Rimage Corp. Q3 2009 Earnings Call Transcript

Oct.21.09 | About: Qumu Corporation (QUMU)

Rimage Corp. (RIMG) Q3 2009 Earnings Call October 21, 2009 10:00 AM ET

Executives

Bernard P. Aldrich – Chief Executive Officer

Sherman L. Black – President and Chief Operating Officer

Robert M. Wolf – Chief Financial Officer

Analysts

Chuck Murphy – Sidoti & Company

Operator

Welcome to the Rimage Corporation third quarter earnings conference call. During today's presentation, all participants' lines are muted. Following the presentation the conference will be open for questions. (Operator Instructions).

This conference is being recorded today, Wednesday, October 21, 2009. I would now like to turn the conference over to Mr. Bernie Aldrich, Chief Executive Officer. Go ahead, sir.

Bernard P. Aldrich

Good morning and thank you for taking the time to participate in our third earnings call. Joining me today is Sherman Black, our President and Chief Operating Office and Rob Wolf, our Chief Financial Officer who will review our recent operating results.

We will be pleased to take your questions at the conclusion of our remarks. Regulation FD prohibits us from providing any forward-looking statements, unless they are released simultaneously to the public.

It is important to understand that any forward-looking statements are subject to a number of risks that could affect our anticipated performance. These risks are set forth in our filings with the Security and Exchange Commission which we urge you to review.

Turning now to a brief discussion of our current performance, Rimage has remained a solidly profitable, cash generator throughout the course of this steep recession. We maintained this track record in the third quarter with sales and earnings that exceeded our internal forecasts.

Sales for the period totaled $22.4 million compared to $25.2 million in the third quarter of 2008. Net income came to $3.1 million or $0.33 per diluted share compared to $4 million or $0.42 per diluted share in the year-earlier period.

Our third quarter earnings benefited from strong sales of our Producer line of disc publishing equipment and reduced service-related costs associated with improvements to our product, which pushed our growth margin to 50%.

Producer sales into the government market were particularly robust increasing 21% from the year-earlier period. These systems were deployed in a variety of applications, including digital, forensics at Homeland Security and other federal agencies, tape-to-disc video conversion for training in public affairs and data archiving, which has been enabled by the market adoption of Blu-ray technology.

We also were encouraged by the 66% increase in equipment sales generated by our Asian operation. In this growing and under penetrated geographic market, Rimage recorded strong wins in medical imaging and other traditional applications. This solid performance indicates that our business development investments in Asia are paying handsome dividends.

However, third quarter was not without its challenges. First, sales of consumable supplies were down reflecting the multi-quarter impact of the recession on sales of disc publishing hardware and on the utilization of our install base.

And second, sales in Europe remained weak in the face of difficult economic conditions. On balance, the third quarter was a good period for Rimage, but we believe it is prudent to remain guarded about our near-term prospects, since the weak economy is continuing to affect the purchasing decisions of many customers, both in North America and overseas.

For this reason, we are participating fourth quarter sales at or near the third quarter level. However, our earnings will be affected by an increase of approximately $1 million on the research and development spending for a strategic new product. I use the word strategic because this new product dovetails into one of the initiatives that we will be implementing in 2010.

Thank you and now Sherman Black will briefly discuss the strategic initials that are currently under way.

Sherman L. Black

Thanks, Bernie. The strategic plan that we are formulating involves a two-pronged approach. Most immediately we are developing strategies to strengthen Rimage's core business. These efforts are focused on our products, our sales channel, our global service offerings and our supply chain.

In terms of products, we are establishing sound product line management practices, which involve streamlining our hardware offerings and focusing on those products with the greatest potential. Regarding our sales initiative, we are evaluating our sales model with the objective of moving Rimage closer to its served markets and improving efficiency of our sales channels.

In addition, we want to ensure that we are adequately serving geographic markets with strong growth potential for our products, including China and other Pacific Rim economies. Our service initiative is focusing on ways to increase the utilization of our service offerings since after-market-service generates a stream of recurring revenues with attractive margins. Part of this initiative involves ways to simplify these offerings and expand our geographical reach and overall attach rate.

And finally, regarding our supply chain, we are focused on generating cost reduction and providing improved access to required technologies. Expanding our base as strategic supplier relationship is the key aspect of this initiative.

We have been working on all these things for the last six months and we plan to start implementation in 2010. In addition to strengthening our position in our current markets and successfully implementing these initiatives, this will position Rimage to pursue new, untapped opportunities that fall within the scope of our traditional competencies.

The second prong or aspect of our strategic focus involves evaluating opportunities that are adjacent or complementary to our core business. This process is now underway and Simar Mittal, Rimage's new Chief Technology Officer is playing a key role in identifying areas that we could pursue through internal development or an acquisition.

We are not operating under any pre-determined timetable in the execution of this process. We will proceed only when we are adequately prepared and only if an opportunity makes economic sense and possesses long-term growth potential.

In closing, I want to emphasize that we are genuinely optimistic about Rimage's future. We believe the plans and strategies that we will be implementing during the coming year have the potential to re-ignite Rimage's growth and profitability. All in all, I'm confident we're moving in the right direction. Thank you.

Now, Rob Wolf, our CFO, will review our third quarter results in greater detail.

Robert M. Wolf

Thanks, Sherm. First I'll review some third quarter sales highlights. Sales of digital publishing hardware increased 36% from the level posted in this year's second quarter, but we're down 7% from the third quarter of 2008.

Hardware accounted for 43% of total sales in the third quarter compared to 36% in this year's second quarter and 41% in the third quarter of 2008.

Sales of recurring revenues, including sales of printer ribbons and cartridges, parts, blank CD/DVD media and maintenance contracts were consistent with the second quarter and decreased by 14% in comparison to last year's third quarter.

