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Executives

Jim Albrecht – CFO

James Bindseil – President

Analysts

Greg Newman – Newman Agency

Tom McDonald – Private Investor

GlobalSCAPE, Inc. (GSB) Q3 2013 Earnings Call November 12, 2013 4:30 PM ET

Operator

Good afternoon. My name is Lilly and I will be your conference operator today. At this time, I would like to welcome everyone to the Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

I would now like to turn the call over to our host, Mr. Jim Albrecht. GlobalSCAPE’s Chief Financial Officer. Sir, you may begin.

Jim Albrecht

Thank you, operator. Good afternoon and thank you for joining our earnings call today. With me this afternoon is James Bindseil, GlobalSCAPE’s President.

Before we begin, just a reminder that today’s call including the question-and-answer session might 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 this call. These risks are detailed in our latest Form 10-K filed with the Securities and Exchange Commission on March 28, 2013 and in other statements made by the company. The statements made during this conference call are based upon information known to GlobalSCAPE as of the date and time of this call. GlobalSCAPE assumes no obligation to update the information we present on this call. And with those Safe Harbor statements presented, I will move to summarizing our latest financial results.

We are pleased to report Q3 ‘13 up $6.3 million, which is a 3% increase over Q3 ‘12 revenue of $6.1 million. We are further pleased to report that our revenue for the nine months ended September 30, 2013 of $11.8 million was a 5.2% increase over our revenue of $17.2 million for the comparable nine month period in 2012.

We believe our deferred revenue, which results primarily from advanced bookings of our maintenance and support services to be provided in the future is a key indicator of our potential future revenue trends. We obtained these bookings when we sell software licenses to our customers, which is an indicator of their front-end commitment to our products and as renewals of existing maintenance and support agreements, which is an indicator of our customers’ ongoing confidence in and satisfaction with our solutions and services based on their personal experience.

Our deferred revenue increased to $10.7 million at September 30, 2013 as compared to $9.8 million at December 31, 2012 and $9.6 million at the same time a year ago on September 30, 2012. Our net income for Q3 ‘13 was $2.3 million or $0.12 per share compared to our net loss of $2.7 million or $0.15 per share in Q3 ‘12. Likewise, we achieved net income for the nine months ended September 30, 2013 of $3.2 million or $0.17 per share as compared to a net loss of $3.1 million or $0.17 per share for the comparable nine month period in 2012.

Our adjusted EBITDA excluding infrequent items for Q3 ‘13 was $1.9 million compared to $1.1 million for Q3 ‘12 and for the nine months ended September 30, 2013 was $4.1 million compared to $1.7 million for the comparable nine-month period in 2012. With regard to our Q3 ‘13 EBITDA and excluded infrequent items, thee agreement covering our purchase of TappIn almost two years ago in December 2011 provided for the possible payment of additional contingent consideration in the event the TappIn product line achieved to certain revenue milestones. This contingent consideration along with other consideration paid at the closing of the TappIn purchase contributed to placing certain intangible assets on our balance sheet as a result of this purchase.

During the quarter just ended, we determined it unlikely that we will have to pay this contingent consideration. That conclusion resulted is us reducing to zero, the TappIn earn-out liability previously reported on our balance sheet along with a reduction to zero of the intangible assets recorded at the time of the TappIn acquisition. The result of these adjustments combined with the effects of the elimination of certain associated deferred income tax liabilities resulted in a credit to our net income of $1.3 million, which we referred to as an infrequent item, the effects of which will be illustrated in our non-GAAP disclosures in our 10-Q filed with the Securities and Exchange Commission.

We are pleased with these solid financial results and the continued strength of our financial position. They provide a solid foundation upon which to build for the remainder of the year.

I will now turn the call over to James Bindseil.

James Bindseil

Thanks Jim. Good afternoon everyone and thank you for joining the call today. Before I begin with my remarks I would like to take this opportunity to reflect on the loss of a great leader, mentor and friend and Craig Robinson, our late President and CEO. Craig was a truly gifted individual and made a positive impact on the lives that every person that he encountered. As the results that Jim just outlined to demonstrate one of Craig’s strengths was building a team around and that can design, build and execute a profitable business. While we have made significant strides with increasing our profitability this year, there is still progress to be made in a number of other areas and the leadership team that Craig assembled and we are building upon as more than up to the challenge.

