Glowpoint, Inc. (NYSEMKT:GLOW)
Q3 2013 Results Earnings Call
November 6, 2013 4:30 PM ET
Pete Holst - President and CEO
David Clark - Chief Financial Officer
Welcome to Glowpoint’s Third Quarter 2013 Results Conference Call. Before we begin, I want to remind listeners this call is being webcast live over the Internet and then webcast replay will also be available on the company’s website, www.glowpoint.com following the call.
The call is being hosted by Glowpoint’s CEO and President, Pete Holst; and CFO, David Clark. There will be a brief question-and-answer period following the company’s prepared remarks.
Slide two summarizes the company’s Safe Harbor statement, the company’s partial discussion of its financial results should be read in conjunction with the condensed consolidated financial statements and related notes contained in the company’s quarterly report on Form 10-Q for the three months ended September 30, 2013 filed today with the SEC.
Various remarks about the company’s future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.
Although the company believes the assumptions upon which preliminary financial results, financial information and forward-looking statements are based, are reasonable as of today’s date. These forward-looking statements are not guarantees of future performance and therefore investors should not place undue reliance on them.
Also, these statements are based on facts known and expected as of the date of this conference call and the company undertakes no obligation to update these statements to reflect the events or circumstances that might arise after this call.
Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in the company’s most recent annual report on Form 10-K and other filings with the SEC.
In addition, today’s call and webcast may include non-GAAP financial measures within the meaning of SEC Regulation G and a reconciliation of such measures to GAAP measures is contained in the slide.
I would now like to turn the call over to Pete Holst, Glowpoint’s CEO and President.
Thank you, Kevin, and thanks to everyone for joining us today. As we continue our journey toward the next phase of video collaboration, I'm pleased to report we've made significant strides in capital restructuring, product development and leadership growth.
Let me start with a quick overview of Q3, which I consider to be a solid quarter for us. I'm pleased with our results, achieving revenues consistent with our guidance, well, exceeding our targets both on margins and operating expenses, resulting an improved adjusted EBITDA performance.
As outlined in prior calls, Glowpoint’s transformation will happen through a combination of great people, there absolute dedication to customer service, our ability to consolidate and automate the company systems and innovation through and with our partners, particularly the areas of unified communications, system integration and reporting.
We spent a good portion of the year focused on restructuring the balance sheet, operating expenses and isolating process and system issues that have historically limited the company's ability to generate both revenue and earnings growth.
Well, I believe near-term revenue growth will remain challenging given the macroeconomic headwinds in the macro video infrastructure and related devices. I believe the company is poised for growth in the second half of next year based on the release of our new operating platform, increasing video demand from a rapidly growing base of mobile users and corporate IT requirements for deeper integration into their environment backed by enhanced reporting and analytics.
For the third quarter, our results were driven by solid execution in capital restructuring coupled with savings from our expense reduction plan and improvements in operational delivery. We made significant strides in enhancing long-term shareholder value by successfully converting all outstanding Class B-1 preferred shares into common stock, eliminating both current and future dividend obligations.
In October, the company completed a successful refinancing of its loan obligations with Main Street capital, allowing for near-term liquidity and long-term expansion capital. We believe the combination of these two significant events and our partnership with both GPI and Main Street will provide the company and its shareholders an opportunity to grow the business in a meaningful way over the next three to five years.
Along with operational improvements and workforce restructuring, we are focused on getting the right leadership in place to lead the company in the next phase of our transformation. To that end, we made several changes to our executive team during the quarter.
In September, Ted Tzeng joined the company to lead the architectural design of our systems and network. Ted is aggressively shifting to a multi-architecture multitenant strategy, which we expect to yield measurable results in 2014. In addition to Ted joining the team, we are also pleased to announce the addition of Scott Zumbahlen to lead our global sales effort.
Scott has over 25 years experience in sales, marketing and product management and joined us from Polycom where his primary focus was on channel sales development and strategic alliances. Scott brings a critical set of skills to Glowpoint sales organization and is a proven technology executive with a wide range of experience, leading sales, marketing and product at scale.
In other organizational moves, we’ve combined marketing and communications to create a new role focused on driving more consistent and high-value interactions with customers and partners to accelerate programs that will drive sales, build brand loyalty and help customers embrace the new style of Glowpoint.
To that end, Jonathan Brust, who has served in a variety of customer facing roles for many years, will become our new Vice President of customer engagement. Jonathan is very passionate about the customer experience and will look to position our service model as second to none next year.
Finally, I am also very pleased to welcome Jeanne Leasure, as our new Vice President of Human Resources. The war for talent has never been more pronounced in our industry than it is today. And Jeanne brings over 20 years experience in the areas of talent acquisition, performance management and career development.
