GlobalSCAPE's (GSB) CEO James Bindseil on Q1 2014 Results - Earnings Call Transcript

|
 |  About: GlobalSCAPE, Inc (GSB)
by: SA Transcripts

Operator

Good afternoon. My name is Danielle and I will be your conference operator today. Welcome to the GlobalSCAPE’s First Quarter 2014 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 your host, Mr. Jim Albrecht, GlobalSCAPE’s Chief Financial Officer. Sir, you may begin.

Jim Albrecht - Chief Financial Officer

Thank you, operator and good afternoon. Welcome to our first quarter earnings call. With me this afternoon is James Bindseil, GlobalSCAPE’s President and Chief Executive Officer.

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 the call.

These risks are detailed in our latest Form 10-K filed with the Securities and Exchange Commission on March 27, 2014 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 in this call. With those Safe Harbor statements presented, I will move to summarizing our latest financial results for the first quarter of 2014 that are reflected in the 10-Q we filed with the Securities and Exchange Commission earlier this afternoon.

Our revenue for the quarter was $5.7 million. That result compares to revenue of $5.9 million for the comparable first quarter of 2013. This relatively flat result is reflective of our continuing program to enhance our sales, marketing and continuing activities in a manner designed to increase our future revenue and earnings potential. James will share additional thoughts on this topic in a moment.

We believe our deferred revenue, which results primarily from advanced bookings of maintenance and support services to be provided in the future is the 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 and satisfaction with our solutions and services based on their personal experience.

Our deferred revenue at March 31, 2014 was $10.7 million as compared to $9.8 million at March 31, 2013, which is an increase of over 9%. Our net income for the quarter was $534,000 compared to net income of $517,000 for the first quarter of 2013. Our earnings per share was $0.03 per share in both periods.

Our adjusted EBITDA, excluding infrequent items, was $1 million for the quarter compared to $1.2 million for the comparable quarter last year. Our cash flow remains strong with our net cash provided by operating activities being $1.7 million for the quarter. That result provided us the resources necessary to continue our ongoing investment in product development whilst still ending the quarter with $13.8 million in cash and long-term investments, which is up from our cash and long-term investment balance of $12.6 million at the end of 2013. We are pleased with this strong financial position that provides us a foundation for future growth.

I will now turn the call over to James.

James Bindseil - President and Chief Executive Officer

Thanks, Jim. Good afternoon, everyone and thank you for joining the call today. As Jim just outlined Q1 was materially the same as Q1 of last year even with the significant changes that are underway at GlobalSCAPE. We achieved the similar level of revenue while increasing the amount of deferred revenue 9% from the same period last year. Our earnings per share remained steady at $0.03 per share. We delivered just over $1 million of adjusted EBITDA and we ended the quarter with over $10 million of cash. The changes that are taking place with sales, marketing and engineering are significant and are all designed to increase future revenue and earnings potential.

As I explained previously however, the changes do take time to manifest themselves in our revenue performance. However, we are pleased that we have been able to maintain our historical level of productivity from both the revenue trend and in earnings perspective even while implementing the systematic changes. To be clear, there is still work to do that we are already starting to see the positive leading edge indicators such as the number of leads and the ungraded pipeline that show the efforts are working as desired.

Before moving on to the status of the future strategies, I will once again give a brief overview of the product portfolio and how the products progressed in Q1. Our maintenance and support revenue continues to be strong and rose to approximately $3.6 million, up approximately 9% over Q1 in 2013. Customer satisfaction has always remained the necessary ingredient for sustaining and increasing our revenue growth. Our maintenance renewal rates remain in the high 90% range and we still find it likely that this revenue line will continue to grow at faster pace than our software license revenue in the foreseeable future. As our planned increases to license revenue occur we expect that revenue to begin comprising an increase in percentage share of our total revenue.

Our EFT suite of products continues to perform very well. And similar to last year accounted for 79% of our total revenue. In Q1 we released a major enhancement to EFT with the general availability of the mobile transfer client or MTC when used with EFT GlobalSCAPE’s MTC app gives an organization’s employees the access to corporate data they need from their mobile devices while keeping the data safe and secure within the organizational boundaries and enforced by corporate IT policies and procedures. Our EFT development increased dramatically in Q1 and we currently expect to announce and release more updated versions in the next several months.

These developments are part of our continuous innovation for our EFT platform as we maintain our leadership position in the MFT market space. We continue to be pleased with the response our product and the plans for its enhancements are receiving from both current clients as well as future prospects. And I would expect also had a major release in Q1 with the introduction of Version 4. This version includes security enhancements to protection sort of customer and corporate information such as allowing administrators to limit communications to use only FIPS 140-2 or TLS protocols which is required by all healthcare providers and corporations that fall under scope of the Health Insurance Portability and Accountability Act or HIPAA.

