Vikas Gupta - President and CEO
Dennis Ensing - Chief Financial Officer
Ron Shuttleworth - M Partners
Doug McDonald - NBS
TransGaming Inc. (OTCPK:TNSGF) F4Q 2013 Results Earnings Call August 27, 2013 11:00 AM ET
All participants please standby, your conference is ready to begin. Good morning, ladies and gentlemen. Welcome to the TransGaming Inc. Q4 F2013 Financial Results Conference Call.
I would now like to turn the meeting over to Mr. Vikas Gupta, CEO and President; and Mr. Dennis Ensing, CFO. Please go ahead, gentlemen.
Thank you very much. Good morning, everyone. It’s my pleasure to welcome you to TransGaming’s fiscal 2013 year end review call. We are enthusiastic we are sharing our perspectives on the year, but before we do so, I’d like to invite TransGaming CFO, Dennis Ensing to review the requisite Safe Harbor statement since some of our conversation today will contain forward-looking statements.
Thank you, Vikas. During this call, we as management of TransGaming may make statements containing forward-looking information within the meaning of applicable securities legislation.
Forward-looking information is based on a number of assumptions and is subject to a number of risks and uncertainties, many of which are beyond the company's control that could cause actual results to differ materially from those that are disclosed in or implied by such forward looking information.
Additional information about these assumptions and risks, and uncertainties is contained in TransGaming Inc.'s filings with securities regulators, including our just filed 2013 annual information form and annual report. Vikas?
Thank you, Dennis. Let me start by stating how pleased I am with our fiscal year end results and of course, our extraordinary fourth quarter. Over year ago, we made a commitment to our shareholders that we would work tirelessly to bring the company to self-sustainability, and our decisions, actions and execution have resulted in this achievement.
As I have stated in my shareholder letter, this fiscal year was one of transition and renewal for us. Over the last several quarters, we’ve discussed the restructuring efforts considerably, where we took decisive action to reach for the business as a whole, constraint costs and realign the entire company into two business units, namely the Graphics & Portability Group and the Digital Media Group.
Q4 is the most accurate reflection of our new cost base and our financial results underscore that our restructure is working well. We are now refining our structure further to achieve greater optimization and further revenue growth.
I’d like to highlight few key events over the past fiscal year that are definitely noteworthy. Speaking to the Digital Media Group side of the business first, we revamped and relaunched our game service on DISH Network in October with new subscription models of $6 per theme pack or $11 for the super saver.
In December, we migrated our GameTree TV service Free to entirely subscription based model. As we’ve illustrated within our annual report, our -- excuse me, our subscription numbers for Free are gaining amazing traction and momentum, and we are encouraged of the data we are seeing.
We’ve also announced new agreements with Roku, Opera and Panasonic, and we are actively working on launching GameTree TV on these distribution partners, as well as several that are still unannounced, but we will be making those public soon.
Finally, we are very excited to have launch GameTree TV content on AT&T uVerse. These games were live in late May, and again, the momentum of attraction on uVerse is noteworthy.
We certainly acknowledge that its taken longer than expected to obtain critical mass for GameTree TV, but we believe that the smart TV market is finally emerging and we are now extending agreement at a much more rapid pace.
Our Graphics & Portability Group has also had a stellar fiscal year. We’ve licensed our core transition technology for use in some of the biggest producing brands of the year, including NCsoft’s Guild Wars 2, a massive multiplayer online game that broke numerous records and thus had incredible traction with the Mac.
We recently launched Rockstar’s Max Payne 3, a AAA title that has received wide-spread of claim. We’ve also worked on Disney's Planes with the Mac version of that game launching eminently.
Finally, we are seeing encouraging revenue growth on the number of our other online massive multiplayer games such as Evil Mind. This is noteworthy because these massively multiplayer online games generate recurring revenue for us on a per subscriber per month basis and that revenue base continues to grow.
In Q4, we expanded our license agreement with Google for SwiftShader. This license expansion obviously delivered outstanding revenue at an impressively high margin but also make SwiftShader significantly more pervasive.
