Sonic Foundry Inc (SOFO) CEO Discusses F3Q13 Results - Earnings Call Transcript

Jul.26.13 | About: Sonic Foundry, (SOFO)

Sonic Foundry Inc (NASDAQ:SOFO)

F3Q13 Earnings Conference Call

July 25, 2013 04:30 pm ET

Executives

Tammy Jackson – Communications Director and Head-Media Relations

Kenneth A. Minor – Chief Financial Officer

Gary R. Weis – Chief Executive Officer

Tammy Jackson

Good afternoon and welcome to Sonic Foundry’s Third Quarter Fiscal Year 2013 Presentation. I am Tammy Jackson, and I will be moderating today’s webcast. (Operator Instructions) We will begin with the Safe Harbor statements and take Q&A after the prepared remarks. In compliance with the SEC regulation regarding Fair Disclosure, we will be using SEC filings and public presentations like the one you’re viewing today as the principle means of informing the Street and investors of our current and past results, financial production, or any material non-public information during those meetings.

Sonic Foundry’s disclosure policy defines the period beginning on the 15 day of the third month of each fiscal quarter and ending on the day we publically release the results of that quarter at a prior period.

During such quiet periods we will not make any comments about our financial performance nor provide forward-looking guidance except in press release form. Finally this conference will contain forward-looking statements about the products and services of Sonic Foundry within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934.

Forward-looking statements include statements about our products and services, our customer base, new partnerships, our future operating results and any statements we make about the company’s future including responses to your questions. These types of statements address matters that are subject to many risks and uncertainties. Actual results could differ materially from the forward-looking guidance we provide.

Any forward-looking statements should be considered in context of the risk factors disclosed in our periodic Forms 10-Q, 10-K and other filings with the SEC. These filings can be accessed online at sec.gov and other websites or can be obtained from the company’s investor relations department.

All of the information and disclosures we make today regarding our business including any forward-looking guidance are as of the day given and we assume no obligation to update or change this information regardless of subsequent events. An archive of this presentation will be available at sonicfoundry.com for 90 days.

And now Ken Minor will begin today’s presentation.

Kenneth A. Minor

Thank you Tammy. Good afternoon everyone and welcome to our third quarter fiscal 2013 investor presentation. I will begin as always by going through a few of the quarterly financial highlights. Revenue grew 3% to $8 million over Q3 of 2012, $7.8 million that’s primarily due to an increase in our hosting services and customer support revenue as well as increase over a couple of quarters.

Our product revenue increased 1% year-over-year to $4.2 million that's up from $4.1 million last year. And our balance grew 2% to $8.5 million from $8.3 million from last year. Our GAAP net income was $40,000 and that is down from net income in Q3 of 2012 of $569,000, primarily due to reduction in the earnings of our affiliate Mediasite KK of $239,000 and expense service revenue recorded in Q3 2013 laid into a couple of individuals that as part of the second quarter. Our GAAP EPS was recorded at $0.01 a share and in comparison $0.14 a share last year.

So similarly we achieved non-GAAP results of positive $1 million, $0.26 per share, that compares to $1.6 million last year. Significant recurring billings that where confirmed in the balance sheet as the primary reason for the significant non-GAAP results. The gross margin of $5.6 million as comparable to the prior year, that is 70% of our total revenue this quarter compared to 72% last year. And the cash balance came in at $3.1 million and as I said our 0.6% ownership interest in Mediasite KK resulted in the reporting of a percentage of fair earnings that resulted in [$11,000] share last year, that number is significantly higher [$250,000].

For the nine months to-date similar charge and revenue grew 6% to $21 million over the prior years $19.9 million. The product revenue grew 7% which is partially due to an increase in DSO, as well as a $340,000 increase in sales through the MSKK, which is (inaudible) higher education (inaudible).

Our billings grew 12% to $21.9 million over the prior years $19.6 million and our GAAP net loss for the full year is down to (inaudible), which is $0.07 per share compares to 60,000, that’s $0.03 per share verus $0.07 per share in the last year.

And we recorded non-GAAP income of $2.3 million or $0.59 per share for the full period, but significant higher than $1.4 million or $0.36 per share in the quarter of 2012. Again, that’s a combination of deferred billings primarily for software results related to Mediasite as well as increase in our service volumes.

