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RRsat Global Communications Network Ltd. (NASDAQ:RRST)

Q4 2013 Results Earnings Conference Call

March 05, 2014, 09:00 AM ET

Executives

Miri Segal-Scharia - Hayden MS-IR, Investor Relations

Avi Cohen - Chief Executive Officer

Shmulik Koren - Chief Financial Officer

Analysts

Andrew Uerkwitz - Oppenheimer & Co.

Maayan Amsalem - Migdal Capital Markets

Operator

Ladies and gentlemen, welcome to the RRSat Global Communications Network Fourth Quarter 2013 Financial Results Conference Call held on the 5th of March 2014. Throughout today's conference all participants are in a listen-only mode. After the conference there will be an opportunity to ask questions. (Operator Instructions).

I would now like to turn the conference over to your host, Miri Segal. Please go ahead, ma’am.

Miri Segal-Scharia

Thank you, Operator. Good day, everyone and thank you for joining us for RRSat Global Communications’ fourth quarter 2013 financial results conference call. Joining us today on the call are Mr. Avi Cohen, CEO; and Mr. Shmulik Koren, CFO. Following the prepared statements by management we will open the call for the question-and-answer session.

I would like to remind our listeners that comments made today will contain forward-looking statements and management may make additional forward-looking statements in response to your questions. Such written and oral disclosures are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Please note that the Safe Harbor statement in today’s press release also applies to this conference call. Please also note that the results presented today include results that are on a non-GAAP basis. A full reconciliation table of the non-GAAP measures to GAAP measures can be found in the company press release issued earlier today. If you have not received this please contact us at 646-536-7331 or 917-607-8654.

And with that I’d like to hand the call over to Avi Cohen, CEO of RRSat. Avi congratulations on a strong quarter and year.

Avi Cohen

Thank you, Miri and thank you all for joining us today. The fourth quarter of 2013 was a strong finish to a solid year for RRSat. This year we made tremendous progress in our effort to transform the company into a global leader with local access to media services, leveraging local talent in key markets around the world. This strategy as well as our solid execution during 2013 resulted in record revenue for both the fourth quarter as well as for the entire year, accelerated sequential growth and increase in cash flow from operations and we finished the year with a record backlog.

Actually this was our third quarter in a row of record revenue and just as importantly we continued to book new business to replenish our backlog. Our backlog for services to be delivered in the next 12 months is a record $92 million, up from $87 million for the fourth quarter of 2012 and up $4 million sequentially on the $88 million we had at the end of the third quarter.

In addition to the business and financial results that Shmulik will elaborate on, during 2013 we completed the integration of SM2 Sports & Media and succeeded in making our second acquisition of JCA TV in London, UK. We have greatly improved the scalability of our company by strengthening our senior management team, consolidation of our two facilities in Israel, reengineering of our business processes and by making some organization changes for improving execution, efficiency and creating enhanced focus.

2013 was an opportunity to establish our vision and act up on it. RRSat continues to make progress in fulfilling our vision of evolving from a mid-market global distribution player to a global media services provider. We have transformed our company into a nimble organization that enables content owners and broadcasters to access our media services globally for any type of content preparation and management and delivering it to any screen anywhere in the world for any of the many video consumption alternatives available to viewers.

Our strategy of establishing a stronger presence in key broadcasting centers, enabling us to get closer to where content is created with local expert in place was reinforced by our acquisition of London-based JCA in September 2013. This acquisition perfectly reflects our local strategy. It positioned us in the heart of content creators in London which support all of the Western Europe part of the world, a mature and content rich market. One of the immediate results of this acquisition has been our access to larger upper tier potential customers.

Beyond the geographic advantage of this acquisition the integration of JCA's Advanced Content Preparation Services into our existing infrastructure and service platform has facilitated the establishment of our Global Media Services Platform. This powerful platform offers our customers a global single point of contact for handling any media, repairing it and delivering it to any screen anywhere in the world in any form of either consumption, from linear TV to video-on-demand, streaming, pay-per-view and TV-Everywhere. These expanded capabilities are helping us reach a higher tier of potential customers, including global broadcasters and leading content owners.