While the overall revenue picture trended as anticipated year-to-date, we’re pleased with our Q3 financial performance relative to the guidance. As stated before, our business is in transition, both technically and in terms of product mix as we navigate through some of the uncertainties typical of such transition periods.
We remain committed to our key principles, including continued investment in the business, accelerating our roadmap for next generation services and diversification of people, products and customer base. Looking forward, we are focused on driving profitable growth and services, focused on management and application layer integration into the video ecosystem.
It's going to take time to get margins to the desired levels that we wish against the backdrop of a changing marketplace but we are confident that our differentiated approach from competitors, including our focus on reporting and automation will pay off over the long term.
Now let me turn to our future outlook. Glowpoint’s foundation has always been in service delivery and to that end, the company will focus its efforts in three key areas going into 2014. Number one, information systems, video architecture and automation; number two key partnerships and channel alliances; and number three expanding our operating leverage.
Let me talk about all three individually. First, we are incredibly focused on information systems and workflow right now. The company will invest aggressively, but prudently in customer relationship, IT service, human resource lifecycle and universal active directory management systems over the next nine months to improve workflow, ensure reliability and enable the company to scale on a multi-tenancy basis. We believe these investments will position us for both growth and margin expansion next year.
Second, our sales objectives will align with our recent leadership additions and core experience in providing a complete solution of video and network services. Moving forward, we will focus our efforts on growing the business through channel partners and global alliances, by leveraging our expertise in creating BPO and IT service management solutions for video collaboration.
And finally, we will focus on the amalgamation of people, systems and process to create a higher degree of operating leverage in the business. We spent all of 2013 realigning the workforce and exploring alternative means for service delivery. Over the last six months, we’ve evaluated multiple systems with the goal to create the most robust service delivery model for video collaboration in the market next year.
We are now on the second of three phases of this process, and we expect to release our new platform in the second quarter of 2014. Our goal will be to increase EBITDA -- adjusted EBITDA by 20% next year, grow our core managed service solutions and managed other less profitable products through their lifecycle.
I remain confident that we are making good progress in our turnaround. We are already seeing significant improvement in our operations and successfully rebuilding our balance sheet. Our cost structure is becoming more closely aligned with our revenue. We are reigniting innovation at Glowpoint with a focus on customer service experience and I expect to see measurable gains in all key areas throughout 2014.
Now, let me turn the call over to David to walk through our Q3 financials.
Thanks, Pete. I will begin with a review of our revenue for the quarter as summarized on slide four. Revenue for the third quarter of 2013 was $8.3 million, up 27% from $6.6 million in the third quarter of 2012.
Revenue for the nine months ended September 30, 2013 was $25.6 million, also up 27% from $20.1 million in the same period last year. These increases are primarily due to 2013 revenue contribution from the acquisition of Affinity, whereas the first nine months of 2012, do not include results from Affinity since the closed in October 2012.
Turning to the next slide. Slide five summarizes the reconciliation or net loss to adjusted EBITDA. As shown here, certain items are added back to net loss to arrive at adjusted EBITDA, an important non-GAAP measure that is used to assess the operating performance of the company and in the calculation of our loan covenants.
Adjusted EBITDA more than doubled to $1.2 million for the third quarter of 2013, as compared to $571,000 for the third quarter of last year. For the nine months ended September 30, 2013, adjusted EBITDA grew 51% to $3.2 million as compared to $2.1 million for the same period last year.
The improvements in adjusted EBITDA for both the third quarter and nine months ended September 30, 2013 as compared to the same periods in 2012, are primarily due to the addition of our, due to our 2013 results, Affinity revenue, less associated operating expenses with such revenue.
Our adjusted EBITDA as a percentage of revenue increased to 15% for the third quarter of 2013 as compared to 9% for the third quarter of last year. And to 13% for the nine months ended September 30, 2013 from 11% for the same period last year. These improvements are primarily due to lower adjusted EBITDA based G&A and sales and marketing expenses as a percentage of revenue in 2013 as compared to 2012.
Moving to slide six. I’m pleased to report that we recently completed two significant transactions, the transformer capital structure and improve our long-term liquidity. During the third and fourth quarters of 2013, we retired all outstanding shares of B-1 preferred stock in exchange for common stock.
The effective conversion price for the preferred exchange was $1.54 per share common stock. This conversion price represented a significant premium of approximately 61% to our common stock price and a trailing 90 day volume weighted average basis as of the date of the first exchange transactions.
This transaction simplified our capital structure by eliminating $10 million of liquidation preference and $247,000 of accrued dividends related to the B-1 preferred from our balance sheet. This transaction also eliminated future dividends of approximately $153,000 in 2013 and $600,000 in 2014, and in each year thereafter.
We also recently completed a refinancing of our debt facilities in October 2013. We secured a new credit facility for Main Street Capital Corporation consisting of a term loan commitment of $11 million and a line of credit of $2 million dollars.