The gross margin of $15.2 million is comparable in the rate to last year’s full-year results of 17% compared to last years $14.3 million. Cash balance, a decrease as expected $1.4 million, as a result of the increased working capital needs. We do expect that that will put back around some (inaudible) lesser.

Again, from the full-year results, regarding our equity earnings in MSKK, we recorded a 179,000 as compared to Q3 of last year.

In terms of the billings comparison year-over-year for Q3 2013 versus 2012, our private billings were up 187,000 which is 4% over the prior year and that’s again due and at least at par to significant results from our Mediasite product, which is an annual software license. Since we did Mediasite of December 17 the last year we put forward over 4,000 billings associated with (inaudible) most of that in the last quarters revenue and service billings were pretty consistent for our period.

The statement of April operations summary, again, we’ve done (inaudible) revenue, our average selling price was a contributor. We did see our average price decrease somewhat compared to (inaudible) relative to small change resulting from a couple of different things and first of all our ratio of (inaudible) for the quarter which is a little over price point over the quarters was 2.91 as compared to 9.5 last year. We also had one very significant transaction of Refresh for quarters, which help drive a significant increase every first quarter, year-over-year and in fact the Refresh in quarters were more turbulent in the last year (inaudible) versus quarters last year 195. The number of rack owners have totaled, increased from 466 last year to 472 this year.

The gross margin percentage as I said declined a little bit from 72 to 70 and it’s primarily the result of a significant increase in the refresh (inaudible). In terms of the operating expenses and reflecting increase of 7% over the prior year that’s a increase to 5.5 million, 5.2 million.

Selling and marketing increased 53,000 which was also 7% increase over the prior year. This results in partly from the higher salary, incentive compensation of benefit cost leading to a slight increase. Headcount as well as increase in travel, sponsorships, tenant’s activities that’s associated with the introduction of products that we introduced as well as our introductions in markets.

Our G&A increased by 111,000 or 17% that’s partial way to increase our compensation benefits, but it’s a very slight increase in headcount along with an increase to legal expense out for the period related to half this.

In terms of our product development, the product development decreased 18,000 or 2%. We released My Mediasite, the version that lead capital submission of labor cost last quarter, in April of this quarter. So there is a small amount of capitalization of flavor associated with that tailwind project in this quarter of 32,000 and that number was identical to the increase in wages and benefit cost that would have occurred based on slight increase in headcount.

We don’t expect any remaining capitalization that are associated with that project. So there shouldn’t be any near-term capitalization at the end for the quarter, in favorable terms (inaudible).

In terms of the GAAP net income, we have those results it’s 40,000 versus 550 million (inaudible). Our reconciliation in terms non-GAAP include a number of adjustments by including the non-cash depreciation increased to 340,000 compared to 233,000 last year. Our billings exceeded revenues by 403,000 as compared to 568,000 last year. And the deferred taxes were the same in both periods of 60,000 solidify those adjustments, and the familiar this year versus last year.

In terms of the year-to-date results, the current asset (inaudible). In terms of the year-to-date results, again our revenues were up 6%, the product and other revenues increased $605,000, 6% over last year. Our units increased from $907,000 last year for again that’s largely international demand that’s driving unit cost.

Our gross margin percentage is pretty consistent as I mentioned at 72%. The operating expenses reflect an increase of 8%, which draw an increase of $15.2 million versus $14.1 million. Selling and marketing increased $806,000 or 9% as partly again with higher salaries and benefit cost as well as the increased traveling trade shows and expos.

Our G&A increased $285,000 or 13% for nine months periods, again partially by an increase in compensation related costs. In headcount, we also had a little increase in selling cost and its legal cost as I mentioned, the increase in wages was largely offset by a decrease in stock-compensation incentive costs. And regarding the pat litigation I had mentioned, Astute Technology is the culprit that sued a customer of ours for patent infringement of Astute Technology, since our customer is using our services, we support our customers’ defense. We sued Astute for a declaratory judgment. We are very confident against about this litigation and we’re plans certainly (inaudible) in this case.

In terms of the product development, that number increased 82,000 or 3%, it results primarily from an increase in cost of net allocated from G&A of 60,000 and also could increase headcount which were marginally offset by compensation on the (inaudible).