The third quarter decline relative to the prior year largely reflects the impact of the recession on the utilization of our install base in retail and other applications. Recurring revenues accounted for 57% of our third quarter sales, down from 64% in the second quarter and 59% in the third quarter of 2008.

International sales declined 10% in this year's third quarter in comparison to the year-earlier period due primarily to an 18% drop in European sales as a result of the weak economy. However, sales in the Asia Pacific market increased 39% exceeding our internal forecasts for this period and reflecting a positive impact of our business development investments in this region.

International sales accounted for 35% of total third quarter sales compared to 38% in this year's second quarter sales and 35% in the year-earlier period. Currency FX decreased worldwide sales by 1% in the third quarter of 2009.

Rimage's gross margin was 50% in this year's third quarter, up from 46% in the second quarter and 48% in last year's third quarter. Compared to the second quarter, our third quarter gross margin benefited from strong sales of our higher margin Producer systems, particularly into the government market.

As a result, we experienced a third quarter shift in our sales mix toward equipment, which carries higher margins than those on consumables. In addition, our gross margin continued to benefit from reduced service-related costs associated with improvements to our products that have further strengthened their performance and reliability.

We anticipate a fourth quarter gross margin in the mid 40% range based on our outlook of lower volumes of Producer sales.

Moving down the P&L, R&D expense of $1.5 million was unchanged from the level in this year's second quarter, but up from $1.2 million in last year's third quarter. Development of a strategic new product is currently under way and this project will cause R&D expense to increase by approximately $1 million in this year's fourth quarter.

Selling, general and administrative expense totaled $5 million in this year's third quarter, down slightly from levels in the second quarter and year-earlier period. The stability in our SG&A over the past year reflects the stringent cost-control measures that we have instituted during this period of time.

Our operating margin rose to 20% in the third quarter up from 13% in the second quarter, but down from 22% in the third quarter of 2008. Our effective tax rate was 36% in the third quarter, down from 41% in the second quarter and consistent with a rate of 36% in year-earlier period.

The higher second quarter tax rate reflected the impact of reducing projected tax exempt interest income for 2009, resulting from the sale of our municipal bond holdings during that period. The decision to sell our municipal bond holdings was prompted by our conservative stance toward cash management.

Turning now to our balance sheet, cash and investments rose to $107.3 million at December 30, 2009 from $104.4 million at June 30, 2009, and $95.4 million at the beginning of this year. Working capital totaled $95 million at the end of the third quarter up from $89.8 million at the end of the second quarter and $62.1 million at the end of 2008.

Finally Rimage's balance sheet remains debt free, while stockholders' equity increased to $116.6 million at December 30 from $112.8 million at June 30 and $109 million at December 31, 2008.

That wraps up our formal remarks. And now the conference call operator will poll you for any questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Mr. Chuck Murphy – Sidoti Company.

Chuck Murphy – Sidoti & Company

A few questions for you, first, could you just kind of talk about what your setup in China is? How many salespeople you have there? Aside from medical, what type of markets you're selling to?

Sherman L. Black

We have today a distribution partner in China that's off recruiting VARs and we've started off with a very minimal amount of investment. We've got one full-time person in China, and that's an area that we see as a potential growth area.

And I'd say, in addition to that one full-time person, we've got a lot of auxiliary support coming in from parts of Asia, as well as we've brought a lot of folks in from the U.S. to jumpstart that market and determine, more importantly, what additional investment is required.

And we're not ready to go in and disclose exactly our plans there, but I can tell you that is a major area of focus for us, and we see that to be a big market opportunity.

Chuck Murphy – Sidoti & Company

And in terms of the new product, the new strategic product you're talking about, can you give us any color there on what market it would be used in or just anything at all there?

Bernard P. Aldrich

I would rather not announce the product in this call today. I'd ask that you give us just a little patience there. We will announce that, I'd say, in Q1 sometime. It will be material for the 2010 revenue and the P&L for 2010.

I can assure you we've spent a lot of focus on trying to understand where is the market growth opportunities and this product is aimed at the right area.

Chuck Murphy – Sidoti & Company

But is it like a totally new product or is it something that would be replacing the Producer or the desktop?

Bernard P. Aldrich

It's totally new, but it also will replace some existing products as well. I mean, it's a total new design, brings in a – I'll just leave it at that. It's a totally new design. But it does and it will replace some existing products.

Chuck Murphy – Sidoti & Company

And could you guys just talk a little bit about your expectations for operating expense growth going into 2010? And are you going to have to rehire people as kind of markets improve or what are your thoughts there?

Sherman L. Black

Yes, this is Sherman again, Chuck. We're not going to get into a lot of detail but I can tell you that the team has done an outstanding job I believe of managing costs relative to the shrinkage in the overall IT market that occurred in 2009.

We're expecting 2010 to, like, if you read what Gartner says, they say that you can expect a little bit of an increase over 2009. The key word there is that the shrinkage, hopefully in the IT market according to Gartner, has stopped and that you have flattening off.

So what we plan to do is our investments will increase and we'll lay that out for you as details become noted. But we'll also have to obviously be aligned with revenue growth as well.

Chuck Murphy – Sidoti & Company

I'll turn it over to somebody else, then.

Sherman L. Black

And, Chuck, we'll get, I know those are the obvious questions and as soon as we can answer those we will certainly do that.

Operator

(Operator Instructions) And, sir, it appears there are no further questions at this time. Please continue.

Bernard P. Aldrich

Well, with that, again, thank you for taking the time to join us this morning, and we look forward to following up with you as our business continues to develop here. Thank you.

Operator

Ladies and gentlemen, that does conclude your call for today. If you wish to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, access code 4172599 star. Thank you and have a good day.

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