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Astea International, Inc. (NASDAQ:ATEA)

Q2 2014 Results Earnings Conference Call

August 14, 2014 04:30 p.m. ET

Executives

Zack Bergreen – Chairman & CEO

Rick Etskovitz – CFO & Treasurer

John Tobin – President

Analysts

Sam Robotsky – SCR Asset Management

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Astea International Incorporated Second Quarter 2014 Financial Results Conference Call. You are currently in listen-only mode. Later you will have the opportunity to ask questions during the question-and-answer session. (Operator Instructions)

With us today, from Astea International Incorporated, are Zack Bergreen, Chairman and Chief Executive Officer, Rick Etskovitz, Chief Financial Officer and John Tobin, President.

I would like to remind you that this conference call may contain certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Exchange Act of 1934 as amended.

All statements, other than statements of historical facts included in today’s conference call are forward-looking statements, including statements regarding the company’s business strategy, plans, objectives and statements of non-historical information.

Although the company believes the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions risks and uncertainties and these expectations may prove to be incorrect. Those factors are incorporated by reference from the press release issued earlier today as well as in the section entitled risk factors as outlined in the company’s filings with the Securities and Exchange Commission.

You should not place any undue reliance on these forward-looking statements which speak only as of today, August 14, 2014. All forward-looking statements attributable to the Company or persons acting on his behalf are expressly qualified in their entirety by these factors. Other than as required by Securities Laws, the company does not assume any duty to update these forward-looking statements.

With this statement concluded, I will turn the call over to Mr. Bergreen. Please go ahead. The floor is yours.

Zack Bergreen

Thank you, Mike. Good afternoon and thank you for joining us today to discuss our second quarter 2014 results. Following my overview, I will turn the call over to Rick Etskovitz, our Chief Financial Officer who will cover the details of financial results. We will then open the call for Q&A.

Astea International today reported financial results for the three months ending June 30, 2014. The second quarter was marked with multiple ways consistent of linked growth on [indiscernible] and configurability models. A premier medical device company in Japan; was looking for comprehensive and cost effective solution that was inline with their total strategy and objectives they selected Astea because we had the most comprehensive solutions that may have produced and we had the strength and experience of medical devices [indiscernible] as also our strong – the industry has. A Fortune 1000 Fire & Security Services Company; shows this year based on our robust service management that could be [indiscernible] now comprehensive contract management scheduling optimization functionality and now some third party ecosystem management capabilities.

Additionally, our ability to easily integrate with existing – structure. One of the largest electronics security services company in North America which is part of the global Fortune company selected with Astea alliance was due to its premier technician dispatching and all – optimization with capabilities robust global local solutions, strong part management functionality adopting a world flow of capabilities and easy to review the customization tools to fulfill their operational processes.

A leading grocery store chain in North America with more than 400 locations requiring their solutions that would enable them to reduce operating profit – for the company, the company needs a comprehensive efforts and service management capabilities and the solution has to easily integrate into reversing salesforce.com and enter innovative medical device company in North America that manufactures and serves as medication [indiscernible] solutions that would standard operating procedures residual, a company – of senior alliance because it has both the scalability and with that to control their rapid growth as well as the [indiscernible] features ensuring that they are right technicians with the right skill and designed to do the right job.

And finally, Asia Pacific division of a Fortune 500 Imaging Equipment Company with slightly standardization and ERP solution to support all of their operating division at Asia Pacific region.

They operate in an extremely competitive environment and [indiscernible] and robust solution that would enable them to put and adopt changes in their business. They also lead the comprehensive approach, management capabilities that would enable them to monitor the key performance in cadence to change [geographies] to the level optimum, optimal customer service to ensure them to even create customized value added services offerings to differentiate themselves from competitors and to drive additional revenue.

We also had several customers go alive this quarter with the combination of both new implementation as well as update of the existing developments. While we successfully sign some notable image [indiscernible] we did not meet our goal for revenue and possibility. As we explained in the prior calls we are e seeing strong upward trends in the number of companies in cloud, in the software and service development models that trigger traditional employments and [indiscernible] deployment. With each passing quarter we see the demand for our cloud-based offerings consistently increases.

While it is basic thought with the shift the cloud has greater destructive transition period that impacts both software licensing revenue as well as professional services revenue. As stated in the past we know provide professional services to the host of customers and get paid the same as we to other engagement that kind of presenting us from recognizing revenue until the customers [indiscernible].

Additionally, some of our details that we already forgotten to close it for the flipped in the third quarter, as some of these global opportunities with larger than they – more complex and challenging to accurately predict the timing.

I’m happy to note that as of today we had already concluded some of those deals. For example, as of this moment there was a sale to large global 200 Company with our strategy partner Capgemini for approximately 1,000 cloud subscribed in Europe.

Our partner [indiscernible] initiative continue to drive more absolute thought on the global basis and over the past few quarters the number of opportunities comprised a greater percentage of overall pipeline.

We are very pleased with the mix of partners that we currently walking with today and continue to uncover the strategic synergistic publishing that we will intend and support our strategic relation.

With regard to talking development initiative we continue to provide top ten features without adding the layers of cost companies but further they not only accuse the – but only potential revenue streams are in that [indiscernible] and more fruitful solutions that will enable them to choose superior service as the law of total – chips. Astea remains unmatched when it comes to delivering the most advanced comparative solutions at a great value.

With that I will turn the call over to Rick to cover the financial review of our second quarter 2014 results. I will make some additional closing comment after [indiscernible] overview. Go ahead Rick.