We’ve talked again about the bottom line results, the numbers that reconcile GAAP, non-GAAP for nine months period included $841,000 depreciation, stock compensation was $405,000 and the billings have exceeded our revenues was (inaudible) for this period, 2013 to-date compared to the reverse our billings exceeded our revenues (inaudible). And again for tax amounts I would say, $180,000, problem loans reconciliation $2.3 million of second quarter this year versus third quarter last year.

And then finally on the balance sheet, our current assets increased from $11.9 million last year to $12.7 million at June 30, 2013, it has increased largely due to increased accounts receivables and partially offset by expected decrease in cash as (inaudible) long-term assets include the CapEx outlook cost as I mentioned. In our current long-term liabilities decreased $12.2 million last year $13.2 million, that’s almost entirely due to the increase in deferred (inaudible) categories.

Total liabilities include two significant non-cash elements, deferred revenue (inaudible) as I mentioned $6.6 million and deferred tax is $2.2 million. So together they represent about two thirds (inaudible) and as I mentioned, the underlying revenue was about [9,000] (inaudible) in terms of our debt capacity, we have $933,000 (inaudible) June 30. We have reviewed our line of credit which has the (inaudible) $3 million and $1.9 million as of June 30. Again we have not used that lot of credit for a while and it did not have (inaudible).

So we definitely believe that our cash (inaudible) and we do not have current tax to equities (inaudible), back any of you I am sure noticed that we announced during the quarter in June that directors office stock purchase program for maximum of $1 million more likely used that facility to satisfy lock purchases rather than probably open market purchases. And although, we did not have any activity during the quarter hence we have not (inaudible). So at this point then I will turn the call over to Gary, who will run us through (inaudible).

Gary R. Weis

Thank you Kenn, good afternoon everyone. We all use the same format that we’re accustomed to in the first several charges. I’ll talk about some comparable metrics for the business over the quarter. First, we’ll talk a little bit about the half five deals in the business, these are obviously not the same customer quarter-over-quarter, but they are simply ranked by size of individual deal. You can see that the third quarter of this year is slightly different in profile than the third quarter of last year, but typically what you’ve seen over the last two years is that the average deal sizes for the top five deals have been made roughly comparable.

As we’ve commented before, in the past, we’ve had some quarters, where we did have some very large at least deals have been influencing numbers, but at this point the pattern has been fairly consistent of the last eight quarters. This chart is exactly the same as the one we used last quarter, it’s meant to portray the seasonal nature of the business, and basically the quotes of GAAP and non-GAAP billings and revenue by half year. So we haven’t added any data to this chart, since we’re in the middle of the second half. We’ll obviously update this at the next call, when we close out here. I will make a couple of comments however.

Our performance year-to-date this year, very favorably compares to our plan. Those of you who follow us know that the last year, second quarter of last year was a very strong third quarter in terms of growth over the previous year of the 2011. So, we anticipated this year that while we would have growth this quarter-over last year. We would not have the same level of growth.

That’s how we planned the year, and from the standpoint of billings, we’re just about on our plan, and from a non-GAAP revenue per non-GAAP income perspective, we’re actually very much ahead of plan. That’s in part due to the fact that we’re selling more software licenses in the last three quarters as we now have products available to be sold in that board. And as Ken has explained that obviously causes more cash upfront to be collected by the customer, but we can only recognized the revenue on a GAAP basis as the full term of the software license agreement takes place usually about a year.

So, next time around, we will update this chart and you’ll see our performance for the full-year and we anticipate that to certainly meet guidance and certainly improved in terms of our GAAP and non-GAAP performance year-over-year.

From a customer billings perspective, this charts use mainly portray the billings by customer group based on new customers versus existing customers. This quarter, you can see that we picked up a little bit on new billings for new customers, and it talks more about that, when I described our expansion of our sales activity. But suffice it to say, we are building our pipeline for transactional sales to the customers very rapidly, and as a result we would anticipate in future quarters that you will see a little bit of an increase in terms of billings to customers.

By sector, again, pretty comparable over the quarters, higher education versus business, corporate and government and other, no real surprises in this chart saying pattern.

