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Covisint Corporation (NASDAQ:COVS)

Q1 2015 Earnings Conference Call

July 29, 2014, 04:45 PM ET


Ed Yuen - Investor Relations

Sam Inman III - CEO

Enrico Digirolamo - CFO


Carl Icahn - Credit Suisse

Rob Owens - Pacific Crest Securities

Matt Williams - Evercore Partners


Greetings and welcome to the Covisint Corporation First Quarter Fiscal 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I’d now like to turn the conference over to Mr. Ed Yuen, Investor Relations for Covisint. Thank you, Mr. Yuen. You maybe now begin.

Ed Yuen

Thank you and good afternoon. With me today are Sam Inman, Covisint's Chief Executive Officer; Enrico Digirolamo, Covisint's Chief Financial Officer. Certain statements made during this conference call that are not historical facts including those regarding the company's future plans, objectives and expected performance are forward-looking statements within the meaning of the federal securities laws.

These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we have made are reasonable, actual results could differ materially since the statements are based on our current expectations, on our subject to risk and uncertainties. These risks and uncertainties are discussed in the company's reports filed with the Securities and Exchange Commission. You should refer to and consider these factors when relying on such forward-looking information.

The company does not undertake, and expressly disclaims any obligation, to update or alter its forward-looking statements whether as a result of new information, future events or otherwise, except as required by applicable law. I would also like to note that we have posted our earnings press release and presentation on our Investor Relations website.

I will now turn the call over to Sam.

Sam Inman III

Thank you, Yuen. Good afternoon everyone and thank you for taking time to join us for our FY 2015 first quarter earnings call.

I want to start by saying that as we said last time Covisint's proven secure B2B cloud platform enables enterprises to provide a single entry point for all their customers, partners and suppliers that ensures trusted information goes to the right people, in the right place at the right time. Because of that we believe we offer the only B2B cloud platform in the market today that combines the necessary integrated technologies required to accomplish this.

But as I pointed out last time, this FY 2015 is a transformative year for Covisint. We are working to get back on track and to realize the significant growth potential that we see in this market ahead of us.

I want to give you an update on our first quarter, and I want to start off by saying I believe we are off to a really good start this year. Our total revenues came in at $21.6 million, with our subscription revenue back on track and in line with our expectations at $15.5 million. I have, of course, asked Rico to give you more detail on this and other items in a few minutes.

Last time we talked, I outlined four key initiatives for us as a company in FY 2015. The first was to focus on our leadership and our organization. The second was the shift we are making from a company with software and services to a company solely focused on enterprise class software.

Third, we set an objective to implement strategic partnerships that allow us to grow our business faster and more successfully than we would without them. And fourthly, cost and revenue alignment, realizing it's important to keep our business in line with our expectations.

I want to provide an update on these four strategic initiatives, so I have organized my comments today around them as we use them both internally and externally to see how we are doing in the year.

So our first initiative, which was leadership and organization. We have already and we are going to continue to build out the senior leadership team in this company, and I am going to acquire the talent necessary to achieve what we need to make our objectives for FY 2015.

Let me make a couple of comments about Michael Keddington our new SVP of Worldwide Sales. Mike is firmly in place now after a few months on the job and he is doing the right things to change our sales organization. He spends lots of time with our key customers.

He has restructured our sales organization and he has made the right kind of changes in our leadership, our measurement and our compensation system to get us truly focused as an enterprise class platform company. He also has a good understanding of the necessity of working with our new business partners to make sure we meet our objectives.

I want to tell you that our momentum is building as we continue to grow and focused on the key industry segments where our platform is required and we see opportunities for this new cloud based business-to-business model in the market.

Secondly, on this point I mentioned last time that I had launched a search for our new SVP of Products and Marketing, as the last key addition to my senior leadership team. I am pleased with the progress here. I have got good candidates. I have seen some good people, and I would hope by the next earning call I would have a position in place.

You know, this position in marketing is one of the biggest holes we have in aligning our product marketing and product management with our go-to-market strategy in our development team internally.

But even without this position, we are making good progress on the things we need to do. We have recently completed a nice piece of work on strategic positioning for our platform, using an outside firm to help us validate our position in the marketplace and increased our -- the efficiency of our messaging. The evolvement of this platform positioning is going to continue to be important as we align our product with the industry segments to be successful.

