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Executives

Michael Wellesley-Wesley - Chief Executive Officer

Johan Apel - President and COO

Jerry Kieliszak - SVP and CFO

Analysts

Chyron Corporation (CHYR) Q3 2013 Earnings Conference Call November 8, 2013 10:00 AM ET

Operator

Good day, and welcome to ChyronHego's Earnings Conference Call, where management will review the Company’s Financial Results for its Third Quarter Ended September 30, 2013. My name is (inaudible) and I am the operator for today’s call. At this time all participants have been placed in a listen-only mode. At the conclusion of management’s prepared remarks, the call will be open to questions. As a reminder today’s conference call is being recorded.

I’d now like to turn the floor over the host of today's conference call, Michael Wellesley-Wesley, he is the company’s CEO. Michael you may begin.

Michael Wellesley-Wesley

Thank you. Good morning and thank you all for joining us on the call today. As the conference call operator indicated my name is Michael Wellesley-Wesley, ChyronHego’s CEO. Joining me on the call today are Johan Apel, President and Chief Operating Officer and Jerry Kieliszak, Senior Vice President and Chief Financial Officer.

Before we begin, let me turn you over to Jerry to submit for the record the required Safe Harbor language prior to discussing our financial results and other matters. Jerry?

Jerry Kieliszak

Thanks, Michael. Before market open today we issued a press release containing the company’s financials results for the third quarter ended September 30th. If you don’t have a copy you can retrieve one from chyronhego.com.

We submit for the record the following statement. From time-to-time and including on this call, management may make forward-looking statements relating to such matters as its anticipated financial performance, business prospects, new products, R&D activities and similar matters that involve risks and uncertainties that may cause actual results to differ significantly from results discussed in those forward-looking statements.

Factors that might cause such a difference include those set forth in the company’s filings with the SEC. Please review the risks and uncertainties appearing in the company’s Form 10-K for the year 2012 and the company’s Form 10-Qs for the first and second quarters of this year. I will now turn you back over to Michael.

Michael Wellesley-Wesley

Thanks Jerry. Shortly Jerry will provide a summary of our financial results for the third quarter. We progressed significant new business in terms of both product sales and multi year sports production services contracts during the quarter and we’re optimistic regarding our business prospects for the remainder of the year and for 2014. Before we get into the financial results I wanted to remind you of some of the key aspects underlying the merger with Hego.

The strategic thinking underlines the creation of ChyronHego is to create a market leading company in the fields of TV graphics data visualization and production services for both live TV and online news and sports production. This merger has created a strong global graphics company that is committed to innovation and to evolving existing products and services to better support our customers in the future.

Third quarter revenues for ChyronHego were ahead of our plan. North American revenue accounted for 48% of our total revenue and the rest of the world revenue accounted for 52%, this compares with 71% and 29% respectively in the prior year third quarter. The percentage revenue split between products and services with 55% products and 45% services in the third quarter, and this compares with 67% products and 3% services in the prior year third quarter.

Now two key objectives of the Hego transactions were to increase our international revenues as a proportion of total revenue and also we increase our recurring services revenues. We achieved both of these objectives in the third quarter and as a result, we believe our business is more balanced and predictable in terms of geographical markets penetration as well as the split between products and services revenue. In the third quarter we experienced revenue growth across the board and now our focus is to aggressive grow our top line in 2014 and beyond.

As a result of the merger, we have an exceptionally strong product offering backed up by extensive product development and engineering resources and strong global service and support capability. We now have offices in 11 countries and the global network of resellers and partners. Our focus of course is on live production in the areas of sports of breaking news. Live sports on TV represents premium content for advertisers and as a consequence broadcasters continue to invest significantly in this type of programming. Sports on TV comprise an area of growth and then otherwise mature industry. And it's in this area that Hego product and technologies are market leaders.

The ChyronHego product line is a complementary with very little overlap. But as I just mentioned, Hego's solutions predominantly addressed the needs of live sports production with product categories such as augmented reality and virtual product placement, illustration and production services offerings based around our proprietary image and player tracking solutions.

Our North American customers are clearly very interested in these capabilities. And with a 195 full time employees a large and expert freelance tool and development centers in the USA, Sweden, Finland and the Czech Republic. Our customers could be confident of our ability to support production needs that range from high school footballs all the way to through to the Super Bowl.

