to predict quarter-to-quarter. We expect this retail consumables demand to normalize over the next few quarters.

Disc publishing hardware sales in the second quarter declined by 19% from the second quarter of 2012 and represented 21% of total sales. This compares with 29% of total sales in the second quarter of 2012. Consumable sales of printer ribbons, cartridges and optical media were up 5%. Service revenue, including parts, increased 4%. These recurring revenues represented 57% of total company revenues in the second quarter, compared with 63% in the same period of the prior year. Disc publishing international sales were down 7% from the second quarter of 2012. These sales represented 27% of total sales in the recent second quarter, compared with 34% in the second quarter of 2012. Compared with last year's second quarter, currency changes reduced international disc publishing revenue by just 1%, with positive euro changes more than offset by negative currency changes in Japan.

Including Qumu, second quarter 2013 sales in Europe were $6.6 million compared with $4.3 million in the second quarter of 2012. Excluding Qumu, Europe sales grew 2% in this year's second quarter compared to last year. Sales in Asia Pacific were down 26% compared with the prior year. Negative currency changes accounted for 28% of this decline. Disc publishing sales were generally soft across this region.

Moving down the income statement. The gross margin was 49% for the second quarter of 2013 compared with 45% last year. The increase was largely due to an improved mix of higher-margin software sales. Qumu's gross margin in the second quarter was 69%. This was improved from last quarter's margin of 60% due to a better mix of higher margin license revenue. Disc publishing gross margin was 43%. This margin is lower than last year's 46% gross margin due to an increased mix of lower margin consumables revenue in this year's second quarter.

Operating expenses in the quarter totaled $12.3 million, a 2% increase from the $12 million in the same quarter a year ago. Second quarter disc publishing operating expenses totaled $5.7 million and included approximately $300,000 of severance cost for the restructuring activities discussed by Sherman. This compares to second quarter 2012 disc publishing operating expenses of $6.5 million.

Second quarter 2013 Qumu operating expenses were $6.6 million, compared with $5.5 million last year.

Total company R&D expenses were $3.2 million in the quarter compared with $2.9 million in the second quarter of last year, higher due to the carryover impact of Qumu R&D hiring in the second half of 2012.

Second quarter 2013 total company SG&A expenses totaled $8.9 million, virtually unchanged from a year ago. Excluding the severance cost in the second quarter of this year, SG&A expenses were down approximately $300,000 from last year, with lower disc publishing SG&A cost partially offset the investment we had made in Qumu sales and marketing.

We generated a net loss of $2 million in the recent second quarter or $0.22 per share. This compares with a net loss of $2.8 million in the second quarter last year or $0.27 per share. Excluding severance and the amortization related to the Qumu intangibles, our second quarter 2013 loss was $0.14 a share.

Turning to a brief overview of our year-to-date results. Total company revenues were up 8% to $40.7 million compared with the prior year. Qumu revenues have increased significantly to $9.2 million, up 233% compared to last year. Disc publishing revenues have declined 10% to $31.6 million with a significant decline in hardware revenue, partially offset by a slight increase in our current -- in our recurring consumables and service revenues. Gross margin was 48% for the 2013 period versus 47% last year. On a non-GAAP basis, excluding amortization and severance expenses, the loss per share was $0.53 compared with $0.44 last year.

Now, turning to our cash position. Cash and marketable securities totaled $46.1 million at June 30 compared with $48.4 million at the end of March. During the quarter, we used approximately $1.9 million in cash from operations. Capital expenditures totaled $341,000 in the quarter. Year-to-date cash used in operations was $2.9 million with capital expenditures of $572,000. 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 condition.

Turning now to our outlook on revenues for the third quarter and full year 2013. We expect revenues for the third quarter to be between $19 million and $21 million. Based on the results for the first half of the year and our expectations for the remainder of 2013, we are raising our guidance on Qumu 2013 revenues. We now expect Qumu revenues to grow at a rate in excess of 70% compared with 2012. Our previous guidance was for a growth rate of better than 50%. This Qumu growth will be partially offset by a decline in disc publishing revenues. But we do anticipate that total company 2013 revenues will be above those in 2012. For the year, we expect cash used in -- excuse me, we expect cash used in operations to remain in the low single-digit millions.

That concludes our formal remarks. Now Sherman and I would be happy to answer any questions. Operator, could you please open the line for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Kevin Liu with B. Riley.

Kevin Liu - B. Riley Caris, Research Division

First question here just on the disc publishing business. Nice to see that retail order come in. It didn't sound like the government business had picked up quite yet. I was just kind of curious what you're seeing there and if you're still confident you'll get the government order within -- by the end of the fiscal year?

Sherman L. Black

Kevin, this is Sherman. Yes, we've got a couple of significant opportunities in the federal government that we're working in, and yes, we still plan on realizing them.

Kevin Liu - B. Riley Caris, Research Division

Great. And given the risk that was enacted on the disc publishing side, could you just talk to us a little bit about what sort of declines you anticipate in kind of the out years based on the level of expenses you took out in this particular quarter?

Sherman L. Black

All I can do, Kevin, is really point to historical declines. Our revenues declined last year about 15%. We declined at about the same rate in the first quarter and 3% here in this past quarter. I think our historical statements about disc publishing and the revenue decline is to basically be pretty much in line with kind of the historical trends.