And finally, domestic versus international. Again, very comparable performance quarter-over-quarter, year-over-year in terms of the balance of billings by international and domestic. And I think because of the numbers Ken went through, showing a relatively large change in quarter net income. I thought I would take a minute to talk you through a little bit of the detail behind that. Ken has already covered most of this but I thought it would be good, to show you this our waterfall chart.

First off, the final column is our third quarter results net income for the current year. The first big difference between the third quarter of last year and this year is that is 10 points without a difference in MS KK realized in our broad ownership share in MS KK look rather dramatic and so this chart simply points out differences between the third quarter of this year and the third quarter of last year.

The next development is reorganization expense. During the third quarter or late, actually at the end of the second quarter, we basically merged the sales force in the events business with the sales force for our product and enterprise business and as a result, we’re less in headcount by couple of folks and the dollars you see here represented the severance cost associated with that.

And the next big adjustment is really one in revenue recognition and I’ll spend just a second talking about this because as we get more and more into selling software licenses, we have a couple of factors that take place, the first factor is the one we will really talk about where when we realized a [containment] with customer for full-year’s license, we can only recognize 25% of that revenue into the fourth quarters during the [bunk of] period.

The other factor though we have in revenue recognition is the fact that when we sell a server license at the end of a quarter, we can only book the revenue if the server license is actually then productively installed by the customer. And so, at the end of this quarter, we did have several large customer deals where the customer purchases were paid for the software, but unfortunately they had not yet turned it on and as a result, we got the billings but we could not recognize revenue. So, it did impact net income.

The last column in the chart represents the full-year actual for 2012 and quarter, which was $559,000. We have talked consistently about the fact that we had increased the expense of our engineering team and then certain other support functions of the company during the year and so, if you have to go back and say, what portion of that expense increase would affect the last quarter’s results, would have gotten about $308,000.

So, in spite of the $40,000 number being a big difference from $559,000 number, we’re very confident that that difference doesn’t represent any pattern in the run rate of the business, but it represents the items that I’ve just discussed on this chart.

So, let’s talk a little bit about software. I pointed out on last quarter’s call that in the past, Sonic Foundry had been perceived as a Room-Based Lecture Capture product supplier and we know two years ago that we needed to add to that in terms of complementing it with software capture capabilities. The first big introduction of a product in that space is My Mediasite, which really was shift in December of last calendar year and is now being promoted and hooked up in trade shows and so forth.

In just the last three quarters, we have seen 290% increases in the adoption of My Mediasite largely by existing customers, but we have a number of promotional and packaging activities planned for the next 18 months. So, you can see promote My Mediasite and they continue to sell it in different modalities throughout that period of time. So, we see this as being a very large opportunity for us to generate of those accounts going forward.

We also during this fiscal year introduced our Mediasite 6.1 family of software, so I basically think of it this way, in December of 2012, which really kind of the large of Mediasite 6.1.3. And this chart simply presents the migration of customers from 6.1.3 to 6.1.11, which is the currently shipping release and which impact would be the last release of the 6.1 family. That migration has been very gratifying to us.

First thing it does for us, it demonstrates that our customer really value the incremental functions that we’re making available in each one of these releases, so instead of saving up lots of function into major releases that happened here 18 months apart, we’d instead started to provide that function and packages of incremental releases that are easy for the customer to digest or dissolve; that strategy is working very well.

We also have found that the code quality has actually improved release over release, so that’s another motivation for the customer to quickly get into the most currently release of the software. So we will continue on with this approach when we release Mediasite 7.0 at the end of this calendar year and this technique or this process of development in product release has been very successful for us.

The other thing that we found is that we track usage of our software by customer service and this chart represents the growth in individual instances of the software installed on customer server machines, represents about 75% growth in seven months.

Now all of that increase is not related directly to the new customer being acquired but it is related to customers expanding their use of Mediasite in the existing deployments. It’s also obviously influenced by the fact that the customers have migrated from pre-release before 6.0 to the 6.x family of products. This chart also includes Mediasite’s x data which was released in December of 2011. So, you can see again that the migration pattern of customers from 6.0 to 6.1 family and within the 6.1 family has continued at a very rapid pace.