Chyron by contrast has recently been more focused on graphics solutions for live and near-live news production workflows. This is an area where speed, ease of use and the responsiveness of our robust solutions continues to be a key ingredient of success. ChyronHego will move to second place in terms of global market share in our industry space.

ChyronHego is now focused on near and long-term value creation for our shareholders. And we believe our comprehensive and competitive product portfolio will quickly make us the market leader in our industry. We showcase the combined product line to the international broadcast TV and content creation community at the IBC Tradeshow in Amsterdam in early September and our products were well received. But this is really just the beginning. With this merger we're looking forward to integrating Hego and Chyron solutions and working together to innovate new products and services. Our objective is to develop powerful easy to use solutions for sports, news and live TV. Hego has been quicker over the last few years and this merger will allow us to take our combined business to a whole new level especially in North and South America where Hego offerings have been generating significant interest.

We're very excited about this combination, I believe that our customers our colleagues and our shareholders will be the real beneficiary. At present the true profit potential of our business model is been explored by a number of extraordinary or deal related costs which Jerry will discuss in a moment. 2013 is a year of transition and transformation of the ChyronHego. A number of one-time costs that have impacted profitability in 2013 will not recur in 2014. I am optimistic for the future and believe shareholder patience will be rewarded.

Johan and I will be happy to answer questions a little later, but first Jerry will take you through a brief summary of our third quarter financial results.

Jerry Kieliszak

Thanks Michael. The third quarter of 2013 is the first quarter that includes full three months results of both Chyron and Hego businesses. Year-to-date results for the nine months ended September 30th, include the operating results of Hego from May 22nd through September 30, 2013. Third quarter revenues increased 94% to $14 million as compared to $7.2 million in the third quarter of 2012. Of this $6.8 million increase $1.7 million was from sales of Chyron products and services, a 23% increase over last year’s third quarter and the remaining $5.1 million was from sales of Hego products and services.

Gross profit margin for the third quarter was 62.7%, down from the 67.9% for last year’s third quarter due to a higher percentage of services revenues in the mix, which generally carry a lower gross profit margin in products. Total operating expenses in the third quarter were $9.8 million versus $5.9 million in last year's third quarter. The increase of $3.9 million arose from the following; $1 million of severance costs in the third quarter, a $0.9 million charge for the change in fair value of the Hego transaction contingent earn out liability is where we purchased the mark-to-market adjustment, the inclusion of $2.8 million of Hego operating expenses and offset somewhat by a reduction of $0.8 million in other Chyron operating expenses.

By type R&D expense was $2.4 million for the third quarter, up 33%. Sales and marketing expenses were $3.5 million up 13%, and G&A expenses were $3 million, an increase of $2 million from last year’s third quarter. The additional $2 million was due to inclusion of $0.6 million of Hego G&A expenses, a $0.4 million increase in Chyron G&A expenses and a severance expense of $1 million.

And lastly third quarter ‘13 OpEx also included a $0.9 million mark-to-market charge. Operating loss for the third quarter was $1 million, the same as the last year’s third quarter. Excluding third quarter 2013 severance expenses of $0.1 million and mark-to-market expense of $0.9 million, the company would have reported an operating profit $0.9 million for the third quarter of 2013. For the third quarter of 2012 where severance expense of $0.1 million to the excluded, operating loss would have been $0.9 million.

Net loss for the third quarter was $1 million versus a net loss of $0.7 million for last year’s third quarter. Excluding the third quarter 2013 severance expense of $1 million and the mark-to-market expense of $0.9 million the company would have reported net income of $0.8 million for the first quarter of 2013. For the third quarter of 2012 the severance expense of $0.1 million to be excluded net loss would have been $0.6 million.

And now for a quick look at the nine months results. The financial results for the first nine months ended September 30 include the results and operations at Hego from May 22nd. Revenues for the first nine months increased 43% to $32.7 million as compared to $22.8 million in the first nine months of 2012. Of this $9.9 million increase, $2.5 million was in sales of Chyron products and services, an 11% increase over last year’s first nine months. Operating expenses for the first nine months of 2013 were $25.5 million compared to $19 million in the first nine months of last year.

The increase of $6.5 million rose from the following. $1 million in restructuring charges from the May 2013 Chyron downsizing, $2.3 million of Hego merger related expenses, $1 million of severance cost in the third quarter, $0.9 million mark-to-market charge, the inclusion of $3.7 million in Hego operating expenses, and all of these expenses were offset somewhat by a $2.4 million net decline in other Chyron operating expenses.

