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ChyronHego Corporation (NASDAQ:CHYR)

Q2 2014 Earnings Conference Call

August 11, 2014 10:00 am ET

Executives

Johan Apel - CEO

Dawn Johnston - CFO

Analysts

Juan Bejarano - Noble Financial

Marty Elbaum - Horizon Networks

Steven Frankel - Dougherty & Company

Douglas Pies - Pies Capital Management

Operator

Good day, and welcome to ChyronHego's Earnings Conference Call where management will review the company’s financial results for its Second Quarter ended June 30, 2014. My name is Samia [ph] and I'm the operator for today’s call. At this time, all participants have been placed in a listen-only mode. At the conclusion of management’s prepared remarks, the call will be opened to question.

I'd now like to turn the call over the host, Johan Apel, the company’s CEO. Johan, you may proceed.

Johan Apel

Good morning, everyone. Thank you joining us today. As the conference call operator indicated, my name is Johan Apel; I’m the CEO of the company. Joining me on the call today is Dawn Johnston, the company's CFO. Before we begin, let me turn it over to Dawn to submit for the record the required Safe Harbor language prior to discussing our financial results and other matters.

Dawn Johnston

Good morning. Yesterday, we issued a press release containing the company’s financial results for the second quarter ended June 30, 2014. If you don’t have a copy of the release, you can get receive it on our website on chyronhego.com.

We submit for the record the following statement. From time-to-time, including on this conference call, management may make forward-looking statements relating to such matters as the company’s anticipated financial performance, business prospects, technological developments, new products, research and development activities, and similar matters that involve risks and uncertainties that may cause our actual results to differ significantly from the results discussed in the forward-looking statements.

Factors that might cause such a difference include those set forth in the company’s filings with the SEC. Please review the risks and uncertainties appearing in our Annual Report on Form 10-K for the year-ended December 31, 2013.

Back to Johan.

Johan Apel

Thank you, Dawn. Shortly Dawn will provide a summary of the financial results for the second quarter of 2014, but first I would like to highlight a couple of things. We are very excited to show our first profitable quarter since quarter two of 2011. Our efforts in both keeping costs under control and driving revenue growth are bearing fruit. We are expecting the growth in revenues to continue for the coming quarters.

We are, in terms of revenues, ahead of our plan both in the U.S. and Europe, and we have a positive outlook regarding development of these markets. Our customers are investing with us, and they appreciate our efforts to have the most complete offering within broadcast graphics.

We have, during the quarter, closed the acquisition of the ZXY Sport Tracking in Norway, and they have performed very well since then. The WeatherOne acquisition we closed not in the quarter but on July 1, beginning of the third quarter, so we will see positive impact from their operations in the Q3 financials.

Before we open the call to questions, Dawn will take us through a brief summary of the 2014 financial results.

Dawn Johnston

Thank you. Okay, from our perspective, as Johan mentioned, we had a good quarter. Our revenues in Q2 were $14.7 million. This puts us ahead of our plan and is 37% ahead of the second quarter of last year. Revenues in both our products and service categories were also improved, and on a year-to-date basis our revenues were up 46%.

We certainly know that much of the increase is driven by the fact that Hego is now combined for the full year, but we also experienced increases from a large sale of tracking systems to European soccer league and also realized the benefits of expansion from the sale of other Hego products into the US.

Revenues in all our geographic markets remained strong and are up over the prior year levels with the exception of lower than anticipated growth in Asia. The gross profit margins were 62% on a quarter and a year-to-date basis and are right on track based on the current revenue and product mix.

Our overall cost structure in the quarter is right where we expected it to be for the combined entity and is at a consistent level with the first quarter this year.

And for the first time since Q2 of 2011, we generated net income and also operating income. Our reported net income was $2.9 million, and excluding the mark-to-market adjustment which was positive in the quarter, our net income was $800,000 or $0.02 a share on a fully diluted basis, which is a 57% improvement over the prior year in terms of dollars excluding the 2013 one-time charges.