I’m now going to talk about a little bit about the usage of Mediasite in our customer base. One thing that has been apparent to us is that the concept of rich media has been a very strong selling point for Mediasite as a Home-Based Lecture Capture tool, but as time has progressed and customers need to capture and present simple video, one of the very desirable ways to capture simple video and audio without rich media is to record that media on a mobile phone, an Apple, an iPhone or Windows Phone 8 or Android Plus and what we found is that customers had a strong demand to upload that video directly from a smartphone into the Mediasite with [passbook]. We have implemented that capability as part of 6.1.11 and mobile devices are a growing source of media ingestion into Mediasite.

I’m now going to talk a little bit about our expanded sales activity. If you go back a year-ago, or 18 months ago, our sales force was in the United States was largely, geographically divided into territories, and account reps in those territories could basically sell and retire their quarter into any type of customer that was within their territory. We realized with our success at North Carolina State that, that we had an opportunity to better exploit the expansion of Mediasite in customers where we knew we have that opportunity.

So what we did during the last four quarters is, we’ve been reorienting our sales force, so that 60% now of the U.S. sales force is focused on named accounts. What that means is that the accounts are identified by each sales person. those are the only accounts that the sales person can retire quarter from and that’s all in higher education. And this is basically a relationship selling exercise. another 30% of the sales force is focused on what we call mid-market higher education and that is largely transactional. this is still a geographically divided type of sales activity.

And finally, something new, we have added a few headcount to our sales force to focus on mid-market corporate customers. So, because of the advent of some of the new Mediasite features, we now think we have a better opportunity to efficiently use a direct sales force to go after and book customers.

Now in the mid-market business, it’s all about pipeline growth. and that means that we have focused a number of the folks that are in this space to developing pipeline over the last two quarters and we would expect that to begin to payoff in the fourth quarter and first quarter of next year. We’ve also added a dedicated business development Vice President and the purpose of this is to really provide focus on entry into new markets such as medical and to focus on new geographies, new places where we can sell and do so.

And as I said, to accomplish this, there has been a modest increase in direct sales system. One of the things that we’ve started to do is, segment our customer base and understand a little bit more about our penetration into those segments. And one segment that we’ve been very successful at is the business schools environment. And so, U.S. News & World Report publishes a best grad schools index and we were gratified to determine the 15 of the top of 25 of those best graduate business schools, actually use Mediasite in their programs.

So you’ll see us focus more on this in the future in terms of different segments in higher education. Our Events business continues to be strong. These are some numbers that show our kind of participation in Events with our customer partners. We found that medical conferences are a very good source for us, doing capture in those venues. The presentations tend to be very detailed, they lend themselves well to high-quality capture, corporate users and association conferences as well. and then finally, internal all hands meetings where we will actually supervise, run and manage to capture activities and the hosting activities of the content after it’s captured.

We’ve done some things with the base product that has served our Events team very well in terms of being able to edit content after capture. So in 2013, Shane Tracy, our VP of Operations for Events has figured out some very good ways to utilize remote editing as a way to reduce the travel cost of our technicians and to improve and shorten our publishing time, projects and content.

I’m now going to talk a little bit about managing video in the enterprise. In this context, when I use the term enterprise; I mean both corporate and higher education. We’ve known for a while that our Mediasite EX Server product, our former name or our enterprise video management product, was very good at managing workflow and security.

And in fact, many customers came to us and said, you know we’d really like you to open up Mediasite and make it able to manage content that’s imported from other sources. Well over the past 12 months, we’ve been working on that. We now have the ability to ingest and transform a many different video content, many different industry standard formats for video content from non-Mediasite sources.

And as a result, a customer can now automatically transcode the older format content into native Mediasite content stored in our Mediasite sever product. And we can now actually enhance and enrich the value of that content to our customers’ viewers by adding things such as OCR translation of the video slide pattern in the surgical text to be able to do voice search against that audio in that content and thereby, also from the OCR, be able to create navigational commands. All of that provides ways that customer can increase the value of content that they already have by using Mediasite as the enterprise video management.

Now we also believe that with our recording appliance and our reporting application, we have the opportunity to take that to the next level of performance. So in Mediasite 7.0, you will see us take many steps to enrich the capturing and enhance the capturing of rich media content. The most obvious way to do that is to capture more real time video sources. We will capture up to four of those sources in Mediasite itself. We will also still preserve the ability to generate thumbnails; we’ll preserve all of the other back-end abilities to provide searching metadata et cetera. But that’s how we’re extending the value of the capture side of our product.