This powerful platform meets the need of today's broadcasters, while embracing the expansion of viewing alternatives where consumers watch content on new devices in an increasingly mobile society as well as the expansion of sports news and live events broadcasting globally.

Content creators are focused on reaching viewers in entirely new ways with multi-screens including mobile devices to streaming content over the Internet and in new markets. Broadcasters can increase the profitability of this content monetization/by delivering content globally on many types of screens. This effort is often outside the expertise of many of our customers and we are an ideal partner to facilitate this important need. Our goal is to be the leading provider of outsourced value-add services for the digital media broadcasting industry and we are starting to see growth related to our new integrated capabilities around the world.

Our scale and state-of-the-art technology enable us to do it better and more cost effectively and our entire infrastructure is IT-based providing service simplicity and flexibility. We are having substantive conversation with upper tier broadcasters as well as other content producers. Over time we will improve our customer base, moving upstream and setting the stage for additional growth in the years to come.

In addition to pursuing and securing agreements with increasingly prominent, larger more recognizable broadcasters our new platform capability is helping us pursue business with non-traditional content creators. For example major sport leagues today own most or all of the game footage and more in more these leagues have dedicated channels for original content.

Beyond distributing the content via the traditional method over the year and to satellite and cable providers this content creators are seeking new ways to reach fans all over the world. To achieve this they're expanding the use of mobile apps, live and delayed streaming and downloadable content. Our staff is uniquely positioned to facilitate this effort, helping these content creators to manage content, convert it into any format, prepare it for distribution in multiple language and enable the delivery to almost any device.

This represents an emerging opportunity for us and a potential area of growth. Earlier this year we completed the integration of SM2 Sports and Media, acquired late 2012 and we are extremely proud to have completed a successful full and festive season for all services the first time being provided on RRsat infrastructure worldwide.

This acquisition and the renewed focus created last year resulted in 2013 in a year-over-year increase larger than 100% of revenue on these types of services. This focus involves agreements to manage and distribute live events such as sports and other major events. We expect that this enhanced focus will continue to accelerate our growth and have recently established a sports and live events department at RRsat Europe, previously JCA TV in London and hired an industry veteran to run it.

During 2012 this contributed less than 4% to our total revenue and in 2013 it accounted for more than 7% of our revenue. We would like to see this become more than 10% over the next few years and we are starting to see related growth around the world. We're very encouraged by the rapid expansion of this revenue stream.

The JCA acquisition added content preparation which has a different business model than RRsat's historic model. It differs in that JCA has much lower third-party cost associated with revenue due to having no capacity cost associated with the content preparation services they provide, which means it generates higher gross margin. However the business has higher SG&A cost, especially sales and marketing. As we integrate the JCA acquisition the combined sales and marketing line has increased but we expect operational margin will improve over time. Although SG&A will continue to be higher as a percentage of sales this is mostly offset by higher gross margin as a result of consolidating the business with ours.

In summary 2013 was a successful year for us with multiple successful initiatives as we executed our strategy and we are carrying that momentum in to 2014. We are leveraging the strong organization and tremendous expertise we've built over the last two years to take advantage of the significant growth drivers in key markets. We are well on our way to taking our business to the next level and becoming a global media services player which we expect will equally create additional value for our shareholders.

Now I'd like to hand over to Shmulik Koren to review the financial results

Shmulik Koren

Thank you, Avi. I will provide a summary of the quarter’s results and then discuss our full year results. After that we’ll open the call for Q&A.