Let me first start with a brief introduction of my thoughts and this is my first time to speaking with you. I have been with GlobalSCAPE since 2010, most recently as Senior Vice President of Client Operations as well as being head of the company sales, managed solutions and support organizations, prior to that I held leadership positions at Fujitsu, Symantec and AXENT Technologies. And my most recent role at GlobalSCAPE, I worked closely with Craig to force the new direction we started last year for the company. I am dedicated to continuing the momentum that company has established as we guide GlobalSCAPE to higher growth and profits.

In addition to my new role I am pleased with the other changes we have made to strengthen the executive team. In our October 9 press release we announced the addition of Matt Goulet as GlobalSCAPE’s new Vice President of Sales. Matt brings to GlobalSCAPE more than 16 years of experience in the security, networking and storage industries. He spent the past five years at Kaspersky Lab, most recently as the Vice President of Small to Medium Enterprise Sales and Operations where he helped to build a sales channel of more than 1000 resellers and drove double-digit growth every year. We are all pleased to have Matt join our team and expect him to play a key role in acquiring new customers, increasing earnings and extending our market leadership. Of course none of us would be able to succeed if it want for the dedicated men and women at the GlobalSCAPE team. The last two months have been difficult for all of us and I could not be more proud of the way everyone has responded to the challenging times.

Now let’s discuss the third quarter results. You may remember back in our March conference call, we emphasized increased earnings and revenue as primary business objective for 2013 and I am pleased with our performance in this period during the first three quarters of the year. Our revenue during this quarter surpassed last quarter’s revenue and now stands off as the highest Q3 in corporate history and second highest quarter ever topped only by the second quarter of 2007 which was heavily influenced by an exceptionally large multi-million dollar U.S. Army contract. For some additional perspective, the total revenue of $18.1 million in the first three quarters of 2013 as Jim mentioned earlier is the highest ever for GlobalSCAPE. And we are on pace to exceed the record performance of $23.4 million that we achieved in fiscal year 2012. I believe we are well positioned to build upon these results with even faster revenue growth during the remainder of 2013 and moving into 2014.

A key to our solid Q3 performance was our maintenance and support revenue climbing to approximately $3.5 million, which is up 14% over the same period last year. We have very strong renewal rates for our maintenance and support licenses. It’s likely this revenue line will continue to grow at a faster pace than our software license revenue in the foreseeable future as our growing installed base generates additional maintenance and support contracts. The corresponding increase in deferred revenue continues to reflect ongoing customer satisfaction with our solutions. Subsequently, customer satisfaction remains a necessary ingredient for sustaining an increase in our revenue growth to the benefit of our shareholders.

And looking at our product mix, our enhanced file transfer or EFT solution continues to power the business. It represents 79% of the total in the third quarter. This is close to the 80% that we recorded last quarter and the 81% over third quarter of 2012. While we intend to remain laser focused with the teams responsible for maintaining our customer satisfaction and increasing our substantial deferred revenue, there is going to be additional focus on increasing new customer acquisition including marketing growth, competitive displacements and continued evolution of the EFT platform in the quarters to come.

We continue to be asked about TappIn and specifically about financial results from our OEM relationship with Seagate, given their announcement and release of Seagate Central which includes the TappIn integration that was shipped in the first quarter of this year. As we have mentioned on the prior calls, revenue from Seagate shipments initially goes into deferred revenue and factors into revenue for us over a three year period. We are still in the early stages of this process and TappIn is still not a material contributor to our revenue at this time. We are however currently planning emerging of technology from our EFT product line, using the TappIn IT to create an enterprise version of TappIn that will permit even further adoption with the enterprise user base. This integration will take time, but it will facilitate even more rapid growth in the existing consumer line.

Carrying on our standard practice of highlighting a key client win for each quarter, I am pleased to reveal that one of the largest domestic pharmaceutical companies selected GlobalSCAPE this quarter for its EFT enterprise managed file transfer solution. The requirements were for elaborate secured file transactions with auditing and automating additional actions following those transactions which included the submission of content to both domestic and international federal regulatory authorities for approval. All of this was easily accomplished using the flexibility they have within EFT’s event rules and advanced work flow engine which allowed us to easily build the solution to their requirements. In addition to the usual technical reviews, this selection process also included an intent legal and company audits which GlobalSCAPE exceeded and received best of breed acknowledgement upon completion.

