GlobalSCAPE, Inc. (NYSEMKT:GSB)
Q2 2014 Earnings Conference Call
August 13, 2014 4:30 PM ET
Jim Albrecht – CFO
James Bindseil – President and CEO
Sam Freed – Twins Capital
Greg Newman – The Newman Agency
Good day and welcome to the GlobalSCAPE Incorporated Second Quarter 2014 Earnings Conference Call. Please note today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Jim Albrecht, Chief Financial Officer. Please go ahead sir.
Thank you, good afternoon. Welcome to our 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’ll move to summarizing our latest financial results for the second 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 $6.7 million, which is the highest quarterly revenue in GlobalSCAPE history. This result compares with revenue of $5.9 million for the second quarter of 2013. Revenue for the first six months of 2014 was $12.4 million, which is the highest combined Q1 and Q2 revenue in company history and compares with revenue of $11.8 million for the first six months of 2013.
We are particularly pleased with these revenue results given that no single customer or transaction accounted for a significant portion of this outcome. We believe these results are built upon sales events of the type that we can reasonably expect to replicate in future quarters.
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.
Deferred revenue at June 30, 2014 was $12.1 million as compared to $10.9 million at June 30, 2013 which is an increase of over 9%. Net income for this latest quarter was $488,000 compared with $381,000 for the first quarter at 2013, earnings per share was $0.02 in both periods. Net income for the first six months of 2014 was $1 million compared to net income of $900,000 for the comparable six month period in 2013, earnings per share was $0.05 in both periods.
Adjusted EBITDA for our latest quarter and year-to-date also increased compared to prior years as reflected in the 10-Q we just filed. Our cash flow remains strong with our net cash provided by operating activities being $2.6 million for the first six months of the year.
This result provided us the resources necessary to continue our ongoing investment and product development, while still ending the quarter with $14.8 million in cash and long-term investments which is up from our cash and long-term investment balance of $12.6 million at the 2013.
We are pleased with the strong financial position at the end of the quarter that provides us a foundation for future growth. Needless to say, we are proud of our accomplishment so far this year, and believe we have established a foundation and outlook for continued growth and revenue and profitability.
While we would have liked to have seen more of our increased revenue dropped to the bottom-line, the net result was consistent with our expectations as we invest in enhancing our sales, marketing, product research and product development activities to support maximizing shareholder value over the long-term.
I will now turn the call over to James Bindseil.
Thanks Jim. Good afternoon everyone and thank you for joining the call today. All of sure GlobalSCAPE considered Q2 to be a very successful quarter and validation of the significant changes that are still underway at GlobalSCAPE are bearing sort of. As Jim just announced a moment ago the June quarter was the highest quarterly revenue in company history. You have heard from us certainly in the last couple of years, we mark about quarters with announced risk stating that it was the highest except for an unusually high second quarter of fiscal year 2007, which benefited from an unusually large contract from the U.S. Army.
I’m pleased to let you know that there are no at risks any more. Our Q2 now represents the highest revenue ever period and most proud of the fact that we generated this record revenue with our any unusually large deals. I would like to also note that in Q2 we recorded the second highest quarterly EFT enterprise bookings in company history, new bookings only excluding renewals and the second highest quarterly bookings in company history, which includes all bookings.
Beyond just the strong second quarter, for the first half of fiscal year 2014 we generated the highest first half bookings in company history and the highest first half revenue in company history. We are very excited about the progress has been made, but recognize that there is still much to be done. You remember from our call back in March that we embarked this year with three primarily tellers determining our non-maintenance and support software license sales on a positive trajectory. The first teller include drastically improving our demand generation and marketing efforts to attract new clients who are not familiar with the GlobalSCAPE brands.
The second was to greatly increase the domestic channel activities to improve our sales capacity. And the third was to further emphasize product innovation and improved time to market for our software products. As a quick update on these three strategies, demand generation is going very well. Without going into specific numbers, I can tell you that even with an all-time high pipeline established in January following the introduction of the new demand generation activities.
I’m proud to say that as of July 1; we have increased that pipeline a 100% since the beginning of the year. Some of that pipeline has been converted into sales that assisted with the revenue, success in the second quarter. Moving forward there is still a good deal of pipeline that needs to nurtured through the process and may not be realized for another or two. We consider the growth of our pipeline to be one of the largest growth plants, but the plants that have been inactive are working as expected even if it is still just a leading indicator.
The domestic channel programs are growing at a rapid rate as well. We are already seeing the old registrations from these partners and once these deals start reaching the maturity, we anticipate seeing the channel results that we were expecting. We have added over a 100 domestic resellers in the first half of the year and through distribution partners.
We have also continued to grow these partnerships and distribution channels internationally as well. While these programs are not yet contributing as substantially to our revenue as our demand generation efforts have, the longer ramp time was expected. The fact that we reached record revenue while still building our channel business, gives us additional confidence in our future growth potential.