Our 3D rendering technology is now covering an array of applications across the breath of Google products and being used by people globally. Such an agreement serves as an exemplary revalidation of the technology and set the stage for continued license success.
I also note there is much anticipation around the $1 million technology license that we announced several months back. We have in fact successfully completed the proof-of-concept, and I’m happy to confirm this license fee will in fact be recognized in Q1. We expect to announce further details in September.
On the administrative front, I want to express my satisfaction on the resolution we reach with Oberon Media, regarding the $2.8 million in outstanding liabilities. These were complex negotiations but ultimately came to [nomical] resolution which gave us a $1.7 million benefit to the balance sheet. We also renegotiated our debt with BEST Funds, with some of our negotiation being the reduction of the interest rate down to 10% for the first three years.
Between the strength of revenue almost reaching breakeven for the full fiscal year and our strong sales pipeline, we feel that the company has been stabilized and we are now poised for continued revenue growth. This has been a period of transition for us, but as discussed in our annual report this is also period of renewal. I’m optimistic and confident about the prospects ahead.
With that high level summary of the business highlights for the fiscal year, I would like to invite Dennis to provide additional color and context for the fiscal financials.
Thank you, Vikas. Clearly, we are very satisfied and very pleased with our results in fiscal 2013. As was evident last year, as we looked ahead, we expected that there would be significant challenges to face and difficult decisions to make to address these challenges. I think that you will see these are well expressed in the financial filings for the year end and our MD&A in particular.
As Vikas mentioned, we did make commitment last year and there was a significant transformation as a result. I want to address my context and comments in a light of three key themes that are apparent in the 2013 results that TransGaming delivered, revenue growth, cost containment and a restructuring of our financial position. As we summed up last quarter in this call, we believe that we definitely finished with an excellent foundation on which to build.
So the first theme of revenue growth. Revenue increased substantially from both business units. From GPG, continuing a trend of growing license revenue from SwiftShader and the first significant monetization of our newly granted patents. And secondly from DMG, a $1.2 million year-over-year increase.
Within GPG, the company successfully closed and executed on a number of licensing agreements. And using our Cider enablement technology, we enabled some of this year’s top gaming titles as outlined already by Vikas.
DMG had equivalent success with an impressive relaunch of GameTree TV on DISH Network, a substantial revamp and relaunch of GameTree TV free and then the signing of many new agreements with TV OEMs over the top device makers and active negotiations with new MSO distribution partners.
Closing up on this theme, I think it is important to access where we’ve come from year-over-year. Since fiscal 2009, we’ve almost quadrupled revenue and since fiscal 2011, just two years ago, doubled it. And as Vikas will summarize, upcoming we believe that our business in the markets we serve can continue to deliver this kind of growth.
Secondly, around cost containment, as mentioned through our previous interim quarterly calls, operating expenses will decrease significantly in fiscal 2013 to approximately $7 million in gross cash burn as promised a year ago.
To give this some context, total operating expenses were lower than two years ago in fiscal 2011. $1.2 million of this expense reductions came from the realignment, Vikas described along.
As a result, our operating loss for adjusted EBITDAs, we are defining it in the MD&A for the year, was only $175,000. This is essentially the net cash operating burn before other items including debt servicing.
Going in to 2014, we planned to hold this line on expenses and believe that we can maintain operational efficiency as well as customer delivery for existing customers with modest increases in expenses only to support launches under new distribution agreements and related customer service as necessary.
So then onto my last theme of financial position, Vikas has already done a good job of highlighting the key parts there. We believe with the stock covering around $0.10 for most of the last half of the year, we were both judicious in the capital markets but at the same time also aggressive in reducing the risk and servicing cost of debt.
The first improvement in the company’s financial position came from the resolution with Oberon in negotiating the year note payable to $1.1 million, which was then subsequently paid in July. Also subsequent for year end, refinancing with BEST Funds resulted in a significant change in our terms both in terms of interest and the extension of the repayment churn.