We also have some great traction, by the way, with industry market analysts. And we were recently recognized by Gartner, as you may have seen, as a leader in their first ever Magic Quadrant for Identity Access Management as a Service. The Magic Quadrant there positions the vendors that have the ability to execute and on their completeness of vision within this segment.

And with this positioning, by the way, we recognized Covisint as a leader in all three of the Magic Quadrants that we see as the key pillars in an enterprise digital platform transformation strategy. Those are security, integration and presentation.

I want to say I continue to have great confidence in our company, our people, our leadership team and our software platform. And I see tremendous opportunities developing with our customers as we go-forward.

Our second initiative was continuing to reposition our company and shift from a company that delivered not only software, but also services and make that shift to a company focused purely on selling enterprise class platforms.

The first step was to move the services piece of our business to this what we call Certified Partners, and I want to report some really good progress in that regard. As of this date, we have announced three certified partners. The first was Lochbridge, actually was announced as CWS Services which was their prior name. The second is CitiusTech, and most recently we announced our partnership with Perficient.

I have met each of these CEOs and I want to ensure you that we both understand how important this is to our companies going forward and everyone is fully engaged in this new relationship.

All three of these companies, by the way, have been major service providers for us in the past with some of our key customers. So they are all familiar with our platform. And we will continue to work with them to get them fully onboarded and allow them to implement the services work that we think is necessary to replace the work we used to do. And, of course, we are continuing to develop a pipeline of future possible partners in this respect and I expect to see more in a very near future.

Our third strategic initiative is centered around this development of strategic partners. I have spent some time last time talking about Cisco and I want to give you a quick update there.

We have been developing this relationship with Cisco since late last year and these large enterprise partnerships take time to develop. But the first release of this joint platform, which Cisco calls SXP, was completed this past quarter and it’s now out in the marketplace with the Cisco sales reps to sale.

We are also pleased to be part of their worldwide sales kickoff meeting in August. And to demonstrate the fact that this partnership is two-way, we were excited to have Cisco as part of our international worldwide sales meeting this June, where they did an excellent job of presenting that platform and how they see the opportunity going forward.

So, of course, I have put a team in place to not only support Cisco, but to develop additional strategic partners as we move forward. And I want to point out that while we have nothing to announce today, we have some very interesting partner potential in the pipeline as we speak and I hope to have update for you all next time we talk.

Last, but not least, we continue to keep our cost aligned with our revenue. As you know, last quarter we did a significant reduction in our workforce to right-size the organization with the top line revenue and gross margin that we see.

You all know these things are tough to do, but I want you to realize that the team here is committed to making sure that we know these are necessary to bring our company to profitability as quick as possible.

We also made some necessary one-time investments last quarter to prepare us better for the final spin from Compuware. And again, I will ask Rico to spend a few minutes outlining some of those with you next.

So in summary on my points. FY 2015 is a transition year for the company. We believe we are off to a good start in the first quarter. We know that our platform is instrumental and transforming the way today as enterprises are going to do business in the future. So we are going to continue to focus on the business here and the opportunities ahead of us. And the entire team here is focused on the objective of reaching profitability.

I would like to turn the call now over to Rico who will walk you through the financial results in a little more detail. Rico?

Enrico Digirolamo

Thank you, Sam. Let's turn to slide four in the deck now. The left side of this slide represents pro forma non-GAAP financial overview for the quarter fiscal year 2015. Just to remind everybody, the non-GAAP presentation excludes the impact of stock options, compensation, intrigues R&D spend as a period expense versus the GAAP approach which capitalizes a portion of the R&D. The GAAP P&L, the non-GAAP P&L and reconciliation of GAAP to non-GAAP were included in this afternoon's press release.

We delivered first quarter fiscal 2014 total revenues of $21.6 million of decline or about 10% year-over-year. First quarter subscription revenues finished at $15.5 million for decline of about 3% versus last year.

For the quarter, subscription revenue represented about 72% of our total revenue. As Sam mentioned before, we are a subscription revenue business. And going forward, we have a team focus on this element of our business and of our revenue. Services revenues declined 26% versus last year and finished at $6.1 million for the quarter.

Gross margin came in at 39%. Although, subscription revenue represented a large percentage of the revenue for the quarter, our gross margin was lower when compared to prior period because we saw a falloff in our services revenue and our services margin.

Operating expenses were a bit higher than our outlook, as for the most we completed our right-sizing plan and incurred some one-time cost really related to the spin. We finished the quarter with a loss of $8.5 million.