We, as I’ve said also view ingesting content as a way to add value to existing content. So for example, on the left hand side, we have a medium quality mp4 presentation that is captured by some other capture technology. The only way to navigate in that presentation is to use the time slider, which you see along the bottom of the slide, but once it’s imported into Mediasite, we can generate searchable slides and thumbnails from the slide content in the mid-to-right part of the screen, which you see displaying here.

So again, it’s about enhancing existing contract. And even on the right side of this graphic, you see a rather low quality video source. And frankly, some of our customers have chosen to use lower cost capture technology. We can also provide some level of indexing searchability to that content and still store it in the Mediasite password.

So I guess, in conclusion of what I’ve said about the product, we now have an opportunity to sell Mediasite solutions to a wider audience of customers. And we are orienting our sales force to take advantage of that and we are really very, very confident that we will be able to see value from that in the fourth quarter.

I’ll make one other anecdotal comment. I think in the last couple of weeks, those of you who follow Yahoo!, saw the fact that Yahoo! used their own technology to basically do what we’re doing here today. The technology they chose to use is a very managed produced technology. But we feel confident that the technology we have in Mediasite allows companies like ourselves and they also would like to take advantage of the technology to use it in a very low operating cost way.

There are no production folks in the room here with us today, it’s just Ken, myself and Candy, basically, using the Mediasite technology to capture the conference that you see going on. So it was very interesting to see that Yahoo! had reached the point where they have decided to use a similar approach in their quarterly earnings call.

So let me now talk about the outlook and guidance. Number one, we are reiterating the guidance of 13% growth for 2013 full-year in billings and that’s without any benefit of large transactions. Again, I’ve indicated that our performance year-to-date is strongly against our plan. We plan for a strong fourth quarter. We anticipate that will occur. and frankly, I’ll be very disappointed if we don’t exceed 13% growth.

On the large opportunities, we continue to watch campuses being built in the deserts in a number of Mideast countries. all of that is progressing very well.

While we might have been optimistic at the start of the year that that construction would lead to purchases in the third and fourth quarter of this year, we are now confident that we will win those opportunities, but the shipments will most likely take place first half of 2014.

The product development efforts that we initiated at the beginning of the year are well underway and it largely already produced the products that we planned to produce. These (inaudible) will be the next step and we would anticipate that to lower the customers in the fourth calendar quarter and first quarter of our next fiscal year. We expect to see continued margin improvements as we move through the remainder of 2013 and into 2014, and most importantly, we will see GAAP net income improvement over 2012. So that concludes the prepared remarks that we’ve had. I think we’ve also this time around taking a little different format and we have three of our analysts that follow the company that will actually be available to ask questions directly.

I will turn over to Ken to introduce that process.

Kenneth A. Minor

Okay. I think, operator, if you could come on the phone and introduce the analysts and get some questions.

Question-and-Answer Session

Kenneth A. Minor

We might have a little bit of a delay from our operator. I think what we’re going to do is we’ll take questions from Internet instead first and then we’ll look back around and see if we can get that one fixed up and have our questions from audience. So tell me if we could go ahead and ask those questions that are I’m sure queuing up.

Unidentified Analyst

Several questions about Gary’s last comment about Yahoo! delivering their webcast, recently there have been several companies using video tools to host their earnings conference calls, which are some parts of the (inaudible). If this trend starts to expand (inaudible) these companies?

Gary R. Weis

Absolutely and I think that with the comments I made about the evolution of our sales force, expansion of our sales force, we will now have the mechanism to do through our mid-market sales effort, to be able to re-job the customers in that segment to sell that application.

Unidentified Analyst

Could you repeat the number of Mediasite units sold or refreshed in this quarter versus the quarter a year ago?

Gary R. Weis

Yeah, we had 85 refresh units last year in Q3 of 2012 and 195 during this year.

Unidentified Analyst

What was the ASP this quarter versus the quarter a year ago? And are ASPs expected to decline further over the coming year or remain stable?

Kenneth A. Minor

I do believe they’ll remain pretty stable and the amount that it was down from the prior year was small and only in response to some significant increase in refresh units. And those refresh units tend to vary and quarter-to-quarter and in this particular quarter, we had one very large refresh transaction. So the ASP did decrease from 9,400 to 9,200 (inaudible) pretty consistent.