Above $1 million had already been paid down on the previous notes payable with BEST interest for 2013. So when we increased the new notes back to $3.5 million, we use the proceeds to finance the payment of the negotiated earn out.
We recognized the risks that were evident in the company’s financial position and are very pleased to be able to reduce the uncertainty that they generated.
So in closing, as mentioned, I believe that these three themes together provide an excess and a stable foundation to achieve our objectives for fiscal 2014.
With that, I will hand it back to Vikas.
Thank you, Dennis. As we look forward, we are formulating these strategies that will prefer our products and revenue upwards more dramatically than ever before. We are focused on a number of key initiatives for the company for fiscal 2014 and beyond.
Firstly, we believe there is enormous outline potentials to share. While we are already negotiating additional strategic license agreements, we believe that this technology could have a profound impact on a broader range of companies at the device level. In supplementing, it’s not entirely replacing the typical graphics hardware.
We are conducting an analysis on our Cider translation technology and updating business model to yield greater revenue. We’re also receiving substantial interest in various components of this technology from non-gaming related applications.
In area that we are actively investigating and to some extent already generating revenue.
Finally, our traction with GameTree TV is encouraging and we’re either negotiating or signing new agreements at a greater pace than ever before and actively working on systematic launches. In fact, we have a major launch happening within the next couple of weeks that will represent a number of global firsts for TransGaming and our DISH TV products. We will announce the details within a few weeks.
In conclusion, I’m very pleased with where we are today and that we’ve been able to navigate the challenges of the past year. We’re well poised to future growth and between TransGaming leadership, our extraordinary employees, and our highly engaged board, we’ll all continue to work tirelessly to generate shareholder value.
With that, we’ll open up the form for any questions. I’ll turn it back to the operator.
(Operator Instructions) The first question is from Ron Shuttleworth of M Partners. Please go ahead.
Ron Shuttleworth - M Partners
Thank you for taking my call this morning. I just want to get maybe some clarity on in terms of like where you stand with your -- the contracts that you are signing AT&T et cetera and what the timing would be on the recognition of -- potential recognition of revenue and if there is some sort of scale that we can look out?
Hey Ron, it’s Dennis. Thanks for your question. All of the agreements that we’ve talked about are either generating revenue already or will be generating revenue eminently. So where we’ve been specific about who we’re engaged with certainly have been we’re hitting the ground running now with revenue.
The scale of that really is related to the size of the subscriber base and the extent to which those particular operators need to roll out devices. For example, in the Smart TV market when we launched something there, those devices are already turned on and activated by consumers as well as increasing over time.
So there is a pretty quick hit in terms of the -- both the traction of users and their related revenue. And so at this point, we haven’t talked about the projections in terms of the user base, we’re going to be conservative with that in the meantime. And hopefully we’ll able to add some color on that in the next couple of quarters.
Ron Shuttleworth - M Partners
As a follow-up to that are you getting paid by the Smart TV guys on a per device basis? So where are you or are you sharing some sort of consumer revenue stream where the consumer has to sign up to, for example, an app store?
Yeah. Ron, this is Vikas. I’ll jump in there. With the Smart TV market, we’re actually evolving our business model for GameTree TV a little bit primarily driven by the fact that most Smart TVs don’t yet have an effective ecommerce system in place or is highly limited.
So while we are pre-integrating it into the televisions which means that either the television maker will issue an update and all of a sudden, GameTree TV is lit up or on new televisions that have already got that software update when a consumer takes a television home, turns it on, it will automatically see GameTree TV there.
Where we can have ecommerce capabilities, we will continue to work with a subscription base model but we’re evolving it to an ad base model as well in the cases where there is no ecommerce available. And in the case of that ad model, we really have two ways of doing this.
One is that we’re sharing the revenue with the ad provider and then they are in turn sharing directly with the television maker or alternatively if we brought the ad provider to the table then our deal is still directing the television maker but then we are sharing the revenue sort of three ways between the television maker, TransGaming and the ad provider, and that would be still be the reconciliation on our end with respect to our content partners.
