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GlobalSCAPE Inc. (NYSEMKT:GSB)

Q3 2009 Earnings Call

November 10, 2009; 4:30 pm CST

Executives

Mendy Marsh - Chief Financial Officer, Vice President & Treasurer

James R. Morris - President & Chief Executive Officer

Craig Robinson – Chief Operating Officer

Analysts

Raymond Young - Dolphin Asset

Greg Newman - Newman Agency

Operator

Good afternoon. My name is Elisa and I will be your conference operator today. At this time I would like to welcome everyone to the GlobalSCAPE third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. (Operator Instructions)

Ms Marsh, you may begin your conference.

Mendy Marsh

Thank you Elisa. Good afternoon thank you for joining our earnings call today. This is Mendy Marsh, Chief Financial Officer for GlobalSCAPE. Joining me on the call this afternoon are Jim Morris, GlobalSCAPE’s President and CEO and Craig Robinson, GlobalSCAPE’s COO.

Before we begin I would like to remind everyone that today’s call including the question-and-answer session may include forward-looking statements regarding expected revenue, earnings per share, future plans, opportunities and expectations of the Company. These estimates and plans and other forward-looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on the call.

These risks are detailed in the company’s Form 10-K released on March 31, 2009, and in other statements made by the company. The statements included in this conference call were based upon information known to GlobalSCAPE as of the date of this call and GlobalSCAPE assumes no obligation to update the information contained in this call. With those Safe Harbor statements presented I’ll continue with summarizing our financial results for the third quarter ended September 30.

As covered in our press release today our revenue for Q3 increased to approximately $4.3 million as compared with $3.7 million in the same quarter of 2008, representing an increase of 15%. Our maintenance and support or M&S revenue increased by 36% to approximately $1.7 million compared with $1.2 million in the third quarter of 2008. Our continued increase in M&S revenues reflect strong customer satisfaction and increased renewal of M&S contract compared to prior quarters. These deferred M&S revenues provide us with a healthy stream of recurring income.

Net income for Q3 was approximately $576,000 or $0.03 per diluted share. This compares with net income of approximately $227,000 or $0.01 per diluted share in the third quarter of 2008. We are pleased to note that our net income for Q3 exceed by over a 150% our net income for the period in 2008. Our net income of $1.3 million for the nine months ended September 30 is a 19% increase compared with the same nine months period in 2008.

We continue to closely manage cost keeping operating expenses within 1% of the prior year. We therefore continued to add to our very strong cash position and endedQ3 with a strong balance sheet. Our cash on hand along with short term investments was $10.1 million at the end of the third quarter, a 60% increase from the beginning of the year and we have no long term debt. In closing our revenue, earnings and cash position us to continue making sound business investment in 2009 in accordance with our business strategy.

At this point I would like to turn the call over to Jim Morris. After Jim’s comments we will then open up the line for questions and answers. Jim?

James Morris

Thank you Mendy and good afternoon everyone. I’m pleased to have this opportunity to speak with you. Mendy has summarized our very strong financial performance during this third quarter.

As mentioned in our press release this afternoon we have continued to execute our strategy of growth through partnerships, certifications, product improvements and continued introduction of new products. Through our partnerships including the one with nuBridges announced in July we have expanded our market reach from Managed File Transfer or MFT into security of data at rest.

We are encouraged with the potential of this new partnership and are receiving many customer invitations to explore their data at rest requirements mapped to the nuBridges product line. In addition, as previously announced in September, we also have formally registered as a small business with the government organizations through out the Department of Defense and directly with large system integrated companies such as Northrop Grumman, SAIC, EDS, Accenture and ManTech in the federal markets.

These registrations will allow us increased the opportunities to participate in federal government programs oriented towards increasing small business revenue share and government contracts. In fact we have already leveraged the small business registration with recent contract awards from the Veterans Administration in the United States Navy.

We are often asked about our plans for the future. As a publicly traded company we are mindful of the need to communicate clearly without giving our competitors the advanced notice we believe they seek through these earning calls and other public releases. With this in mind let me now put our recent significant accomplishments into context and outline our vision for the future.

First, our certifications, validations and awards reflect our corporate strength on multiple fronts. We build solutions that work. As we noted in our press release today our service call volumes are declining and we maintain an extremely high level of customer satisfaction in excess of 98%. The government has certified our solutions as being secure, trusted, interoperable and scalable.

We have numerous independent industry certifications and validations that give our commercial customers and prospects additional confidence in our solutions. And we have assembled a tremendous leadership team and our people are highly motivated and excited to be part of the GlobalSCAPE team.

Second, we have multiple partnerships, contract vehicles and small business registrations that increased our long term ability to grow our business. The number and variety of our partnerships is at all time high. We have multiple partner and channel sales initiatives under way internally. While the sales cycle typically can span multiple months or quarters our deeper market reach throughout these partnerships gives us great confidence in our future growth prospects.

Third, our financial strength allows us to continue investing in research and development and in our people and engineering processes. Today’s press release mention that we have an internal product road map extending into 2011. Without getting into specific details I will mention a few things about our road map.

First, we intend to continue delivering upgrades and enhancements to our enhanced file transfer server and wide area file services or WAFS solutions. Enhanced file transfer server represents over 70% of our revenue and has multiple add on modules that allow customers and prospects to implement capabilities driven by their unique business needs.