The bottom right of the slide provides our outlook and expectations for fiscal 2015 and for the second quarter. Our guidance is based on current market conditions. For the full year fiscal 2015, we will maintain the guidance we provided at our last call, which is that we expect year-over-year subscription to be flat to 2% decline. We expect services to be down between 24% and 34% when compared to the prior period. Accordingly, we expect total revenues to be off between 9% and 11%.

Specifically regarding the second quarter, we expect subscription revenue will be about 1% to 2% decline versus last year and services revenue will be off between 32% and 37% from a relatively large fiscal year 2014 second quarter compare. Because services were a much larger portion of our total revenues a year ago, we expect that Q2 total revenues will be off between 13% and 17% versus a year ago.

So the right-sizing essentially behind us, we will see a positive impact moving forward on fiscal 2015. So, we will be able to maintain our incoming cash flow guidance as well for the entire year.

We continue to expect a net loss for fiscal 2015 of between $7 million and $10 million on a non-GAAP pro forma basis. Recognizing that we have the right-sizing behind us and as we said at the last call nearly all of that fiscal loss will really happen in the first quarter. We expect our outstanding shares at the end of the fiscal year to be 38.8 million.

And finally, as we continue to focus on building top line momentum and with the right-sizing behind us, we are still on track and continue to expect our free cash flow will turn positive during the fourth quarter of fiscal year 2015.

I will turn it back to Sam for some closing remarks.

Sam Inman III

Thanks Rico. Let me close by saying again, I am very confident that we have the right team of people, leadership, and structure going forward. Our company and its platform are well-positioned and what is becoming an emerging market with their tremendous opportunity.

And our platform provides the key pieces for enterprise to transform the way they do the business in the cloud. And it’s proven with some of the largest companies globally and it’s proven that scale.

So with those comments from myself and Rico, I would like to turn it back to the operator to see if there is any questions you might have that we can take.

Question-and-Answer Session


Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question is from Michael Nemeroff of Credit Suisse. Please go ahead.

Carl Icahn - Credit Suisse

Hi. This is Carl Icahn for Michael Nemeroff. Thanks for taking the question. I was wondering if you can comment on the sales productivity this quarter, did they meet your expectations. And if you can highlight some of the steps that management is taking to improve the sales organization and increase the productivity?

Sam Inman III

Yeah, Carl, hi. Sam Inman, let me take a shot at that. Yeah, they did. Actually, we set internal targets for ourselves on the growth of our book-of-business, so to speak. And the team actually met and exceeded those.

Relative to the point about reorganization and aiming at productivity, we -- I think a big part of what's helping us as we have talked about this transition of our sales resource, out of dealing with services and turning those over to qualified services partners, thereby given them more time to focus on this platform.

And as you may know we have restructured our approach to the healthcare vertical, backing out and winding down this healthcare point of delivery application business that we had. Again, giving that team and anyone on that team, a better chance to focus on platform opportunities in the healthcare industry.

So we have got good skilled people inside. The company, we have got people better organized on our team now including our sales and our customer support has better organized in my opinion. And we are clearly all focused now on opportunities for the platform at an enterprise level and customers and prospects.

The pipeline is building. It’s not as big as we would like it to be. But it’s building and it’s showing some nice momentum. So we have got work to do, but I like the direction we are heading.

Carl Icahn - Credit Suisse

Great. That's helpful. And I was wondering Rico, if you can comment on your level of business, your largest customer, what type of trajectory you are planning? And if any of the recalls and the down streaming the financial impacts could have a -- on the customer could have an impact on your level of business with them?

Enrico Digirolamo

Well, actually we -- a couple of questions there. First of all, the recall, they actually are probably helping us, because there is more and more volume going through a lot of the customer centers and owner centers as it relates to all these recalls. We don’t expect these recalls to actually have any effect on us, at all.

Our business with our biggest customers, we are actually doing quite well. We continue to work in this -- with this lean and expand strategy. And so we will make a point of our continuous recalling on our big customers, continue to work with them on other projects besides the ones we are on.

Carl Icahn - Credit Suisse

Great. Thanks. Best of luck.


Thank you. The next question is from Rob Owens of Pacific Crest. Please go ahead.

Rob Owens - Pacific Crest Securities

Great, and good afternoon. Talk a little bit about the subscription revenue and the sequential increase. I know that in the March quarter, some customers had cycled off some of the legacy capabilities that you were providing, was that completely done in March; did you see any of that spill into June?