Thank you. (Operator Instructions) The following question is from [Stefan Lanc] of Laurentian Bank Securities. Please go ahead.
Hi, guys. I’d like to know how do you see Q1 this year in terms of sales versus last year?
The simple answer Stefan is up, quite nicely. What we have demonstrated historically year-over-year, quarter-over-quarter is that, we are seeing a lift in revenues on a very consistent basis. We do point out that Q4 historically has always been our strongest quarter for a whole variety of reasons and that Q1 does come down again, and then we continue to see a lift into Q2, Q3, Q4.
The good news is that when we do come down to the Q1 revenue we never do come down as dramatically and revenue is always higher. So we do expect that Q1 revenue to be higher than last year’s Q1. And again as for the comments of both Dennis and I have made, we are committed to ensuring breakeven and sustainability as we move forward. So everything that we do on a quarterly basis is measuring both our costs, as well as our revenue fairly intensely.
Thank you. The following question is from James [Zakari] of EDT. Please go ahead.
Hi Vikas. How are you?
I am doing well. Thank you, James. How are yourself?
Excellent. I just want to tap you on the back for your company, everybody in the company that you managed to reorganize quite nicely as you expected and you are like the Phoenix that has coming out of the fire now. We shall have -- don’t have to worry so much about the financial aspects.
My question is how are we looking forward for the new MSOs that are out there? Are we looking to possibly do three, five, I mean, what we are looking at the next calendar year, this fiscal year?
All right. Well, first of all, thank you very much for the kind words. We are calling the past year renewal and taking a collective effort of everybody at TransGaming from our employees, our Board of Directors, our leadership to make this happen, but we do appreciate the feedback and it’s always nice to hear.
With respect to traction as we move forward, so publicly we have already announced deals with Roku, with Opera, with Panasonic, and we are actively working on the constant pipeline for all those. I can’t give you direct timelines, it’s just, when we expect to launch, but it is going to be somewhere between now and we call it early in the calendar 2014 period. We do have a number of additional agreements that we have already signed that haven’t been made public yet and we are working on those as well.
Now I will point out that our strategy around figurative distribution is a three-tier strategy. One is the MSO market, secondly is the television OEM market and thirdly is over-the-top device market.
The reason why we have actually forged a three-pronged strategy, because each of these tiers are moving at very different pace, given the global economic crisis that we have gone through and to some extent are sibling through, one of the biggest challenges that we’ve faced is a slowdown in capital expenditures by the largest operators in the world.
And what I will point out as a reminder for everyone is that, in order for GameTree TV to run effectively what we require is a next-generation set-top box. And the production and the commercialization of these boxes from an operator standpoint is not an inexpensive feat, which is why there has been a slowdown globally not just for us but for our competitors as well.
So when we aggregate together the overall distribution, again I remain very optimistic given the deal curve we have currently but we are going to be launching on several television OEMs between now and early next year, while we’ve also got other MSOs who are lining up and we’ll systematically launch with them as soon as we can based on what their own lifecycle what product launch looks like.
Excellent. So how many deals do you have actually signed now whether you don’t know, don’t know who they are obviously, but how many do you have signed and ready to go to be announced in the mid-term future?
It’s a good question, I mean, it’s like figuratives, I can’t give the exact number, between now and early in 2014. I would say we are probably in the beyond what we’ve already announced another three to six. Bear in mind that we also are in negotiation with the number of additional companies as well. So we are very aggressive on trying to get some of these new agreements closed.
Thank you. The following question is from [Ono Rio of Modern Touch]. Please go ahead.
Hey guys. How is it going? Just wanted to call and ask question in regard to the stock price, and where you guys are heading for next year or our target for next year?
Thanks for your question. We are not in the habit of providing a lot of guidance except for what you’ve heard from us in terms of our objectives for fiscal 2014 and in particular we can’t comment on the market. I think my editorial comment is I have not guess right at all in the last 12 to 18 months on TransGaming stock…
… and I’m not about to do that now. Our job is as you’ve seen this year in particular to execute on a strategy with the objectives that we’ve put in front of everybody today and the market we’ll just respond and set the price.