Revenues in the fourth quarter of 2013 totaled a record $32.5 million compared to $29.4 million in the fourth quarter of 2012 and compared on a sequential basis to our previous record of $30.6 million in the third quarter of 2013. In terms of fourth quarter revenue breakdown, revenues from our digital media services which are composed of content management, content preparation and distribution services amounted to $29.5 million and our mobile satellite services contributed $3 million. This compares to $26.8 million and $2.5 million in the fourth quarter of 2012, representing a growth of 9.7% and 20% respectively.

An important driver of our digital media services improvement derives from the growth of our sports and events business which grew on an annual and quarterly basis by over 100% and 44% respectively. This growth is mainly attributed to the acquisition of SM2 in November 2012 and our ability to fully integrate it into our facility in a very short period which led us to win many prestigious projects and to the contribution of one full quarter of JCA content preparation revenue.

Our fourth quarter revenues breakdown by geography was 41% in Europe, 29% in North America, 11.2% in Asia, 7.4% in the Middle East, excluding Israel, 7.5% in Israel and 3.7% in the rest of the world. Our largest customer accounted for approximately 3.8% of our revenues and the 10 largest customers contributed approximately 19% of our revenues.

Gross profit was $7.6 million in the quarter, up from $7.4 million in the fourth quarter of last year and compared to $7.5 million reported last quarter. It is important to note that the gross profit in the fourth quarter of this year was negatively impacted by foreign currency fluctuations and the impact of revenue mix in the quarter. During the quarter we generated higher MSS revenues which carries a lower gross margin compared to our digital media revenue which resulted in a lower gross margin in our overall business.

As we have been saying for the last few years we expect gradual improvements in our gross profitability on a year-over-year basis due to the change in product mix, including the more value-added services such as content preparation, channel origination and play out, a higher mix of sports and live events and better leverage of the infrastructure we have created as we scale up.

Despite these headwinds we delivered high gross margin as expected for the full year. We expect gross margins to improve in 2014, excluding further currency exchange impact. Our operating expenses were $5.8 million compared to $4.7 million in the fourth quarter of last year and compared to $6 million reported last quarter. The increase in operating expense is mainly due to the increase in sales and marketing and business development costs as part of our strategy to have a global footprint and the consolidation of JCA for the first full quarter.

In the fourth quarter we also booked $490,000 special bad debt expense related to Fashion TV, a now former customer. Subsequent to the end of the quarter we took down the former customer’s content for non-payment. On February 2014, we filed a $5 million lawsuit in Israel to recoup the debt owed to us. A few positive notes; first we expect to recoup the write-down when the lawsuit is resolved and potentially recoup monies beyond $490,000 write-down.

Second, the capacity has already been offset by a new customer resulting in an increase to our backlog in a multi-year contract. As a result we do not expect the situation to have any negative impact to our income statement going forward. Our non-GAAP operating income excluding non-cash stock-based compensation expense, amortization of acquisition related intangibles and embedded derivatives and acquisition related prepaid compensation expense was $2.1 million for the quarter compared with $2.9 million in the fourth quarter of last year and $2.7 million in the previous quarter.

Excluding the one-off bad debt expense and the negative impact of the foreign currency fluctuations our non-GAAP operating income would have been over $3 million in the fourth quarter of 2013.

Net income on a GAAP basis was $2.1 million for the quarter compared with the $2.4 million for the fourth quarter of 2012 and $1.1 million in the previous quarter. Non-GAAP net income totaled to $2.4 million, comparable to $2.4 million in the same quarter last year and compared to $2.1 million in the previous quarter. Non-GAAP fully diluted net income per share totaled $0.14 compared with $0.14 in the fourth quarter 2012 and $0.12 in the previous quarter.

Finally, our adjusted EBITDA for the fourth quarter of 2013 totaled $4.5 million compared to $5 million in the fourth quarter of 2012 and $5 million in the previous quarter.

Turning to the full year results, full year 2013 revenues were record of $121.8 million, up 7.4% compared to $113.4 million for 2012. Gross profit and gross margin for the year were $29.5 million and 24.2% respectively compared to $27.1 million and 23.9% respectively for 2012.