The reintroduction of WAFS continued to progress with there release of Version 4.3. This version was built specifically to improve the performance of various WAFS features such as file based filters, accessing folders that contain large number of files and copying files. The ability to store in previous file versions in a compressed format while keeping current versions uncompressed was also added which will result in a significant reduction in this space used by them all. And metadata cleanup can now be set to run at a specific time allowing for off-hours scheduling. These features establish the base line on which further enhancements that expand the reach with which WAFS can be sold to a current and future periods.

Lastly, from a product update perspective, the advancement of these SaaS version of TappIn has continued and in Q1 we completed the development efforts for launching new OEM partnership, which will provide greatly expanded opportunity for adoption. This OEM partner is completing their launch process and has a completely white label product that will be sold and communicated under their brand. As we have outlined previously however, the larger longer term opportunity for cap and revenue remains in enterprise markets where we know company struggled to deal with bring your own device or BYOD trends. We continue to drive our strategy and our execution towards making this happen in the future and believe that the initial release for this effort will happen within this fiscal year.

Continuing with what we believed will drive revenue growth as we discussed on the last earnings call, one of the major initiatives to drive future growth is the reinvestment into our primary product launch. We have expanded our engineering team for EFT and are excited about releasing multiple new features in the coming year. As was announced last month, we intend to release high availability version of the EFT early in July that will enable the largest enterprises to leverage EFT in a horizontally scalable environment and ensure that the most mission critical operations are functional with an active deployment.

We are also going to release out that plan a new version of the web transfer client, which will provide HTML file support for the platform while removing the requirement to deploy Java in the enterprise. The realignment of the sales and marketing teams announced in the previous earnings call is almost fully implemented. Increasing demand generation across all mediums and attracting new clients has been the primary focus and as previously stated the leading edge indicators are all very positive. Beginning with demand generation, the sales and marketing teams have completed the addition of the new app of sales model including both new customer acquisitions and new business development changes. There has been a significant digital marketing outbound push with joint partner events, social media focus and marketable database investments. These activities have resulted in increased leads and pipeline of every source which will be pursued for the remaining quarters of the year and beyond.

In addition to the increased leads, our marketing team has increase brand awareness and media visibility through targeted future coverage. This includes the risky file sharing survey campaign we initiated in Q1 additional news releases to promote on new product offerings white papers, infographics, marketing emails, social campaigns and contributed articles. The dialogue in articles survey data and our renewed focus on channel partners were featured in the Wall Street Journal, Forbes and CRM, among many other publications around the world. The data from the survey continues to drive interest in the media and by itself has delivered more than 175 new leads in Q1.

To give some color on our results so far we have seen our pipeline grow more than 48% since we implemented this new strategy. And the number of opportunities has increased by 52%. While I am pleased with the initial results, we want to caution that turning the leads into sales does take time. However, started promising and I am confident these efforts will translate into revenue opportunities in fiscal 2014.

At the same time, we have instituted an aggressive North American channel initiative to acquire customers not available through the traditional direct sales model. We have on-boarded a highly skilled and experienced channel recruitment and enablement team and launched the formalized partner program. This does included the creation of new partner margin structure, deal registration and incentive programs as well as creating channel focus content and assets required to support these partners. With this new structure in place, we have now signed 63 new industry leading system integrators, national and regional partners and technology distributors such as Ingram Micro. This relationship we announced in January. These partners of beginning the register deals at this point and while these opportunities like all others will take time to nurture. The indications for future benefits are very promising.

Beyond these new opportunities, we will continue to focus on organic growth with the existing product lines. While we have added additional resources to EFT based on its position of driving 79% of the revenue, we are also looking forward to further positioning the overall suite of products into a solution set that offers greater capability than any one product does on its own. We have become more transparent as a company about the plans for the overall products lead and we continue this trend in the future. With our portfolio of solutions, the roadmap of innovation being pursued and the continued enhancements we are making to engineering, sales and marketing, I am optimistic and excited about our growth potential for 2014 and beyond.

Our 2014 focus remains the same as in the previous earnings call. First to continue to grow top line revenue, but also position ourselves for greater future capacity by ensuring we are innovating as a company. And second develop demand generation sales and marketing funnel that attracts new clients to the GlobalSCAPE brand. The renewed focus on our core products and the increased reach into the market provided with our new channel partners will continue to enable those objectives. I am confident in our ability to meet those – these objectives and look forward to updating you on our progress each quarter.