The third teller I discussed earlier this year was our commitment to reenergizing our product innovation activities. At the annual shareholders meeting on May 14, we published our first ever public product world map. This presentation was filed with the Securities and Exchange Commission and is available for review. I’m proud to say that GlobalSCAPE team has achieved each of the elements and timelines that were included in our roadmap.
In particular, during Q2 we released new versions of every product including EFT Version 7, which added high availability to our flagship product. There are numerous releases planned throughout the rest of the year as well and we are receiving a high level of interest from our clients off the road ahead.
To be clear, while we are pleased with our second quarter results, we know there are still work to do; the changes we are undertaking do take time to full manifest themselves. However, as evidenced by our Q2 results we are already starting to see the positive leading edge indicators such as the number of leads and the pipeline that show the efforts of working as desired.
While we are confident in the long-term outlook for our business, I do want to remind our listeners that historically the enterprise software market in Q3 can be subject to certain seasonal trends due to items such as the timing of budget cycles and the variability in sales from selected international markets during the summer months. As of today, we see no exceptions of this pattern.
Beyond these seasonal trends, I am confident that the plans in place are working and should yield higher returns in future periods. Q2 was the beginning of some of these initiatives paying off, but there are still areas that need to gain traction before we are able to produce the desired growth that is planned.
Before passing this back to Jim for questions and answers, I will once again give a brief overview of the product portfolio and how the products progressed in Q2. Our maintenance and support revenue continued to grow and rose to approximately $3.7 million, up approximately 9% over Q2 in 2013.
Our maintenance renewal rates remain from the high 90% range even with this high rate there has been notable traction in improving both the timeliness of renewals as well as expansion of renewals beyond the core EFT product lines. While we are actively looking to increase the growth rate of software license sales to exceed our MNS growth rates we have every intention of continuing to service our clients in a superior fashion to maintain this renewal success.
Our EFT suite of products continues to perform very well and slightly increased from 79% of our total revenue in Q2 of last year to 81% this year. As mentioned earlier, at the end of Q2 we released a major enhancement to EFT with the general availability or high availability for EFT as well as an enhanced person of the web transfer client that supports HTML files.
Our EFT development increased dramatically in the first half of the year and we plan on introducing more enhancements in the second half. These include integration with third-party tools such as antivirus and data loss prevention tools as well as the introduction of workgroup capabilities to make EFT even stronger in distributed work environments.
These developments are part of our continuous innovation for our EFT platform as we maintain our leadership position in this market space. We are excited with the response of product and the plans for its enhancements that we’re receiving from both our current clients as well as future prospects.
Mail Express also had a minor release in Q2 with the introduction of Version 4.04 including enhancements requested by clients for enhanced administrative controls and updates to supporting software to mitigate a hackly vulnerability introduced by one of our open source components.
Last continued to build upon its momentum following the release of Version 4.3, last through 64% over the Q2 of 2013 revenue and the pipeline continues to improve. There are numerous enhancements to the stability and scale for the product that have been introduced and will be even further enhanced and releases expected near the end of the year.
Lastly from a product update perspective, the advancement of the TappIn both from SaaS version as well as pending enterprise version has continued well in Q2. In our last call, we announced that we have completed the integration with a large OEM partner and this partner is now actively launching with numerous marketing efforts to take place.
It is unknown what the material impact of this partnership will be, but it is a very exciting development for both GlobalSCAPE and our OEM partner. On the TappIn enterprise front, we announced at the Annual Shareholders Meeting and subsequent 8-K filing that are roadmap projected release at the first version of TappIn enterprise for the end of this year.
We are still on target to achieve this objective and look forward to provide an enterprise class BYOD capabilities to our clients in 2015. 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 very excited about our growth potential for 2014 and beyond.
We explained in the previous earnings call that our 2014 focus was to continue to grow top-line revenue, but also position ourselves for greater future capacity by ensuring we are innovating and generating demand as a company.
This positioning is taking place and we are even more excited that we are building the infrastructure to produce better results in future periods. This infrastructure has upfront investments, but needed to be made to support our growth plans.
The increases in SG&A that have occurred in the first half of the year as enabled much of the growth that has occurred so far. And while there were likely to be gradual as SG&A increases in the future, they are not expected to be at the same rate as a top-line growth. This should lead to improved earnings as all of our initiatives reach maturity.
In closing, I want to personally thank our many-stockholders including our committed employees they have done a tremendous job during this transition period, our partners, customers and of course our investors for their continued support and trusting GlobalSCAPE.
I remain confident in our ability to meet our growth objectives and look forward to updating you on our progress each quarter. At this point, I’ll turn the call back over to Jim, to start our question-and-answer session. Jim.
Thank you, James. Operator, we are now pleased to take questions, if you would now open the line for question-and-answer please.
Thank you, sir. [Operator Instructions]. We’ll take our first question from Sam Freed with Twins Capital.