Gary R. Weis

I would pick up on what Ken said, if we find the refresh business in spite of the fact of its minor impact on average selling price, to be a very strong demonstration of our customers’ royalty to our products and our capability. The very large customer this time around demonstrated that and I think as the installed base of our solution out in the market continues to grow, we will see that that base will have to refresh itself every three or four years. So that’s very good, that’s right.

Unidentified Analyst

Regarding the three-year plan to get to $40 million with a 15% pre-tax margin, can we assume that FY 2013 is your one and FY 2015 is your three, and does this mean revenue in FY 2015 should be at least $40 million?

Kenneth A. Minor

You can assume all of those things, yes. So we do believe that fiscal 2015 is the year that our revenues will see $40 million, and next year, we are targeting for 15% pretax. We obviously haven’t made significant improvement towards that pretax percentage number yet in fiscal 2013, but we are absolutely committed towards making some significant improvement in fiscal 2014 and achieving that number in fiscal 2015.

Unidentified Analyst

You said in the earnings release that you expect to exceed the current year guidance of 13% growth in billing, are you expecting this level of revenue for the next quarter?

Kenneth A. Minor

Well, I think year-to-date, we’re 12% billings increase year-over-year. So obviously, if we are going to exceed 13%, we’ll have to exceed something like 15% or 16% in the fourth quarter and yeah, absolutely, we see a larger number than that. The – I’ll remind everyone that the fourth quarter of last year was somewhat weak and so we certainly are at a minimum 15%, 16%, 17% of last quarter.

Gary R. Weis

That’s right. That’s right. We don’t expect the same kind of trend from Q3 to Q4 this year like we did last year. So expect Q4 to be significantly stronger than Q1 last year.

Unidentified Analyst

Okay.

Operator

There are no more questions on line.

Kenneth A. Minor

Okay. All right, and did we get any questions from the phones then. Well, it looks perhaps our experiment with using the AT&T Bridge for our analysts didn’t work this time around. So we’ll instead do that again for next time.

Operator

(Inaudible) please go ahead.

Unidentified Analyst

Okay.

Kenneth A. Minor

Hey, Marco.

Unidentified Analyst

Hello?

Kenneth A. Minor

Yes. Go ahead, Marco.

Unidentified Analyst

Can you hear me?

Kenneth A. Minor

I can hear you.

Operator

Marco, I believe they can hear you. We just can’t hear them. Go ahead with your question. We’ll see if they can hear you.

Unidentified Analyst

Yes. Hi. Thanks for taking my questions. I wanted to talk a little bit about the updated guidance. The original guidance was core growth of up to 13% billings for the year and then you had the 8% growth for new clients. So with your prepared remarks, you are indicating that the new clients are being pushed. So does that imply that the full 8% was Mid East clients?

Gary R. Weis

Yes, I mean, actually I don’t believe we actually termed it as new clients. What we had said is that we expected our core business would be 13% or greater. We still believe that to be the case. We said that we expect these large deals that we’ve been tracking, which are all Middle Eastern deals, would range between 0% and 8%. Obviously, that’s a very large range, but they are completely dependent on the timing of construction and those construction projects are progressing. We have got some initial orders on those projects. And so we do feel confident that we are seeing the kinds of progress that we want to see and we expect that we will release those transactions in the first half of next year.

Kenneth A. Minor

And I would expand just a little bit on that, Marco, that our anticipation and our estimates of what would happen was based on two large deals that we had in the Saudi Arabia and I think it was 2010, 2011…

Gary R. Weis

That’s right. Right.

Kenneth A. Minor

And those deals had a little bit different dynamic than what we see at the schools that we’re now selling into in the Mid East in the sense that there was a very large amount of time before they required the equipments they actually ordered the equipment. So I will reemphasize that we are very, very confident that those deals will mature and will come to fruition, but it’s going to happen on the schedule the customer chooses.

Unidentified Analyst

Right.

Kenneth A. Minor

Are there any other questions? All right, I think we are good then. So thank you everyone for participating and if you have any additional questions, Gary and myself, you please. feel free to contact us by phone or email and we’d be happy answer your questions then.

Gary R. Weis

Thanks, again, have a good day.

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