At this point, I will turn the call over the Jim to start our question-and-answer session. Jim?

Jim Albrecht - Chief Financial Officer

Thank you, James. We are now pleased to take your questions if you would ask a initial question along with one follow-up question there will be time to have additional questions after that feel free to get back in the queue. Operator, if you would now please open the call for questions and answers.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And our first question is from the line of Ryan Downie with Sidoti & Company. Please go ahead.

Ryan Downie - Sidoti & Company

Hi, good afternoon.

Jim Albrecht

Hi, Ryan.

Ryan Downie – Sidoti & Company

Just trying to again understanding on how I should think about the licensing revenue, are you guys seeing any fundamental change in the competitive environment or anything like that?

James Bindseil

No, not – to be honest it really is continuing as we expect. There has been nothing disruptive from any of the competitors. We are continuing to see the exact same opportunities that we have seen historically.

Ryan Downie - Sidoti & Company

Okay. You think there is any chance that some of the customers might be pushing back orders into stating the new version of EFT coming up?

James Bindseil

We believe that that is the case.

Ryan Downie - Sidoti & Company

Yes. Okay. And then just moving down with the SG&A line not a big increase that is about 5% year-on-year and pretty good sequential growth on that line each of past two quarters, is there an increase in headcount driving that?

James Bindseil

Yes. There is a number of things as we discussed just a moment ago. We are expanding our sales team and our marketing team to do the demand generation and the channel activity. So it really is about providing the people in order to operate those programs.

Ryan Downie - Sidoti & Company

Alright, thanks.

Operator

Our next question is from the line of Greg Newman with Newman Agency. Please go ahead.

Greg Newman - Newman Agency

Congratulations, you had a good cash and your M&S is real strong and growing and like you advised this last conference call, you had a lot of media marketing exposure and some very important new product developments this year already appreciate the hedge up on that and you have implemented a very fine partner deal registration system that we started to believe what it’s worth is going to benefit you greatly, could you tell me what your operating expense I haven’t had chance to review the 10-Q your operating expense and your EBIT earnings before income tax were for Q1?

Jim Albrecht

Sure. Greg, just this is Jim hang on just a moment. So our total operating expenses were $4.9 million for other quarter and our earnings before tax were $787,000.

Greg Newman - Newman Agency

Thank you. And final question is on you new push in the channel international North American specialists are very excited with your resellers, distributors you have had the increase in hiring with the bottom line focus. I think some people not known how Q1 would be, but if you could touch on there a little bit more you just finished I know in Q2 on May, the Info Security Euro and Ingram Micro Channel in New Orleans I think there is another one this week and how you would be able to see by the channel, the channel partners you mentioned release pipeline, the aggressive North American channel partner structure and did you say 63 partners, that’s my final question? Thank you.

James Bindseil

Yes. It’s we are being received very well by the partner community, I was up in Europe last week and we met with a number of our partners and we have been as you pointed out, talking with them about the new product launches and about the roadmap ahead and it’s very exciting. We are actually some of our partners already in discussions about competitive displacement for other products that they are dealing with, it’s being received very well obviously as we discussed we have to engage the partners then we have to enable them through training, through putting the appropriate programs and placing all of that. So a lot of that work has been done and deal registrations are starting to occur. So there is absolutely some very good interest and we are very excited. And as you pointed out it’s not just the North American channel although there is a whole lot of excitement with that. There is also increased excitement for our international channel partners as well. And I am sorry did I miss any portion of your question there, right?

Greg Newman - Newman Agency

Not at all, thank you very much. I appreciate it.

James Bindseil

Thanks a lot.

Greg Newman - Newman Agency

You’re welcome.

Operator

(Operator Instructions) And our next question is from the line of (Sam Freed with Twins Capital). Please go ahead.

Unidentified Analyst

Thank you. Gentlemen congratulations on another profitable quarter. I like seeing that, I also appreciated the color you provided on the many initiatives you have in place to drive revenue growth through the balance of the year, could you sort of provide additional granularity on couple of the revenue growth drivers you see this year it might be your best opportunities to deliver increases in the top line. And if we do start seeing revenue decline throughout the course of the year, what sort of impact might there be if any on your margins or operating expenses to support the higher revenue, I guess that’s the two part question and I appreciate your response to it?

James Bindseil

Sure. Well all three of the initiatives that we discussed the demand generation going after the multiple lead generation channels. As well as the North American channel partner programs as well as the new product innovation that we are working on, all three of those really are designed to drive that top line for us. And using the innovation as the first example, we are launching a major upgrade for our flagship product EFT at the end of Q2. And we are expecting not to have significant impact in the later part of the year.