In closing, we borrowed $9 million on the term loan and $200,000 on the revolver and paid off $8.8 million of existing term loans and fees plus new facility fees and expenses. Our new term loan has a five-year maturity date. The principal payments for the term loan are based on the percentage of the excess cash flow we generate where as our prior term loans have fix scheduled of principal payments that totaled a $166,000 in the fourth quarter of 2013 and $1.5 million in 2014. Our new credit facility will provide us greater liquidity, borrowing capacity and financial flexibility.
Turning to slide seven, I’ll summarize key data for our cash flow and balance sheet. We generated positive cash flow from operations of $1.8 million for the first nine months of 2013 as compared with $757,000in the same period last year. During the first nine months of 2013, we paid down $780,000 on a revolving line of credit, resulting in no outstanding balance on the revolver at the end of the third quarter.
Our capital expenditures totaled $753,000 for the first nine months of 2013 and represented key investments in our infrastructure to serve customers. We ended the third quarter with the cash position of $2.1 million as compared to $2.2 million at the end of 2012.
Now I’ll turn the call back over to our moderator to open call for questions.
(Operator Instructions) It appears there are no further questions. I’d like to turn the call back over to management.
We have a few questions coming in from the web.
I do apologize, I do have a question coming from [Jack Gilbert]. Please proceed with your question sir.
Pete, my name is [Jack Gilbert] and I listen to the announcement and the transition period, can you tell me if the transition period ending this quarter or the year end and can -- and you talked about the EBITDA going to 20% next year. Can you talk about sales or revenue when that -- can you tell me when the transition period that we are in is going to end and we are going to see increase in revenue?
Sure. So we're not giving any guidance right now, Jack for next year and probably will contemplate doing so at an Investor Conference coming up. But at this stage, we believe we are materially through the transition period, expect this to continue probably through the fourth quarter and into the first quarter of next year. And in terms of revenue growth I think the goal right now is to make sure we have our new platform in place, and then expect -- you should expect growth rather in the second half of next year on the topline for revenue purposes.
As it relates to EBITDA, specifically, I believe we stated our growth objectives of 20% over this year and obviously we haven’t completed the year yet. So we don't have complete guidance on what the final EBITDA numbers is going to be, but our growth objective for EBITDA next year will be to grow the bottom line by 20% over the 2013 period.
Thank you. (Operator Instructions) There are no further questions at this time. Probably, there are some questions over the web. Please take them now.
Sure, very similar to Jack’s question actually. The question, as you mentioned growth in the second half of 2014, can you talk more about where that's coming from?
We believe it's coming from three key sources. We believe there's right now explosive growth in video-enabled mobile devices and that's a market we intend to tap substantially. We believe there is -- based on recent surveys, a substantial demand for a greater reporting in analytics over a complete ecosystem of video devices. And we believe monitoring security and advance ticket management within the enterprise and a movement toward proactive versus reactive notification, is a movement that's taking shape right now and we believe we are well positioned to tap into that market.
The other -- the second question, we have from the web, as it relates to headcount we always seem to get that question every quarter. Headcount right now is 110, all-time people as of September 30, but frankly this really isn't a core KPI for the company. And moving forward, we will probably discuss revenue and EBITDA productivity, as it relates to headcount specifically in the future.
Another question from the web we have right now from Sam Schwartz. As long as we mentioned competition, how do you compare with BlueJeans as to revenue and capabilities? BlueJeans can speak to revenue, specifically it's a privately-held venture backed company. In terms of capabilities, we believe that BlueJeans provides a very good reservationless video conferencing service. And we certainly believe that reservationless video is part of a much broader video ecosystem that starts with standards-based devices, mobile devices, desktop devices.
And within the enterprise, we believe that the demands for reservationless are certainly, A category. But it's much, much broader than what BlueJeans provides today from a help desk scheduling conference production and level I to level III support. And we believe that IT service management for video collaboration as a whole is something that Glowpoint specifically addresses and certainly reservationless video is included as part of that ecosystem.
The second question we have is what differentiates Glowpoint from free mobile video apps like Skype or FaceTime or any other freeware that exists out there today? Those applications are generally have been driven by the consumer movement towards video. And if you look at Glowpoint’s revenue, you certainly would see very quickly that the vast majority of our revenue is delivered to enterprise clients who demand a whole host of services that start with scheduling reservations on as needed basis. They certainly want to adopt reservationless services on a scalable basis, but their primary demands are focused on security, monitoring and management and ongoing availability of 24x7 support basis globally.
Certainly some of the applications that were mentioned in the web don't do -- very many of those things if any at all. So that would be three or four different differentiators about what we do versus what some of the freeware applications do out there. That summarizes the questions that we see on the web.
So, on behalf of the entire management team here at Glowpoint, I would again like to thank everyone for your participation on the call today and we appreciate your continued support.
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.
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