As highlighted in the past, we have a relatively broad product portfolio for a company of our size and many potential points of market leverage. We are working these as a part of our managed growth strategy which balances revenue and earnings growth with highly focused expense management building on the strong foundation we have built throughout the first portion of 2013. We are going to be examining every product line to determine what if any changes need to be made in order and maximize efficiencies. Finally, I would like to mention that during the quarter GlobalSCAPE was listed as Champion in Info-Tech Research Groups Vendor Landscape for managed file transfer. In addition we were named one of the world’s largest software and service providers by Software Magazine. This is the third consecutive year GlobalSCAPE has ranked in the Software 500. We are happy to be recognized by both organizations for our outstanding products and improving financial performance.

In summary, I am pleased with our sustained profitability through Q3 and optimistic about our growth prospects. While we are certainly more in the loss of Craig Robinson, we also look to the future and how to continue his legacy by growing the company that he put so much into. The leadership team in place is strong. We have a great product line that our customers really value and we’ll continue to find new ways to grow while servicing the customers that are already doing business with GlobalSCAPE. I want to conclude my prepared remarks by thanking those who have served or who are serving in our (indiscernible). Thank you all so much for your interest in GlobalSCAPE and I look forward to providing updates on future calls as to how we are progressing.

At this point I will turn the call back over to Jim to startup question-and-answer session.

Jim Albrecht

Thank you, James. Our 10-Q for the third quarter which we filed earlier this afternoon will provide you a comprehensive look at the financial results we just reviewed as well as a discussion of the various elements of our business. We are now pleased to take your questions, so operator please open the call for questions-and-answers.

Question-and-Answer Session

Operator

Thank you sir. (Operator Instructions) Our first question comes from the line of (indiscernible) with DA Capital. Please go ahead.

Unidentified Analyst

Thank you very much. Congratulations to the management team and company for another solid quarter and of course condolences to you all and the family members of the loss of CEO, Craig Robinson. I just have a few questions and then – that are relatively important and then other set housekeeping, so I will ask a couple of them and then I will turn it back to you to take questions before I spend awful lot too much of time here. On the financial questions that I have, the maintenance and support revenue continues to grow at a nice pace, is it fair to say this revenue line will likely grow at a faster pace than your license revenue over the last – over the next year?

Jim Albrecht

This is Jim. Thanks for the question. The thing about MNS revenue is there is a compounding effect, because every year we sell licenses result in even more MNS renewals in subsequent years. So currently, the MNS revenue is growing at a faster pace than a licensing revenue, but with the addition of Matt Goulet as our new leader of our sales team, we hope to see a renewed growth in our license revenue, such as that gap will close a little bit, I don’t know that it will ever completely go away, because that compounded growth in MNS is a good thing, because it’s a good solid recurring, almost annuity top revenue stream, but I would expect the gap to close somewhat.

Unidentified Analyst

And how would you characterize the margins on the MNS revenue, does it change year-to-year or is it pretty consistent?

Jim Albrecht

The margins?

Unidentified Analyst

Yes.

Jim Albrecht

The margins on MNS revenue are very handsome, because the variable cost associated with supporting a new or even a renewed MNS contract are very amenable.

Unidentified Analyst

Okay. And then the other question I had maybe for James, I believe in your script remarks, you mentioned some other TappIn OEM relationships, which were varying stages in the business development pipeline?

James Bindseil

Yes.

Unidentified Analyst

Can you expand on that for me? I am more curious on the type of companies you are targeting and how you know about the sales process?

James Bindseil

Well, there is a variety of different ways that you can go to those OEM relationships, some of which are more designed, where we are part of the technology that’s being rolled out. And when there is a subscription, then obviously GlobalSCAPE benefits. And then there is other relationships where you actually get – you get paid when the device is shipped. And so obviously we are seeking both of those, but we are looking for the OEM relationships that actually get us out to the largest groups of people and get us the most mindshare for the types of companies that are going out, but it really plays in to what kind of relationship it is, how attractive it is financially and how attractive it is right upfront or whether it’s routed below for a longer period of time.

Unidentified Analyst

Okay, that’s great. Thanks for taking my questions. I will just go back in the queue to ask few more if they haven’t been asked give other people an opportunity here. You guys are doing great and continue.

Jim Albrecht

Thank you so much.

Operator

(Operator Instructions) Our next question comes from the line of Greg Newman with the Newman Agency. Please go ahead.

Greg Newman – Newman Agency

Thank you. Congratulations on the quarter and our condolences to you and Craig Robinson’s family on his passing.

Jim Albrecht

Thank you.