Broken down by type; R&D expenses were $6.5 million, a 14% increase; sales and marketing expenses were $9.7 million, a 4% decrease; and G&A expenses were $8.4 million for the first nine months, a $5.2 million increase over the first nine months of last year. The $5.2 million increase is primarily due to the inclusion of $0.7 million of Hego G&A expenses, $2.3 million of Hego merger-related expenses, $1 million of severance expense and the portion of the restructuring expense of $1 million that was allocated to G&A. Also included in the operating expenses for the first nine months of 2013 was $0.9 million mark-to-market charge.

Operating loss for the nine months of 2013 was $3.7 million as compared to an operating loss of $3.2 million for the first nine months of last year. Excluding the restructuring charges of $1 million, Hego merger-related expenses of $2.3 million, third quarter severance of $1 million and a $0.9 million mark-to-market charge, the company would have reported an operating profit of $1.5 million for the first nine months of 2013. Excluding severance expense of $0.1 million operating loss would have been $3 million for the first nine months of 2012. Net loss for the first nine months of 2013 was $4.1 million as compared to a net loss of $2.3 million in last year’s first nine months.

Excluding restructuring charges, Hego merger-related expenses, third quarter severance and a mark-to-market charge, the company would have reported net income of $1.1 million for the first nine months of this year. Last year excluding severance expense, the net loss would have been $2.1 million.

Operating income and net income amounts discussed here are exclusive of restructuring charges, Hego merger-related expenses, severance cost and the charge obtained in the failure of the Hego transaction [contingent] to our liability are not US generally accepted accounting principals basis operating income or net income. And I’ve discussed here and solely to disclose the operating income and net income amounts that might have been reported had these costs and expenses not been occurred. As a basis for comparison between periods and to better understand the delta would have been reported had these costs and expenses not been occurred.

This ends my prepared remarks and I'll turn it back to Michael.

Michael Wellesley-Wesley

Thank you, Jerry. With that let's open the call for your questions. Operator, please instruct our listeners on how to queue up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And the first question is from Michael Kupinski of Noble Financial. Please go ahead.

Unidentified Analyst

Hi, good morning. This is actually (inaudible) for Michael Kupinski. And thank you for taking my questions and great quarter by the way. So just looking at Chyron excluding the Hego merger, revenues increased substantially, I believe 22% is that correct.

Michael Wellesley-Wesley

That is correct, yes.

Unidentified Analyst

Can you maybe give us some color on where that growth came from, was it mostly domestic or did you see any international growth?

Michael Wellesley-Wesley

I think quite a substantial piece of that came from Latin America where we closed the major order beginning of July. So I would think year-over-year Latin America growth was partially responsible for that. Jerry do you have other feeling, I think, and also I believe the rest of it was in the United States.

Unidentified Analyst

Okay. Thank you.

Michael Wellesley-Wesley

So it was across the board.

Unidentified Analyst

Okay, great. Thank you. And then on gross margins, I know they were down due to higher percentage of services. But what do you guys see gross margins in the future, do you see an opportunity to increase them, any comment on that would be helpful?

Michael Wellesley-Wesley

Let me pass that to Jerry.

Jerry Kieliszak

Sure. I think what we’re seeing is probably a leveling of the gross margins to be in the range of mid 60s. When Chyron was a standalone Chyron business we were more in the 70% range because we have much higher mix and product and service, but Hego is more of a service revenue oriented and with the combination we're going to see will slightly grow our margin overall. But certainly the revenue as you have seen will be substantially higher providing significant increase in gross profit.

Unidentified Analyst

Okay, great. Thank you for that. And that’s it for me. Thank you.

Michael Wellesley-Wesley

Thank you.

Operator

Your next question is from [Marty Albock] of Horizon Networks. Please go ahead.

Unidentified Analyst

Gentlemen great quarter fabulous great. Let me ask you, Michael we have spoken in the past about you hiring an IR firm we had made some suggestions to you. Has the Board made a decision on that yet?

Michael Wellesley-Wesley

Yes the Board met yesterday and we've made a decision. We have an investment bank who we believe will fit us very well from both an investor rating profile and the investment community and in other ways and certainly in terms of organizing one-on-one meetings, road shows and appearances, the conferences and we expect to be able to make an announcement on that next week.