Non-GAAP operating income and operating margin were $9.9 million and 8.1% respectively during 2013 compared to $10.3 million and 9.1% respectively in 2012. The main change was the $490,000 non-recurring bad debt expense related to the former customer and the effect of the foreign currency impact the amount of $1.6 million in 2014. In aggregate, the foreign currency and extraordinary bad debt totaled $2.1 million impact for the full year. GAAP operating income was $8 million compared to $9.7 million in 2012, GAAP operating margin was 6.5% compared to 8.5% in 2012.

Non-GAAP net income was $8.3 million, an increase of 4.6% compared to $7.9 million in 2012. Non-GAAP net income per share on a fully diluted basis was $0.47 compared to $0.46 in 2012. GAAP net income was $6.5 million compared to $8.3 million in 2012. GAAP net income per share on a fully diluted basis was $0.37 compared to $0.48 in 2012.

Adjusted EBITDA was $18.7 million in 2013, down slightly compared to $18.9 million in 2012. We reached a record backlog of services to be delivered in the next 12 months of $92 million as of December 31, 2013 which we expect to recognize as revenues during the next four quarters. Comparable backlog in the year-ago quarter was $87 million and in the previous quarter of 2013 was $88 million.

Cash and cash equivalents and marketable securities as of December 31, 2013 totaled $24.2 million compared to $26.12 million as of December 31, 2012. Our current ratio as of December 31, 2013 was a healthy 1.9 and our shareholders equity improved to $80.5 million representing over 62% of our total balance sheet after distributing a dividend of $5 million in 2013. We generated $8.1 million in operating cash flow and $5.2 million in free-cash flow in the fourth quarter of 2013 and $21.3 million and $10.4 million respectively in the full year of 2013.

In accordance with our dividend policy on March 5, 2014 the Board of Directors declared a cash dividend in the amount of $0.06 per ordinary share and in aggregate amounts of approximately $1 million representing 50% of the company's net income on a GAAP basis for the fourth quarter of 2013. The dividend will be payable on April 9, 2014 to all the company's shareholders of record at the end of the trading day on NASDAQ on March 19, 2014.

Now I would like to focus on our guidance for the fiscal year 2014. As we focus on accelerating our growth and continue to transition we have been speaking of, to a more global company with local expertise near our customers and a broader portfolio of capabilities which are traditionally not linked to long term contracts we expect greater fluctuations in our quarterly results. As a result we think that the full year guidance is more meaningful to our investors, providing a clearer picture of where we expect to take the company. This guidance is preliminary as of today and we do not commit to update it.

Full year 2014 total revenues are expected to be in the range of $129 million to $134 million, representing a 6.2% to 10% growth. Year-over-year growth in addition we expect to continue our trend of improving our full year gross margin though from quarter-to-quarter there could be fluctuations in our gross margin due to revenue mix. This outlook suggests continued growth, increase in profitability and the result of higher dividend as we grow our net income.

We have built a solid foundation of growth and believe our strategy can help us reach the next level of our evolution.

With that I would like to open the floor for Q&A. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Thank you, and the first question comes from Andrew from the company Oppenheimer. Please go ahead.

Andrew Uerkwitz - Oppenheimer & Co.

Hey, thanks for taking my question, a real quick one. On the kind of the choppiness in revenues is this kind of driven in part by live sports and through the new growth opportunities, and if so should we start to expect like a seasonality trend to the merger?

Avi Cohen

Hi, Andrew, this is Avi. Thanks for the question. I wasn't sure I got the first part of the question it was a little bit unclear did you say something about choppiness?

Andrew Uerkwitz - Oppenheimer & Co.

Yeah, it seems like with offering the yearly guidance, not the quarterly guidance it feels like that the revenues could be a little -- kind of the guidance could be little may be choppy is not the right word but uneven may be.