Greg Newman – Newman Agency

You are welcome. I will just start with some questions about the news, if you all are going to share more of the things in the press when we found out about the Panama Canal deal, I found out through a case study on the website? And then like with TappIn, there seems to be well – I am a TappIn subscriber, but I couldn’t find anywhere, where it said how many subscribers, how many people I could invite, and that’s a big part in my life. I have a pretty good Facebook family. And so when I called into company, the question is are you going to spend on that, because they patched me over to TappIn and they told me I could have 100 or 1000, it’s unlimited how many people I wanted to invite? So that’s my first question. Are you not going to start sharing more, just those are things that you all know, but that I had to kind of dig for. They seem like really big deals?

James Bindseil

Okay, Greg this is James. There is really kind of I think two different questions there. The first one around sharing significant win and used case scenarios that is something that we are actively going to be pursuing more of in the future is more outreach, more media outreach, more case studies, more go-to-market type materials, because we really do believe that we have some great stories to tell. And we have not necessarily been as effective as we can be getting those stories out. So there is going to be a lot of effort in 2014 about increasing that visibility for the successes and for the great things that we can do with the product. So the answer to that question is absolutely you are going to see a lot of focus on those marketing outbound efforts.

As far as the second question, I think that’s more of capabilities of the products and what limits may or may not exist? There is certainly always room for improvement for that kind of information that gets published. There is a lot of that information that exist in knowledge basis in the KPs and product documentation. And to be honest, we rely a lot on the types of questions that are asked. And so if that’s a question that does get asked on a routine basis, it’s certainly going to be asked in one of those venues. I certainly don’t pretend to think that we are going to answer all questions before they are asked, but we do make it a point of observing the kinds of things that are asked about the capabilities and making sure that we can’t answer those proactively as they occur.

Operator

Thank you. Our next question comes from the line of Tom McDonald. Private Investor. Please go ahead.

Tom McDonald – Private Investor

Yes. Congratulations on an excellent quarter. I haven’t had a chance to review the 10-Q yet, but could you just comment of the $2.2 million in net income, how much of that is related to TappIn tax benefits?

Jim Albrecht

This is Jim speaking. It’s about $1.2 million to $1.3 million.

Tom McDonald – Private Investor

Okay, great thank you. And can you give us any color around headcount right now, like how many full-time employees the company has?

James Bindseil

It remains right around 100.

Tom McDonald – Private Investor

Okay. And so some of the lower cost of operations can you give us any color into that more operational efficiencies or is there something else you can give us around that?

James Bindseil

Yes, it’s certainly, there is an element of operational efficiencies. There is – we are certainly always looking to spend the money that we need to spend in order to further the business, but some of it is due to unfilled headcount and things like that. So it really is just a matter of being diligent with every single spend that we have got and making sure that we are doing the right things. So there is – it’s a combination really of headcount, which is our biggest expense and then just spending wisely.

Tom McDonald – Private Investor

Okay, thank you very much.

Operator

Our next question comes from the line of (indiscernible) DA Capital. Please go ahead sir.

Unidentified Analyst

Thanks for having the opportunity to come in again. On the revenue for the TappIn, if you move the TappIn one-time benefit, what would net income have been?

Jim Albrecht

If I could refer you to the 10-Q that we just filed, there is a table in there that we call non-GAAP reporting, excluding infrequent items. There is a lot of information there. So that 10-Q was just filed, so it’s out there right now. Okay, feel free to avail yourself of that, it’s a pretty good resource of information.

Unidentified Analyst

Good. I am glad, you broke that out. Couple of other questions. With the company consistently generating healthy EBITDA cash, has there been discussion using some of the cash retired the loan you still have from the TappIn purchase? And how much of your cash generation goes into your thinking in terms of the special dividend as you just gave out which was $0.05 and after the prior year when you gave out $0.07 in a dividend, should we expect some sort of continuation of a dividend payment or we go from special dividend to regular dividend?

Jim Albrecht

The first part of your – this is Jim speaking, first part of your question is definitely the cash flow that we enjoyed from our operations is the direct driver of the dividend that is declared at the pleasure of the Board of Directors. So that is factor number one. On the subject of will it be a regular versus a special dividend, don’t know that we as a company or to the point where we want to move to a regular dividend, I think we will just enjoy the fact that for two years in a row, we have been able to reward our shareholders’ continuing support with the two special dividends we have done. And I am sure that the Board will remain cognizant of that when 2014 rolls around and our financial results hopefully yielding equal amount of cash flow if not more.

Unidentified Analyst

Yes. So will you be using any cash to retire the loan from the TappIn purchase?