We intend to continue development of these solutions as necessary to meet increased customer demand in this area. Our current WAFS solution is our most stable product ever. Improvements to this solution have been a major driver in our reduced service call volume. We intend to continue delivery our performance enhancements to this product line and we will showcase its improved capabilities at Autodesk University in Los Vegas in early December.

Sales of our consumer product line, specifically CuteFTP have continued to decline in recent years. We will consider new improved consumer products as part of our product roadmap to ensure that we continue to leverage our considerable consumer customer base and market reach. We have over one million consumer licenses sold and significantly more than that issued in the form of trials and maintenance upgrades. This represents an enormous installed base world wide, name recognition in considerable markets for future development.

Finally, our road map considers potential adjacent markets for us to enter. The phases engaged presented in our road map development process allows us to consider potential new markets and investments on an ongoing basis and we will and we are doing so. From our current position of strength our vision for the future includes growing both our revenue and earnings as we have done so in the recent past. We have a very strong base from which to build toward our vision. Gartner Group recognized GlobalSCAPE for the second year in a row as a leader in the managed file transfer market.

This continued recognition is an independent proof point of the success of our transformation from less than a $5 million in Revenue Company in 2004 to an enterprise leader with approximately $16 million in annual revenue today with more than 85% of that revenue derived from our non-consumer solutions.

We are proactively considering strategic opportunities or organic and non-organic growth in our current and prospective markets. We also evaluate all potentially viable opportunities as they are presented to us and address them as appropriate in the context of our long term vision, strategy and roadmap.

In September we met with institutional investors and analysts in New York and New Jersey. We highlighted our accomplishments and began positioning our vision. The feedback was positive, the consistent feedback we received was to keep executing and growing your business which we have quarter-over-quarter, year-over-year.

We also participated in our second Americas growth capital conference last month in Boston and conducted multiple briefings. Again the feedback was positive and we already have scheduled a third set of meetings for institutional investors and analysts in December in San Francisco. There is a lot of interest in GlobalSCAPE and these are exciting times.

We appreciate the trust and support of our shareholders and we are very pleased to have had this opportunity to give you our perspective on our market strength and to outline our vision for the future. In addition, I want to thank the GlobalSCAPE team for their hard work to make these results possible.

Our strategy is sound and proven itself in our performance year-to-date and most recently in our tremendous third quarter performance. We believe continuing to execute our strategy we’ll serve our shareholders well in the coming quarters. Finally, tomorrow is Veterans Day, GlobalSCAPE wishes to thank our men and women in uniform that have and continued to serve our nation.

That concludes our prepared remarks. Elisa at this time please open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Raymond Young - Dolphin Asset.

Raymond Young - Dolphin Asset

I just have one quick question. The other long term liabilities on the balance sheet, trying to understand the significant increase in that category.

Mendy Marsh

Hi Raymond this is Mendy. Other long term liabilities for the most part represent the long term portion of deferred revenue and then this year the significant increase is due to the US Army orders because that orders, the maintenance and support revenue was for three years. So, the one year portion of it is in the current portion of our balance sheet anything over a year is in that other long term liabilities category.

Raymond Young - Dolphin Asset

And one other question, what is the split between revenues coming from governments’ contracts or similar types of vehicles versus revenues from the private sector.

Craig Robinson

Raymond, hi its Craig here. Revenue from government sales in the third quarter was under 10%.

Operator

Your next question comes from Greg Newman - Newman Agency.

Greg Newman - Newman Agency

I had a question about the current assets last quarter’s figures I think it brought it up to about $12.5 million, and so I was curious what that had grown to if you have those figures for us for this quarter.

Mendy Marsh

Current assets for the current quarter is about $12.4 million.

Greg Newman - Newman Agency

Okay. And your financial strength indicators, the return on assets, return on equity, return on investment, I’m picking on the ones that are probably in negative territory here, operating margin and profit margin, those have been down about negative 50% for a few quarters, and I know that’s on a trailing 12 month plan, and so…

Mendy Marsh

Greg, without knowing specifics of how you are calculating your numbers I can’t really speak to your question. I know that the financial ratios that I look at on a month to month basis have been generally about the same since about June or July and certain ones of them have been in the positive for some time now.

Greg Newman - Newman Agency

Okay. I was concerned or curious to know when that would drop off where we go into the positive on those.

Mendy Marsh

As I indicated I am not sure which ratios that you are looking at, but the ratio is that I look at including day sales outstanding, current ratio, return on equity, those are all currently in the positive and has been for several last months now.

Greg Newman - Newman Agency

Okay, all right that’s good. Yeah, I was looking at the trailing 12 month probably due to charge off from last year the ones I look at it will still be on there till after next quarter that, I mean after next quarter it will be removed.

Mendy Marsh

Yes.

Operator

We have no further questions in queue.

Mendy Marsh

Okay well thank you very much. Thank you Elisa, and thank all of you for joining our earnings call today. We intend to publish the transcript of this earnings call along with the recorded version on our Investor Relations page for 30 days from today. We look forward to continuing our dialogue in future calls. Thank you very much.

Operator

This does conclude today’s teleconference. You may now disconnect.

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