Unidentified Analyst

Okay, all right great. And you also mentioned you might be exhibiting at some financial shows in January, can you confirm that?

Michael Wellesley-Wesley

We will be, Johan Apel who is on this call will be presenting at the Needham Conference in January and the Nobel Financial Conference in January.

Unidentified Analyst

That’s wonderful. That’s what we need, more exposure. I think it’s fabulous. We've got a great story to tell and I think that the time has come this is the time to expose it. Keep up the great work. Really it’s a great quarter.

Michael Wellesley-Wesley

Thank you.

Operator

The next question is from Larry (inaudible) an Independent Investor. Please go ahead.

Unidentified Analyst

Good morning Michael and Johan.

Michael Wellesley-Wesley

Good morning Larry.

Unidentified Analyst

I wish to call this morning to thank you Michael for your years of service to shareholders. Your [curtail call] as our CEO must be quite gratifying. In addition I wanted to wish you happiness and success in the future. Thank you again, Michael. Johan, do we have anything planned for the World Cup, our expertise in soccer prompts me to ask this? And that's my question and my statement. Thank you again, Michael.

Michael Wellesley-Wesley

Well, thank you, Larry. Over to you Johan.

Johan Apel

Yeah. We are not working directly for proceed for the host broadcaster, but as we have many of the right fielders across the world in terms of will do World Cup next year or are trying. So there will be many, we have many projects with the local broadcasters where our equipment will be used. So I think we’ll, we can expect some positive effect next year from the World Cup. Our company has become so large now, so World Cup is a big thing, it won’t be a spike in the revenues, but it certainly won’t be negative.

Unidentified Analyst

Thank you very much Johan and Michael. Good day.

Operator

(Operator Instructions) The next question is from Douglas Pies of Douglas Pies Capital. Please go ahead.

Unidentified Analyst

Hi everyone, hi Michael, Jerry, Johan.

Michael Wellesley-Wesley

Good morning Doug.

Unidentified Analyst

I’d just like to [speck] on Larry’s comments, Michael and thank you very much. I know it’s been a hard work and we appreciate everything you’ve done.

Michael Wellesley-Wesley

Thank you very much indeed Doug.

Unidentified Analyst

A couple of questions, could you give us maybe some idea of the size of our total addressable market now annually with the combined company. Can you just give us a little color on that?

Michael Wellesley-Wesley

I think that’s one for about to be new CEO, Johan.

Johan Apel

Good morning. Hi Doug Johan here.

Unidentified Analyst

Hi Johan.

Johan Apel

Yeah. The tradition broadcast graphics products market is depending on who you ask, but it’s $200 million, $250 million a year something like that. What we are addressing now though is a much larger pie which encompasses both the sports teams themselves and the sports markets, but also very, very big services market around broadcast production and concentration. And exactly saying how big that market is, it’s quite hard. But it’s much bigger than $250 million a year, that’s for sure. So I think we can safely say that we have at least more than doubled our target market, that’s for sure.

Unidentified Analyst

Okay. So with revenues let’s say $50 million to $60 million currently that market could be five times at least greater than our current revenues?

Johan Apel

Yeah absolutely, it’s more. I would say, I would be -- as we are addressing so many markets it becomes a bit fragmented and it’s very hard to say exactly what that target market is. But saying that we could, I wouldn’t claim that we have more that we were in double-digit percent of market share and I totally guess the market up by any charge.

Unidentified Analyst

Okay. That helps a lot. Can we get some idea from a goal standpoint, Johan and Michael and Jerry as to what operating margins could be in like a year or two since they messed a little bit as you said by extraordinary expenses this year and so forth. But going forward in the 2015, ‘16 range, can we think in terms of mid-teens something on that range?

Michael Wellesley-Wesley

Doug, this is Michael again here. We always we have never given any forward guidance. So asking that Johan or Jerry say now is really more sort of goals and objectives type of answer rather than a prediction. But with that health warning, I will hand it over to them.

Unidentified Analyst

Okay. I understand.

Johan Apel

No, if you look at the figures this quarter Doug, its $1 million out of 14 if we should be rough. And hopefully there are more efficiency and more margins that we can take out which means that it’s a deep what we are showing now. So we are at least aiming for the [theme], that’s for sure.