Jim Albrecht

No, that loan is at about – it’s two loans, one is about 4.75% and they actually spoke about that amount, but one of them is offset by earnings from a long-term investment we keep at the bank. So our net cost of capital is really low. And we believe we can generate a higher return investing our money internally or returning it to the shareholders then by retiring that debt. It’s pretty cheap money.

Unidentified Analyst

Fair enough. So the company has stride in the last couple of years to enter new areas with acquisitions like TappIn or other types of partnerships? Will you continue with this approach? And if you did, what technology areas, would you view as complementary to GlobalSCAPE’s current business?

Jim Albrecht

We are not really currently pursuing any additional acquisitions. That doesn’t mean that there won’t be something that occurs in the future, but right now, what we are really focusing on is making a success out of the acquisitions that we have made and even more so making sure that we are investing in our core. As we said earlier, we have 79% of our revenue is coming from ESP and we need to make sure that we are investing into growing that base and making that as powerful as we can be. So we are looking at our new license to our – we are looking at new logo license compared to our up-sell license and we are looking to invest in whatever the right area is to grow our revenue at the fastest rate. So we don’t have anything that we are considering that doesn’t mean there won’t be things in the future, but we are looking to invest in the business that is just today at this current time.

Unidentified Analyst

Okay. Just a couple of more questions if that’s okay?

Jim Albrecht

Sure. We’ve got a couple of other callers, but maybe one more question, it will be great.

Unidentified Analyst

Okay. Just $6.3 million recorded in Q3 was the second or third highest quarter on record? Now that we have hit that mark what sort of factors need to be in place for GlobalSCAPE to exceed this number in the next couple of quarters?

Jim Albrecht

Would you repeat that? There is a phone broke up for few words of your question.

Unidentified Analyst

Okay. So your $6.3 million in Q3 was one of your highest quarters on record, so at that level, what sort of factors need to be in place for the company to exceed this number in the next couple of quarters?

Jim Albrecht

Okay. Well, there is a variety of things that we are working on and we talked about some of those earlier. We are really looking at new customer acquisitions, because a lot of our numbers in that fixed up three is coming from our maintenance and support revenue and from up-selling of our clients. Now, we do have a number of really exciting new clients, but we are going to be focusing a lot on our go-to-market plans and on actually acquiring new clients and we are going to be looking at competitive displacements and what we need to do with our technology to actually go after some of the existing clients for our competition. And so there is a lot of things that we are going to be working on. They are mostly around how we go to market and acquiring our customers and then making sure that we are maintaining our competitive edge from a technology standpoint.

Unidentified Analyst

Yes. Well, everything seems to be working very well, congratulations on a great quarter and thank you for taking my questions, that’s it for me today.

Jim Albrecht

Thank you.

Operator

We have a follow-up question from the line of Tom McDonald, Private Investor. Please go ahead sir.

Tom McDonald – Private Investor

Yes, thank you again. I know that there was discussion during the last conference call about more search optimization according to publicly available regarding web analytics. It looks like the search traffic has really kicked up for GlobalSCAPE as well as TappIn and I think you probably noticed that TappIn’s rankings in the world, has shot up significantly? I wonder if you can give us any update on that in terms of the progress that you are seeing as well.

James Bindseil

Well, our marketing team is doing a lot of work on the (indiscernible) there. They are looking at what is working for us and what’s not working for us. A lot of that really has to do not just with the words that we are using, but how they are placed them and what our tax rates and our conversion rates to be honest. So the marketing team is really focused on our lead generation, but even more so that can, they are focused on quality lead generation. So our SEO work will continue, where we have got a lot of effort supplied to that, where we are working both internally and with contractors to maximize that every chance we can get. So it’s not something that you ever just say okay, I am done, this is something that is ongoing with our marketing team and we are looking once again as I said a moment ago at every single possible customer acquisition strategy that wouldn’t come up with.

Tom McDonald – Private Investor

Okay, thanks again. Excellent quarter.

James Bindseil

Thank you.

Operator

Mr. Albrecht, there are no further questions at this time. Please continue with your closing remarks.

Jim Albrecht

Thank you, operator and I want to thank everybody for joining in the call today. We are pleased with the success we have enjoyed during 2013 and we appreciate everyone’s acknowledgement of that. We look forward to continuing that trend during the remainder of the year and also look forward to visiting with you in 21014 when we report our fourth quarter results along with the results for 2013 as a whole. Everybody have a great remainder today. Thank you for joining us.

Operator

Ladies and gentlemen, this concludes the conference for today. We thank you for your participation. You may now disconnect.

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