Okay. Thank you.
Thank you. The following question from Doug McDonald of NBS. Please go ahead.
Doug McDonald - NBS
Yes. Good morning. Congratulations again. Two questions or two part question. One is on SwiftShader and I’ll ask the three parts to it. Can it be put into smartphones and tablets, and if it can or wouldn’t, I assume because it’s a software algorithm-typed structure, would that not be a significant benefit for power savings to smartphones and tablets? And my part of that question is, are there technical limitations to it, to using it in smartphones and tablets?
So it’s a great question and let me expand a little bit on SwiftShader. So as I’ve already indicated in my comments earlier, some of the license agreements that we’ve already negotiated and establish for company like Adobe, Citrix, Google, et cetera, really do validate the capability of that technology, as well as some the universality of what we are capable of from a 3D rendering perspective.
As we look to the future, we believe that there is significant unlock potential within SwiftShader across more enterprise-based applications, as well as at the device level. So answering your question more specifically, we do believe that at the device levels specifically smartphones, tablets, including televisions by the way, there is a lot of upward potential.
Now couple things to keep in mind here. One is that, currently, as all these devices start to become more intelligent and more capable, they do require both a CPU and a GPU, GPU being a graphics processing unit or graphics hardware, that’s what the current rendering.
A GPU consumes power, it dissipates heat and it takes up physical space, and depending on the kind of GPU get it is not an inexpensive piece of hardware either. We believe strongly that we can either supplement the GPU or we can replace entirely, which then ultimately gives a lot of these device makers incredible flexibility to do all sort of things with in the future from applications to better CPUs.
So it is a market that we are aggressively going after and we are looking at that market both directly, as well as through other third-party that’s specialized in what I would call IP and/or patent monetization.
The second part of your question related to technical limitations. I will point out that from the software rendering perspective, that software rendering occurs on the CPU itself. So you have to have either a multi-core architecture and I don’t want to get too technical here. Multi-core architecture meaning you get multiple CPUs and/or you got to have a CPU that is high-end enough from a processing capability perspective. That then allows us to run through share much, much more so effectively. Having said that, if there is a device maker that still wants to run extremely high-end graphic intensive applications, well that’s the right kind of CPU in place, while SwiftShader can do part of the job, we certainly can’t do all the job.
But it gives us a great deal of flexibility however to be able to negotiate with some of the biggest consumer electronics companies of the world because we believe that we can offer them a serious competitive advantage both from a price perspective as well as the flexibility perspective.
Doug McDonald - NBS
Okay. So just an add-on then, some thing like an iPhone 5, would it be able to remove its graphics chip and run with just with SwiftShader or would that be or would it just complement the graphics processing units?
So the answer from a purely theoretically perspective is yes. It could potentially eliminate the graphics processor completely and then do all the rendering through the actual software layer that we provide in a situation like that. Now, we can make that statement partially because the actual CPU that’s running on an iPhone 5 is very powerful CPU.
And then the other thing is that when you look at the nature of the applications that are currently available on iPhone 5, based on just some tests that we already run, we do believe that from a benchmarking perspective, our technologies have the capability to render that very effectively.
(Operator Instructions) The following question is from [Michelle Gani] a Private Investor. Please go ahead.
Hi Vikas. Following your comments, when can we expect to have something concrete regarding what you just had said?
What I point out is that given what I’ve described regarding SwiftShader running at the device level, those are complex negotiations to have with very large companies, who are working on a road map that is developed over the course of many years and our roadmap actually takes two to three years to execute upon.
So it’s one of the reasons, why we aren’t engaging third parties outside the organizations specialized in this as well as house the relationships. I’ll give you an overview because it is impossible for me to give you a timeline other than to telling you that we are very actively working on this. And it’s got the attention of myself as the CEO, Dennis is involved and both our engineering teams as well as the VPs who are running the divisions within which SwiftShader is housed.