Shmulik Koren

Well, first of all you are right there will be as we, as the percentage of revenue that is generated from what we call non-long term long-term contracts, okay. Long-term being the 24x7 services mainly that we provide increased relative to the overall pie and that is the result of our strategy now we are getting closer to content, we are handling content flow, customers, which is very sticky and it's actually very, very good for us, but as we move and do more and more of this media services that are not based on what we used to call long-term contract there will be more fluctuation, okay.

Certainly some good parts will come from sports and events but the main -- that's the main events, event are something that happens for two weeks, three weeks and goes away, it's Olympics, it's some other event whatever you think, yes there is some fluctuation.

Avi Cohen

I think that's one major reason why we feel that the annual guidance is a better view of where we are taking the company. The other thing is with all that said it's still a very large part of our business, is large contracts and therefore recurring, that's still three quarters or more of the business like that. To be honest with you when we provide results sometimes in the middle or almost at the end of the second month of the quarter and we give the next quarter number with a range for a quarter that almost ended was 75% or more is recurring, I am not sure how much that number means in terms of guidance.

So we felt therefore that this will be more appropriate, more should I say more right, although there is no such word for investors. Yes, there will be some fluctuation between quarters but overall we're managing the business on a goal stuff, we like to increase the goals year-over-year that's our goal, both as I said when we talked about goals, if the goals will enhance further by acquisition but that's what we would like to do and again how it's broken into quarter obviously is very important to us in managing the business.

But again from the reasons I outlined we felt that this was a better way to track the company.

Andrew Uerkwitz - Oppenheimer & Co.

Sure, understood. Do you think this will lead to a pattern of seasonality where one quarter will typically always be stronger than another or is too early to tell?

Shmulik Koren

It's a bit early to tell, well there is already some of it, okay. But let me try to give you some color on that. If you take our sports and events business which grow to 9% of our revenue, as we were growing that also is a large part of our revenue. On one end this is great, it's 9% but it's only 9% and what do I mean by that, because it's only 9% so there is let's say we do the NFL, the NFL season comes in the second half of the year, okay.

If there isn't another league that happens to be in the first part of the year then there is imbalance in the quarters, right. So yes in that respect there will be and there is already some seasonality. If the 9% continues to grow it becomes 12% or 11%, well two things will happen. The seasonality may grow on one end but on the other hand in order to grow we will have to get a larger mix of leagues and things that will balance it over the year. So, both of those factors will play here.

Andrew Uerkwitz - Oppenheimer & Co.

Got you, and then last question. It goes to kind of your services side of the business so I guess the side of the business that doesn't necessarily grow in backlog is growing as a percentage of revenue, yet your ultimate backlog did grow I think is it safe to say that both of your segments of business are growing at fairly healthy clips here?

Avi Cohen

I think so, absolutely I mean, look to be honest with you I don't think we've ever had a $90 million plus record high. We never get to $90 million of 12 months -- the next 12 months backlog, which is really the important part because remember the overall backlog is a function of the length of contract. But assuming all of them are longer than a year which is tall, really looking at the next 12 months is really what gives you a good feel are we getting -- are we growing in terms of revenue generation opportunity. And you are absolutely right that is what it means.

I just want to say one other thing on the seasonality, if I may and on the part that is not backlog -- backlogable if you may long-term contract. We need to remember one thing, although it is not in the backlog a very good part of it is something we can predict. Why? We don't put in the backlog the NFL, because that’s the nature of the game. However we know exactly what it’s going to be. We know when in the year, we know about how much, okay so it’s not really something that we hope to get. It's just not something that we feel is appropriate to backlog. Is that pretty clear Andrew?

Andrew Uerkwitz - Oppenheimer & Co.

Yeah, no that’s clear. I really appreciate color and thanks guys. I appreciate it.

Avi Cohen

Thanks a lot Andrew.

Operator

Thank you. (Operator Instructions) The last question currently in line comes from Maayan Amsalem from the company Migdal Capital Markets. Please go ahead.