Kevin Liu - B. Riley Caris, Research Division

Got it. And given how the savings are expected to flow through about $700,000 for the remainder of this year, $2.8 million next. I was hoping you could help me kind of reconcile whether most of that $700,000 for this year just falls in Q4 and that's an annualized number for next year? Or if this is going to be enacted in kind of phases, and that's why the savings that seemed to accelerate over time.

Sherman L. Black

No. We should see a good chunk of savings here in the second half of the year. The actions that we took in the second quarter are going to impact fully in the third -- starting in the third quarter. And so you'll see the full year annualized impact that Sherman talked about in his remarks, impact us by about $2 million -- $2.7 million or so in 2014.

Kevin Liu - B. Riley Caris, Research Division

All right. And then just turning to the Qumu business, how much of the contracted backlog today is licenses versus services and maintenance?

James R. Stewart

I would say, we don't give that kind of detail. But you can assume it's probably relatively the same kind of mix that's in our actual results. I mean, we don't sell license without maintenance. So when we build the backlog, we are generally building both the license and maintenance revenues in relatively the same proportion.

Kevin Liu - B. Riley Caris, Research Division

Okay. And maybe just talk a little bit about the $3.4 million in contracted commitments. I mean, I know it's still kind of early days for you guys in building out the opportunity. That's a little bit lower than kind of first quarter level and I think, the levels you guys have been able to book in the past 2 quarters. So curious just if that's just kind of lower deal sizes you're seeing? And how you're feeling about transaction flow and closure rates there?

Sherman L. Black

Kevin, I feel really -- actually very good. We were expecting, obviously, to have a much richer second half than we did in the first half. And we -- I thought it was a pretty good quarter for Q2. Our pipeline is up several orders of magnitude over -- year-over-year. And the other thing that was exciting to me was the cloud opportunities that we picked up in the quarter. We launched this product in Q2 and actually closed 3 deals on it. And there was just a significant improvement in the sales cycle time and rapid deployment, as well as I think there was going to be an also big uplift in customer stats just because we're managing more of the process for the customer.

Kevin Liu - B. Riley Caris, Research Division

Got it. And just one last one for me. Any updates to your cash flow expectations on the year?

James R. Stewart

We expect it to remain in the low single-digit millions negative for the year.

Operator

And our next question comes in the line of Svy Ryan [ph] with Sabre Capital.

Unknown Analyst

First, I want to commend you guys on the actions you're taking on the cost side of the equation and ramping up Qumu as well. Just so I'm clear on the cost-reduction program, is it $8.9 million in the second quarter that you reported, is that sort of the base line that we should be looking at as the benchmark going forward, that the cost reductions are going to take effect?

James R. Stewart

Yes, I think if you look at the $8.9 million, as we talk about the severance cost that's included in the quarter, adjusting for that, that's a reasonable base line. There were some partial savings from the actions that we took in the second quarter, but they're pretty small.

Sherman L. Black

Yes. Month of June, basically. Right up [ph] [indiscernible] to some extent.

Unknown Analyst

Okay. So really, $8.5 million is what we're looking at and the cost reduction should impact -- should bring that lower?

James R. Stewart

That's right.

Unknown Analyst

And there's -- is there any --

James R. Stewart

But one thing, Svy [ph]. Not all of those cost reductions impact just SG&A, right? I mean, some of those will impact our cost of sales, some will impact R&D, some impact SG&A.

Unknown Analyst

Got you. Completely clear on that then. And then more from a strategic perspective, in the last Q, you guys reported an increased investment in BriefCam. I think that brings the total up to $3 million and change. What's the strategic rationale behind that? How is that helping you, and what's your end game here as it relates to that investment?

James R. Stewart

We invested in BriefCam, our initial investment was really, what, 2.5 years ago. And at the time, we were evaluating strategies for the company and we felt that surveillance in video was an exciting area, and we wanted to get strategic headlights into that space. And so, the primary initial reason that we invested was to do that. And I think, it's actually worked out quite well. We have evolved a little bit differently with our longer-term strategies, so we don't anticipate investing any more in BriefCam. But the reality, BriefCam has performed quite well and is, I think, going to end up being a pretty good investment for Rimage.

Unknown Analyst

Okay. Sounds good. And the last question and I'll turn it over. Basically as it relates to -- now I lost my train of thought, the Signal product where you signed 3 new cloud clients, was any of that revenue recognized in the second quarter? Or is that all going to be in the second half of the year?

Sherman L. Black

It's mostly the second half of the year. It's -- I mean, the contracts were signed, the actual deployments, there's probably a little bit recognized...

James R. Stewart

Yes, very minor.

Sherman L. Black

Yes, it would've been minor. Those are subscriptions, and so they're recognized quarterly or monthly.

Operator

[Operator Instructions] I'm showing no further questions. I'll turn the call back to Sherman Black for any closing remarks.

Sherman L. Black

All right. Well, I want to thank everybody for joining us today and we look forward to updating you again for our Q3 earnings call, which will be scheduled for sometime in October. If you have any further questions, you guys know how to reach us, and we'd love to take your call. Thank you very much.

Operator

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

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