Sam Freed – Twins Capital
Thank you, good afternoon gentlemen and congratulations on your highest revenue quarter ever that’s quite an accomplishment, so for rest of you and the team. I just have a few questions, I’ll start with and then I’ll give up the call to someone else. First on your SG&A which goes that’s a better up 20% sequentially, what is your expectation for your SG&A expense over the remainder of the year, to support your revenue growth objective that you discussed in your earlier remarks?
Well we don’t actually forecast what the SG&A is going to be, what I will reiterate a little bit is that we made a lot of the upfront investments are definitely we have definitely increased SG&A we’ve increased the size of our sales force, we’ve increased our demand generation and we’ve increased our engineering team. The vast majority of our expense is around human capital and so that expense is ongoing. But as I said we created an infrastructure and we’re not expecting to have any significant increases in the percentage of SG&A.
But, it’s not going down necessarily either, because it is in support of the infrastructure we’ve put in place for these initiatives.
Sam Freed – Twins Capital
Hey in other words your SG&A is going to continue to increase in lock step with revenue?
No, no absolutely not, yes Jim.
This is Jim Albrecht. I would point out that while there is, just there is not a straight line relationship between SG&A and revenue that we have seen this year so far relative to prior years. As we continue to gain momentum and we’re able to leverage what we put in place you might also consider that that might not be a straight line relationship going forward, albeit perhaps in a different direction.
Sam Freed – Twins Capital
Okay very good. Let me move on to second question, you mentioned the expansion of the resellers and distribution partners. Can you help me understand, how large the piece of your revenue stream there their contributing now and what your goal is in terms of your contribution as a percentage of total revenue?
No we don’t actually disclose that, those percentages what I can’t tell you is that historically our channel has been almost exclusively international and there has been very little domestic channel contribution. And so when we’re talking about growing the channel, our primary initiative right now, although we are also growing international, our primary initiative right now is in the growth of that domestic channel and that has primarily been direct historically. And so, while we are not going to predict what that percentage is going to be, it’s new growth for the company.
That’s great. I will be floor to someone else and maybe come back with more questions.
Thank you. [Operator Instructions] We will take our next question from Greg Newman with The Newman Agency.
Greg Newman – The Newman Agency
Congratulations everybody, good quarter, record quarter.
Greg Newman – The Newman Agency
I have a question about reaching out to schools and women market as your customers, if you can speak to that market. They seem to go to a lot of schools like the Independent School District in San Antonio doesn’t allow kids to use their BOYD devices during school hours. And I wonder if you all are addressing that. There is anything you can do that will mitigate those issues that they have?
And also women, seemed like there is not enough women somehow using the products, I don’t know why that comes up in some of the demographics that’s at least what I’m saying?
Well, we certainly appreciate that input. I will tell you as we have emphasized the demand generation and going out and finding the appropriate addressable markets for all of the products is a key initiative and marketing is really focused on making sure that we are going in all of the right directions. And so I can assure that if that’s an addressable market space that is something we can go and get. Our marketing organization is going to be all over it. We are examining all of the different industries and all of the different market spaces that exists that we can go and capitalize on.
Greg Newman – The Newman Agency
Okay. In line with that, I know noted that [Ja] [ph] had received a call from the Randolph Brooks Federal Credit Union and that’s located in San Antonio and I appreciate the fact that they called you guys and that they were happy, the IT guy was former like pay user or something. I wondered if there was a way that you can data mine your past product customers, 10 years later, 5 years later, it got to be moved up in their jobs most likely. I would have thought this guy before he called you, I would have – is there anything whether document reach out aggressively to some of these former users like your products?
One of the key initiatives in that demand generation, it is the introduction of business development resources that can do exactly that. And they have been reaching out to previous customers and so that is absolutely in progress and we will continue as part of the key efforts by that team.
Greg Newman – The Newman Agency
Thank you. And I will get back in the queue.
Thanks very much.
And our next question will come from Steve West, Private Investor.
Thank you very much. Great quarter. As a long time investor since the spin-off, I really feel good today looking at this turnaround. And I just had a question regarding the bad debt expense, although it seems minor, it looks like it increased about 2 or 3 fold. Can you share with us is that mainly from one client or is that a group of clients that maybe had shuttle paying, if you don’t mind sharing?
Jim Albrecht, here. Certainly the number is insignificant. We go through a thorough analysis of this every quarter as your business as our business volume increases just to be conservative and say there is going to be somewhat of a proportional interest in that amount. We suffer very little bad debt expense relative to our overall volume. And while the number in absolute terms might look a little larger than usual, it certainly insignificant relative to our business. But, rest assure we keep a very close watch on that. Fortunately we have a very high quality group of customers who have a very good ability to pay and who are very satisfied with our product and hence collection won’t be an issue.
And that concludes our question-and-answer session for today. At this time, I would like to turn the call back over management for any additional or closing remarks.
This is Jim Albrecht thanking everybody for joining us today. We certainly appreciate your interest in GlobalSCAPE and look forward to visiting with you in the fall when we review the results for the third quarter. Everyone have a great afternoon. Thank you for joining us.
And this will conclude the conference for today. We appreciate your participation.
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