Unidentified Analyst

Okay. Can maybe get a little more color on the integration of Hego in Chyron, like for example the touchscreen technology from Hego and that’s been incorporated more into Chyron technology and vice versa, are those things that Chyron’s technology has that can be incorporated to Hego products?

Jerry Kieliszak

There are various levels of asking that question. Number one, are we selling more of Hego touchscreens in US now? Yes, we have a couple of probably five trolleys running in the U.S. right now with (Inaudible) in technology, but that is more utilizing safe capabilities of Chyron in the U.S. and piggybacking on that. What will come though is much large integration between the technologies of both companies.

And if all goes well, you will see quite a lot of nice things like that on NAB next year. But it would -- what our development teams get with -- the development teams are focusing on is to show us really great portfolio, which is much bigger in terms of coming from both sides, but also using technologies from both companies and creating new things for themselves and coming out with that in the screen for NAB.

Unidentified Analyst

Okay. It sounds like Soren is going to be very busy.

Michael Wellesley-Wesley

He is busy.

Unidentified Analyst

Last question I guess would be social media, is there any direct contact that we have with some of the social media companies or is there an exposure there, primarily through the broadcast station?

Michael Wellesley-Wesley

With social media companies, do you mean the ones keep rating the data from Facebook and Twitter or do you mean Facebook and Twitter themselves?

Unidentified Analyst

I was thinking of Facebook and Twitter themselves, but maybe a little color in general and what are social media opportunities could be going forward?

Michael Wellesley-Wesley

There are multiple levels in this, you have the Instagrams and Facebook themselves, which are the social media companies. Our interaction with them is more or less understanding, there are APIs and technologies that we can integrate with them. I think though the interesting part for us is on the second level because there is quite a large industry today with companies like (inaudible), there is many of them who are Q rating or adding value to the social media data. And we're working with all of them quite a lot to make sure that when this data is supposed to be visualized or displayed in any of the outlets where we are competing putting our products on the market that we are the preferred shows.

So I think we are in a quite good way taking advantage of the opportunity in the space for us. It’s still I would say there is more buff than bank -- than buck if you understand what I mean in this space at least for us.

Unidentified Analyst

Okay. Well, that helps very much. I appreciate everything and I am good enough from here.

Operator

The next question is from (inaudible) Investment Management. Please go ahead.

Unidentified Analyst

Johan, I have a question regarding the technology. Is this technology from Hego applicable to other areas besides sports? And if so, are there any plans to attack any other areas? I realize the Stat maybe small and you may want to go left the one area first, but can you just elaborate on that if there is any other potential application?

Johan Apel

When you say technology I assume you mean the image processing play tracking technology?

Unidentified Analyst

Yes.

Johan Apel

The answer is of course on a high level, yes. The question is do we have the manpower and resource and expertise to run for other opportunities. As this right now we have enough on our plate within the sports world to keep all the guys we have [DCM]. We are trying to get as much resource into this part of our company into the door as possible.

So it’s a, I would say if we have a fantastic business idea in an area which is not our core business then our internal high level resources might be utilized, but then I think that's a spinoff from our company then, because I think, I am a firm believer in staying through to your core and doing what you are good at. And even if we have the technical competence around this and our similar guys that they are amongst the best in the world do this. You can’t just be good at the technology, you must understand your environment as well, and that's where I think we are fortunate that we both had a technology and understand this sports environment, otherwise we wouldn’t be successful.

Unidentified Analyst

Did you comment on the competition that you have in this area or is it minimal?

Johan Apel

There are few companies out there, there is one company, the Stat is U.S. company doing using some sports data company probably heard of them, they required (inaudible) company some years back who also have a player tracking technology based in image processing. So they are competitor, there are couple of other companies across the globe who are also in this space, but we are in a very good position. In this technology field we are if not the leader we are very high among the ranks.

Unidentified Analyst

Great to have you on board and we look forward to good things ahead.

Johan Apel

Thank you very much.

Operator

I am showing no further questions in the queue and would like to turn the conference back to Mr. Wellesley-Wesley for any further remarks.

Michael Wellesley-Wesley

Thank you very much. Again thank you everyone for participating on today’s call. On a personal note, it’s a business week day, this is the last call that I will participate on, but I am very, very enthusiastic about the prospects for this company under Johan’s management going forward and look forward to participating in the future as a director and as a shareholder. So thank you all very much and have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s program. This does conclude the presentation and you may all disconnect. Everyone have a great day.

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