Maayan Amsalem - Migdal Capital Markets

Hi, guys congrats on the good result. Can you provide some color on the bad debt expense related to Fashion TV? What were the dynamics between you guys and the channel?

Avi Cohen

Sure, Maayan, well thanks a lot, it's good to have you on the call and thanks for the question. Yeah, let me give you a little bit of color on that. Fashion has been fairly long term customer for RRSat. I think many, many years long before I came on-board. Good customer, not the largest as a matter of fact it used to be but over the past few years it got behind in terms of its size versus many others as we made progress in our business.

So bottom line what happened with Fashion is they got behind on payments. We really tried to work with them very closely because of their long term relationship we had with them but there has been a continuous deterioration in the payments and in the compliance to our agreement and after a relatively long term of trying and accommodating various requests in terms of delays of payments we basically had no other choice but to give them, basically with the contract to go forward with the notice, unfortunately they for whatever reason did not adhere to it.

We didn't get paid and we just felt that it's not right for the company, for shareholders, for our business to continue providing services where we have tremendous amount of costs and we are not getting paid and we basically according to our contract with them as they were in a major contract we took them down and no choice but to try to cover their debt through legal proceeding.

Again this is not something we enjoy or like it. We really, really quite hard to keep them going. We were fortunate enough that in a relatively short amount of time we were able to minimize our damages actually in terms of revenue generation and in terms of backlog we completely recovered because we have managed to sign a different customer to basically take over all if not most of the infrastructure parts that were dedicated for Fashion and therefore from a revenue generation standpoint as well as from backlog we are actually not only in the same state but actually better off. The contract is longer but as you can imagine the debt itself is still hanging.

According to our company policy we started to write-off some of it by the way even though we believe that we’ll recover all of it because there is a very clear situation here of breaching the contract and that’s it.

Maayan Amsalem - Migdal Capital Markets

Okay, great. Thank you. Good luck.

Avi Cohen

Thank you.

Shmulik Koren

Thank you.

Operator

Thank you. And the next question in line comes from [FM Field] from the company [Ecolyte Capital]. Please go ahead.

Unidentified Analyst

Two quick questions for you, one is and I apologize, I came on late in to the call, you have the adjusted EBITDA for this quarter was $4.5 million. Is that before or after the bad debt expense in other words if you would have had no bad debt expense what would that number have been?

Shmulik Koren

It would be $5 million.

Unidentified Analyst

Okay so it would have been $5 million, thank you. And my second question is what do you expect your CapEx to be for 2014?

Shmulik Koren

Okay, so thank you for the question. We are, as we said in the past, we've done -- doing most of our infrastructure upgrade in the U.S. and in Israel. We are now in the stage we're looking to do something in Europe but we believe that this year's CapEx will be in the range of $6 million to $9 million and this is something we'll have better visibility along the year.

Unidentified Analyst

Okay.

Avi Cohen

This is Avi, thanks for joining just as a quick note as you remember last year I think when we were ask that question I am not sure if it was you or not we were planning to spend in 2013 to spend less than we planned even thought we had this big project of the consolidation. So this will be -- we need to have very, very high control over our CapEx and with all the plans that we have we'll spending less than last year.

Unidentified Analyst

Great, okay, thank you.

Avi Cohen

You are welcome.

Operator

(Operator Instructions) Thank you. There seems to be no further questions please go ahead with any concluding remarks.

Avi Cohen

Thank you, operator. Thank you all for joining us today. We are very excited about our 2013 progress and we look forward to carrying this momentum into 2014 as we leverage new capabilities to move upstream within the industry, ultimately accelerating our growth. We appreciate your attention and interest in RRsat and we look forward to updating you in next quarter on our progress with our growth strategy. Have a good day.

Shmulik Koren

Thank you.

Operator

Thank you, ladies and gentlemen. That does conclude the conference call for today. Thank you for your participation and you may now disconnect.

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