Our EBITDA on a GAAP basis is $1.2 million for the year-to-date and would be $2.2 million on an adjusted basis if we were to exclude the mark-to-market and share based compensation.

Our balance sheet is strong. We have cash just under $5 million, our working capital is at $4 million, and we've paid down about $300,000 of our European debt.

But just as a reminder, the operating loss, net loss, and the EBITDA amounts just discussed here that are exclusive of the mark-to-market adjustment for the contingent liability and other 2000 one-time charges are not in accordance with GAAP and are discussed herein solely to disclose the amounts that might have been reported had those expenses not been incurred and to serve as a basis for comparison between periods.

That concludes my remarks.

Johan Apel

Thank you, Dawn. And with that let's open the call for questions. Operator, please instruct our listeners on how to queue up for questions.

Question-and-Answer Session

Operator

Yes, sir. (Operators Instructions). Our first question comes from Michael Kupinski of Noble Financial. Your line is now open.

Juan Bejarano - Noble Financial

Hi, good morning, this is actually Juan Bejarano in for Michael Kupinski, and thanks for taking my questions. Just want to get a quick update on how your relationship with the Major League Baseball is going. Obviously, the system was installed in three stadiums and it was being tested. Has there been any decision on expansion to other stadiums? So how is that relationship going?

Johan Apel

Yeah, the relationship is going further. We are installing in two more stadiums as we speak, and we are anticipating rolling out in a large amount of stadiums in the latter part of the year and beginning of the next year.

Juan Bejarano - Noble Financial

Great, good to hear. And were you also in discussions with other leagues?

Johan Apel

Yes, we are in discussions with various sports and various leagues all over the world. So it's nothing we have -- nothing we have disclosed so far, but we are quite bullish on our prospects on the player tracking side, and I think the ZXY Technology acquisition we did in the second quarter shows how serious we are in this business area.

Juan Bejarano - Noble Financial

Great, thank you. Just kind of wanted to follow up on the ZXY tracking. You kind of mentioned that it received new orders. Was that mostly new customers and was that mostly in the U.S. or international?

Johan Apel

Nothing in U.S. so far; in Europe and, yes, new clients. So we expect that ZXY will have a positive contribution to the bottom-line for the full year.

Juan Bejarano - Noble Financial

Great, and looking at product revenues, they were better than we had expected; they actually grew nicely over last year. Was that mostly those new product launches that helped in the quarter HeliPaint or was that something else?

Johan Apel

A lot coming from sales around the tracking systems in terms of camera systems. Our traditional broadcast businesses remain strong, but the -- as you know from our business model, the traditional broadcast business is growing on a nice and steady pace, but the higher growth can be derived from the sports side.

Operator

Thank you. Our next question comes from Marty Elbaum of Horizon Networks your line is now open

Marty Elbaum - Horizon Networks

Hi, Johan, congratulations. Numbers are great; you're doing a great job. Can you give us a little clarity about the shelf offering on the 50 million shares that you did recently, what the plans are? And a lot of people are concerned about that. So can you give us some clarity on that?

Johan Apel

Sure, very good question, thank you for giving me the opportunity to clarify that. You can always discuss what the size of the shelf filing should be. And just to put it on record, as we speak right now, we have no plans of immediate short term of raising money. We have filed a shelf to be ready to be able to pull the trigger if the market conditions are ripe and if there are business reasons for us to raise money.

So that said, trying to make sure that there are no people out there really scared of the huge dilution just around the corner. That is not our intention. We are just trying to make sure that we have all the legalities in place to be able to, if there is a need to raise money for acquisition purposes and so forth. As Dawn stated, to run our business and to execute on our plan, we have enough cash on the balance sheet and as you have seen, we are profitable in generating money.