We also believe that as the partners get more online and they are already registering deals as I had just informed to Greg. They are already starting to register deals, we believe if those are going to realize themselves as well. And then lastly, our third initiative around this regular demand generation all with the different opportunities that we are using there for the different mediums, they are all, every single lead source is up. And we’re expecting that to having impact as well. So we actually are very bullish about all three of our primary strategies to drive that future growth. So as I indicated earlier all of the positive indicators are really good. Obviously, we are always obligated to tell you that just because the leads are there that doesn’t guarantee future revenue, but all of the indicators that are there for these initiatives to be working as we hope.

Jim Albrecht

Brian, this is Jim Albrecht relative to the second part of your question, excuse me, Sam, this is Jim. Regarding the second part of your question as it relates to margins, certainly we are making an investment for the future, but we are certainly also doing that in an environment of continued profitability. So we are not compromising current profitability for that, but what we are doing is building a highly scalable model. Our model was already scalable. We are just leveraging that to a greater degree, such that we believe we are putting a foundation and a platform in place that will support and notably higher revenue run rates of what we are experiencing today.

Unidentified Analyst

What you believe it could support in the future?

Jim Albrecht

Oh, gosh, that’s a great question that we will learn more about as time goes on. I am not in a position to say at the moment.

Unidentified Analyst

Okay. In terms of the new customers that sign on, whether – regardless of whether they come through the channel, through your direct sales efforts. Can you talk about your implementation cycle, how long it takes for a customer to be from revenue generating for you folks from the time at which they sign on for service?

James Bindseil

It really varies by product line. And it varies by the type of the customer. Generally speaking, the cheaper or I should say less expensive products with the smaller customers will turn over a lot faster than the large enterprise, very large and complex solutions, because you don’t end up having to go through all of the different trials and pilot periods and RFPs and RFIs and price and legal negotiations that you have. So, really some of the entry level customers can convert in a matter of weeks, whereas the largest enterprise customers can take a period of quarters.

Jim Albrecht

This is Jim again. I will add on to that, but just hard about that is for those larger customers from the selling cycle, is somewhat longer, because they are making a significant investment. These are usually higher dollar purchases to use somewhat over used term these days. Those applications are much stickier. They are typically multi-year commitments, which means, we get multiple renewals of our M&S agreements, which in turn leads into our recurring revenue stream.

Unidentified Analyst

Terrific, terrific. Okay, one final question if I may, your cash balances were up to about $1.3 million at the end of December, is there anything in particular that accounted for this larger than normal gain? And in terms of your cash generation, could we see similar increases as your top and bottom line performances improve?

Jim Albrecht

We enjoyed the win-win benefit of some stock option exercises by some of our former employees during Q1. And when I say win-win, that’s a win for the employees, because they make some gain on what they exercise. And we also get cash from those option exercises. So, it’s always nice to put that cash in the bank from those sources. Going forward, as I mentioned earlier, we are structuring all of our operations and in particular our operating expense profile to maintain ongoing profitability. And in my judgment, the ongoing profitability will also translate into being continually cash flow positive and quite cash flow healthy.

Unidentified Analyst

Alright. Everything sounds great. Thank you very much guys.

James Bindseil

Thanks.

Unidentified Analyst

Bye-bye.

Operator

(Operator Instructions) And our next question is a follow-up from Ryan Downie with Sidoti & Company. Please go ahead.

Ryan Downie - Sidoti & Company

Yes. I was just wondering to ask a quick question about the mobile transfer client, for few months, we have sort of been looking at the mobile enterprise product as real opportunity. You guys get any early feedback, I know it launched a few months back now, want to just see what you might have heard from anyone who had adopted it so far?

James Bindseil

Very positive feedback. It’s really a game-changer for a lot of our clients. It’s providing the ability to have that consumerization or consumer access to information, but yet control that in enterprise level. So, we have received very positive feedback as with anything that just come out, we do have opportunities for future development that people have requested. But the feedback thus far has been extremely positive.

Ryan Downie - Sidoti & Company

Alright, thanks. That’s all for me.

James Bindseil

Thanks, Ryan.

Operator

Mr. Albrecht, there are no further questions at this time.

Jim Albrecht - Chief Financial Officer

Thank you very much and thanks to everyone for joining us today. We look forward to visiting with you again in August when we review our results for the second quarter. Everyone have a great afternoon and thank you very much.

Operator

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

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!