So this is a very important area of focus for us. It’s an area of that we are committed to monetizing much more dramatically but I can’t give you a timeline at this stage. All I can tell you is that we are very optimistic about some of the prospects that we have ahead of us.
(Operator Instructions) We do have a question from Doug McDonald of NBS. Please go ahead.
Doug McDonald - NBS
A follow-up on a separate issue, GameTree on the set top boxes like Western Digital offers, I believe, Samsung in their DVD player that sort of thing. Any comments?
I’m not sure I understand your question, Doug. Could you clarify please?
Doug McDonald - NBS
I have a Western Digital set top box, I can use for Netflix that sort of thing. I forget what it’s called but it’s a way to get screen things, Netflix and other services. They offer some digital internet radio stations, that sort of thing. I noticed that GameTree is not there. I know that you -- I believe you have a contract with Sony.
I would think that Samsung with its penetration into DVD players which again falls into a service set top type thing because the DVD player is on top and the smart unit. I’m just wondering if you can comment on any relationships there because I was surprised that GameTree is not in a Western Digital thing?
Yeah. Certainly so, great question. So what you’re referring to is really part of the over the top device strategy that we have, one of the three tiers that I have described earlier. Roku is really our first over the top device partner from that perspective. And then depending on how you categorize this Opera to some extent because Opera really is a browser that is pervasive across the whole range of devices as well as televisions.
Now within Western Digital, I don’t know what the architecture specifically looks like, but what I’ll point out is that, number one, we’re pursuing the Over the Top device market but as we look at how we’re going to pursue that we’re evaluating individual opportunities based on what kind of market share they actually have.
One of the biggest challenges that we face in this industry is that there is a great deal of what I call fragmentation from the technology architecture perspective across all these different devices.
Everyone is using different forms of CPUs, different operating systems, different environments, we’re starting to see a little bit of a convergence and Linux is becoming the embedded operating system of choice, which works very well for us, but architecturally with so much fragmentation there is a lot of development that we need to do that obviously becomes very expensive and takes a substantial amount of time. So we look at how much traction in Over the Top device maker has and based on that we then pursue accordingly.
I know, I can tell you definitively I had conversations with Western Digital about a year and half ago, and things sort of dropped off. I can take a look at where they are at and what their overall strategy is, but we’re being very systematic about who we decide we’re going after to ensure that we’re getting the right kind of adjustable market growth.
Doug McDonald - NBS
Could you comment on Samsung?
My comment on Samsung is that they squarely fit within the bucket of a consumer electronics company that we need to do business with. So we announced an agreement already with Panasonic, I believe about a month ago month and half ago and internally as a part of our strategy we do have a number of large companies who are leaders in the respective field that we are pursuing and I don’t think I’m giving you any confidential information but I think that yes Samsung fits into that bucket. I can’t provide details on whether that is at this point for confidentiality reasons.
(Operator Instructions) There are no further questions registered at this time. I’d like to turn the meeting back over to Mr. Gupta.
All right. Thank you very much. Well, these were great questions and certainly, I think we’ve got a shareholder base and investors who are reengaging with the company and really trying to understand both of product portfolio mix, as well as our overall market adoption strategies little bit better. We are committed to increasing our transparency, communicating with the market more effectively and ensuring that we’re providing out the details on how we’re progressing as we execute on our business plan.
I certainly want to express my gratitude and my thanks for our shareholder base that’s been very patience as we restructured the company, realigned our business units and as I’ve indicated earlier, navigated through some of the challenges that we’ve had.
Both Dennis and I are extremely confident about where we are today. We believe that the stage is set for substantial revenue growth and we’re actively working on pursuing new agreements, as well as looking to monetize in existing ones in order to be able to deliver significant shareholder value over the course of the next year.
So, please stay tuned, we have lots of exciting things and works and we’ll look forward to talking to everyone again during our next quarterly call. Thanks very much everyone.
Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.
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