Marty Elbaum - Horizon Networks

That’s great, that’s great, let me ask you this. I think we got a great story as I've told you in the past. I think we need to -- do you have any plans in the near term for shareholder value to let the street know more about our small company that’s a sleeping giant that we want to expose?

Johan Apel

Thank you for calling us a sleeping giant. We don’t think we are that big yet, but, we are trying constantly to improve the way we communicate and so forth. So, of course there are plans. And I agree with you; there is much we can -- there is more we can do in this area, and I really hope we can improve on that during this quarter and next quarter, and into the next year.

Operator

Thank you. (Operator Instructions). Our next question comes from Steven Frankel of Dougherty & Company. Your line is now open.

Steven Frankel - Dougherty & Company

Good morning. I wonder if you might start by breaking down the revenue for us between the Chyron and Hego pieces.

Dawn Johnston

Sure, in the quarter, the Hego piece was about $6 million of the $14.7 million. So that brings it to about $10.5 million on a year-to-date basis.

Steven Frankel - Dougherty & Company

Great, that’s helpful. And then what was the cash flow from operations and CapEx in the quarter?

Dawn Johnston

The cash flow from operations was about $300,000. I'm sorry what was the second?

Steven Frankel - Dougherty & Company

And capital expenditures in the quarter?

Dawn Johnston

Capital expenditures were about $900,000.

Steven Frankel - Dougherty & Company

Okay. And then going back to MLB, will it be ruled out league-wide next year or do you see next year as another test year where they're just having it in selected stadiums?

Johan Apel

No, we anticipate league-wide rollout by season start next year.

Steven Frankel - Dougherty & Company

That’s great. And is that business that will be positive to profitability in the first year or should we expect that to kind of have some upfront costs and it's really year two where you make your money?

Johan Apel

We should anticipate a positive outcome from get-go. Then, of course, we hope to increase revenues and profitability over the length of the engagement, but it should be profitable from day one.

Steven Frankel - Dougherty & Company

Great. And then you mentioned weakness in Asia. Was there anything in particular behind that?

Johan Apel

No, not really. If you look at our numbers and our business, you know Asia is a fairly small part of what we're doing. So how it affects our overall business is fairly small, but it hasn’t performed as we planned.

How we should attack Asia? It's one of our, call it strategic deliberations right now because we need to really make sure that we're doing it in the right way because right now it is very small. So, I think probably we need to have a strategic review and see what we can do to really make it grow in the right way.

Operator

(Operators Instructions). We do have a question from Douglas Pies of Pies Capital Management. Your line is now open.

Douglas Pies - Pies Capital Management

Hi Johan. Hi Dawn.

Dawn Johnston

Good morning.

Johan Apel

Good morning.

Douglas Pies - Pies Capital Management

Hi. A couple of questions, Johan, where in our investor presentation section on the website, we show a total addressable market of about $1 billion plus or minus. Has there been any change on that? Like from an objective standpoint is that still a valid number? Do you think it has increased in the last evaluation or is it pretty much where we are?

Johan Apel

No, I think that is a fair assessment of the market. We are -- the traditional broadcast graphic technology market is about $0.25 billion a year, but with our new efforts both in sports and in services, we are addressing a much larger market. If you look at the broadcast market in total globally, it's about north of $25 billion a year, and a third of that which is I would say roughly $8 billion are services, and the subset of those $8 billion which somewhere in the region of $750 million a year, that subset we are addressing as well now with the new sports offering and services as I said. So I think the $1 billion is a valid number.

Douglas Pies - Pies Capital Management

Okay. Our goal I think was operating margins in the low teams. Do you think in the next year or two that’s achievable or is that more of a longer term goal standpoint?

Johan Apel

No, if you look at our numbers to make the analysis you can see that it's a fairly big inflection point around the revenues where we are right now in this quarter. So a fair part of the revenue growth move lead to higher visibility. So our goal remains the same to get us that level of profitability and looking at the adjusted EBITDA that we have in this quarter which is over $2 million I think is very positive. And then also includes a negative impact from the acquisition of ZXY where they I think it's about $400,000 of cost in the second quarter. So, it's that part looks fairly well.