And was it being sequentially up? May be talk a little bit about new customer acquisition. I noticed this quarter; you didn’t give a vertical breakout, so any color on that front would be helpful as well. Thanks.

Enrico Digirolamo

So, Rob, you’re right. So, when you sort of back out PQRS, we had a sequential increase of about 400,000 versus the fourth quarter. It was -- we had still some hangover from some of the EDI when you compared, but very, very little.

We’ve just added a couple of other customers. They were -- Sam kind of pointed out earlier, we’ve been able to get where we wanted to get in the first quarter with our sales group. And we’ve added a handful of small customers, and when you add them all up, you get an extra 400,000 that appeared in this quarter and it’s kind of been added to our book of business.

Nothing really big. I will say this thing, Sam kind of mentioned in his remarks, we’re really working hard on this Cisco relationship to sort of take it to the next level. And this has started to already bear some fruit.

Rob Owens - Pacific Crest Securities

Any color with regard to the verticals that you guys have talked about historically in automotive, healthcare, and enterprise?

Sam Inman III

Yeah, Rob, it’s Sam Inman. Let me take a shot at that. What we’re beginning realize obviously is that -- what we’ve called automotive in the past is really manufacturing, so I would tell you that while we haven’t nailed down all of the additional verticals we want to get focused on, we clearly understand that automotive is a great opportunity for us by the way, not only in the short-term, but in the longer term. But we’re expanding our approach to that to realize that manufacturing, the issues and opportunities we’ve dealt within in auto are true for all manufacturing.

Healthcare is still a key vertical for us. But I just mentioned, we’re exiting the application clinical point-of-delivery application business and working on platforms and we have some very important platform customers there that while they know we’re exiting the application piece of it, they are still very comfortable with our platform and I feel good about that.

We have new customer prospects we’re building now around opportunities for the platform. And we have -- Rob, I would say that the verticals where we have some interesting opportunities that are developing for us are like energy, and pharma, and a little -- to a little -- to a lesser degree some of the financial services more on the insurance type, brokerage type opportunities in the marketplace.

Rob Owens - Pacific Crest Securities

Okay, great. Then lastly the gross margin was a little bit lower than we were looking for, realized there’s moving parts there. May be just around that subscription component, there’s a firm line where it’s been the last year and if so, then we just assume that it was unwinding procure of headcount, just a little bit more color. Thanks.

Enrico Digirolamo

Yeah. Well, couple of things in there. You’re right, first of all, there is -- the main issue with the entire margin is really around the professional services. How it’s kind of tighten up. You’ve moved a lot of people out as Sam mentioned in the first quarter.

We didn’t get them all out at the very beginning of the quarter, but we got them out as the quarter ended, so the first part of the quarter was really touched kind of hard by that. So, we got it more normalized during the second quarter, and we’ll probably be able to give a much better view on that as we get to the end of the second quarter.

Rob Owens - Pacific Crest Securities

All right. Thanks guys.

Sam Inman III

Thank you.


Thank you. The next question is from Kirk Materne of Evercore. Please go ahead.

Matt Williams - Evercore Partners

Hi, guys, it’s actually Matt Williams in for Kirk, but thanks for taking the questions. Not sure what you can say about it, but is there any change or update to fall spin from Compuware, any other strategic things you might be looking at?

Enrico Digirolamo

Yeah. Matt, well, we -- actually this is probably a better question for Compuware. We can only rely on what your last information was at the previous call which was at the -- we're sticking to the original timetable. I guess their call is priority after ours.

Matt Williams - Evercore Partners

Okay, that's fine. We’ll follow-up with them on that. And again secondly, I guess don't really guide or provide any real sort of bookings update on a quarterly basis, but I guess just relative to your expectations, the things sort of come through in the first quarter as you were expecting them to just from a booking standpoint.

Sam Inman III

Matt, Sam Inman, yes, they did.

Matt Williams - Evercore Partners

Okay. I’m just going through here. I know some of my questions are already been asked, so I think that's it for me. I’ll hop back in the queue.

Sam Inman III


Matt Williams - Evercore Partners



Thank you. We have no further questions in queue at this time. I’d like to turn the floor back over to management for any additional remarks.

Sam Inman III

Guys, again, Sam Inman here, thank you all taking time out to spend some time -- recap the first quarter and again, I -- we strongly appreciate your interest in the company and support. We look forward to talking to you next quarter.


Thank you. Ladies and gentlemen this does conclude today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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