And with the development of ZXY, as I said, they will contribute positively over for the full year. So we remain positive.

Douglas Pies - Pies Capital Management

So there's really quite a bit of operating leverage you're saying over and above where we currently let's say in a $15 million quarterly run rate. Anything over that $1 billion, I'd say, does create quite a lot of operating income at that level? Of $8 billion, from this level is pretty important.

Dawn Johnston

Yes.

Johan Apel

Our fixed operating expenses in terms of parts of sales and marketing and G&A and R&D are of course they are not things for ever. They will increase over time if the company grows, but they are of course on a short term of fixed, you can say, and therefore, the revenue growth will give us margin expansion.

Douglas Pies - Pies Capital Management

Okay. The chances are still we have net operating losses or they pretty much going to shelter income over the next few years, or has it been any adjustments on that methodology?

Dawn Johnston

No, they would continue to shelter any income in the United States.

Douglas Pies - Pies Capital Management

Okay. A quick, quick question Latin America, Johan, is that -- we didn’t talk about that. Is that firm at this point?

Johan Apel

Firm in terms of?

Douglas Pies - Pies Capital Management

Well, from where we are going, from our budgeting standpoint.

Johan Apel

Yes, we are way ahead of last year in Latin America, so it's going in the right direction, yes. To make a long story short, we have quite big plans for what we want to do down there and the special leading up to the 26th Olympics we anticipate the markets to be fairly strong.

Douglas Pies - Pies Capital Management

Okay. A question for Dawn. Dawn, will there be outstanding after the second tranche comes in, and also when we get the Weather shares issued? And second part of that question is there any mark-to-market accounting associated with two recent acquisitions?

Dawn Johnston

Our shares outstanding right now are about 36.7 and that already we've flexed the WeatherOne acquisition. The tranche on Hego I guess could be as much as 3 million which that actually includes both the 2014 and 2015 tranche but if they meet the targets then it could be the 3.3 million at the end of this year.

Douglas Pies - Pies Capital Management

Okay. So we're roughly at 40 million into 2015 assuming all the metrics are met.

Dawn Johnston

Correct, correct. Yes.

Douglas Pies - Pies Capital Management

Okay. Go ahead, I'm sorry.

Dawn Johnston

That's okay. I was going to say and then on the other acquisitions, no, the only one that has an earn out is ZXY and that earn out is in cash.

Douglas Pies - Pies Capital Management

Okay. Because I think the mark-to-market accounting was a little complicated for many people.

Dawn Johnston

Yes.

Johan Apel

Not in this. This quarter looks fantastic.

Douglas Pies - Pies Capital Management

I thought I'll ask one rather question, Johan, and in terms of option issuance and so forth over the years I think there's been a lot of potential dilution certainly. I think there's still some options outstanding from previous years. Can you give us a little color on the option program? Is there going to be let's say significant dilution going forward option issuance?

Johan Apel

No. We've -- the way we look at share options right now and any kind of share-based compensation is that if it should be selective and really be used for pinpointing either really, really good delivery from management and other employees or for recruitment purposes. So we are -- as you know, we are quite shareholder friendly in the sense that a large part of the shares are owned by my management and staff. So we are trying to be prudent with ourselves in terms of how we use our stock as collateral.

Douglas Pies - Pies Capital Management

Okay, that’s help. Thank you very much. Okay, well I am through with. I appreciate very much your work and we're very optimistic going forward. So thank you.

Operator

Thank you. And at this time, I'm showing no further questions in the queue. I'd like to turn back the call to Johan for an closing comment.

Johan Apel

Thank you so much. Again, we thank you for participating on today's call. We look forward to reporting to you again at the conclusion of the next quarter. Have a great day and use it.

Operator

Ladies and gentleman, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.

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