Rick Etskovitz

Thank you, Zack. For the quarter ended June 30, 2014 Astea recorded revenues of $5.3 million which were flat compared to the same period in 2013. Net loss for the second quarter was $0.08 million or $0.23 per share compared to a net loss of $1 million or $0.29 per share of the same period of 2013. Software license revenues were $1.2 million a 32% increase over the same period of 2013.

Service and maintenance revenues were $4.1 million compared to revenues of $4.4 million for the same period in 2013. As we indicated in today’s press release, we remained very encouraged by the increasing adoption rate of our cloud offering and expect strong growth moving forward.

Although we started our cloud offering with a relatively small base, we are showing significant growth. From June 30, 2013 the number of subscribers to our cloud offering has increased over 600% and our monthly contracted recurring revenue has grown by over 400%. While we do not expect to maintain these growth rates, we are happy about the adoption rate and are optimistic about our ability to maintain this momentum.

With a pipeline visibility to date, we expect to continue adding new cloud customers and see our cloud subscribers as being a significant contributor of both revenue and profitability to our business. To further understand the financial impact of our hosting business that is not reflected in our operating results, it’s important to look at our growing deferred revenue.

In the past this consists primarily of deferred maintenance revenue which is generally renewed at the end of our Astea’s sales contract signing. Since we added subscription services to our customers over one year ago, our deferred revenues have increased, have increased its deferred hosting services and deferred implementation service every quarter, and we expect that this balance will continue to grow.

Deferred implementation services the larger of the two continued to grow as all implementation fees incurred prior to the hosting customer going live or deferred and then recognized relatively over the remaining life of the contract.

The overall impact for now is that we report our cost rate implementation as they are incurred but the related revenue is deferred had the same services been performed for our customer who thought it’s a contractual license and our operating results would have been much better than reported. Overall we are building a base of significant customers who will generate a continuous, predictable, growing revenue stream into the future.

This concludes my remarks. I will turn the call back over to Zack.

Zack Bergreen

Thank you, Rick. Our latest stock reviews continue to assume high accolades from industry analysts subsequently and fast track as we continue to have a superior products when it comes to addressing the needs of central organizations around the globe. We recently have achieved some very significant wins within the Fortune 500, Fortune 1000 companies and we have assumed many more large actually in our pipeline than we have in the past. Competition is serious and we remain relentless in our aggressive pursuit to retain and demonstrate our value of robust solutions and the company’s capabilities that make us the obvious choice for companies which serve strategic to [indiscernible] .

Our solid portfolio now we generally in the sales management and [indiscernible] and it has proven to be a difficult combination for us and – to be. And we expect to continue its momentum of moving forward over 2014. Thank you for taking the time to attend our today’s conference call. Operator we will now open the floor for Q&A.

Question-and-Answer Session

Operator

(Operator Instructions).And we’ll go first to Gary [Gut] a private investor. Your line is open

Unidentified Analyst

Hey thank you. And it sounds like you are making progress and Zack; I wanted to thank you especially for what you’ve done in converting your debt into preferred shares. It means a lot to the company, it means a lot to the shareholders and thank you for that. My questions are regarding the NASDAQ equity requirements, given the fact that you showed a loss this quarter, it doesn’t look like you’ll need them in the 10-Q filing in August. And also can you comment on that, and can you also comment on whether or not meet the $450,000 trailing six-month profit as required in the loan covenant?

Zack Bergreen

Okay, Gary. I’ll let John for NASDAQ question and we’ll let Rick conducts the banking. So, go ahead, John.

John Tobin

Hi, Gary, it’s John. I can see you’re familiar with some of the details on NASDAQ, though as you know we came out of compliance and they gave us an opportunity to make a compliance plan which we did. On back of that they gave us – they use their staff discretion to allow us to continue our listing provided we did a couple of things, one of which was add some equity which we did to the conversion.

And second thing was to file the Q -- this quarter’s Q that was evidence compliance with the requirement, obviously with these results we get back below the compliance, so back in a point where NASDAQ staff has – they doing evaluation. We proactively sent them a message, a letter, communication with them explaining the results and the operations and that generally what’s been happening on the ground is consistent with the compliance plan that we gave them. So we are -- they are currently viewing that. And we are optimistic that they will exercise the discussion to continue allow us to remain aggressive until roughly the first week of October.

Unidentified Analyst

Even though you’re below the minimum equity?

Zack Bergreen

It’s correct. They have – the staff has the ability and again it’s up to discussion, but has the ability under the rule of NASDAQ, I believe there is 180 days original notice until October 6th to allow us to continue to evidence compliance.

Unidentified Analyst

Okay.

Zack Bergreen

And so we hope to be able to do that. We hope they’re going to be – give us a lead way to kind proved out what we showed and what we discuss in compliance plan and – but that’s can’t review at the moment by NASDAQ.

Unidentified Analyst

Okay. Okay. Now getting back to the loan covenants, obviously you’re not incompliance with the covenant for Q2, will you be in compliance or do you expect to incompliance with the covenant for Q3 which is $450,000 net income on a trailing six-month basis?

Rick Etskovitz

Yes, Gary, this is Rick. Our expectation is that based on our knowledge of the pipeline and deals we have closed to-date as well as deals that we expect to close by the end of the third quarter is that we’re back in compliance with bank covenants. And coincidently if we in fact we meet those covenants it will also put our equity back above the NASDAQ level. So, we’re confident that we can achieve those goals and address both the NASDAQ requirement and the bank covenant by the end of the third quarter.

Unidentified Analyst

Okay. Well that’s very encouraging to hear, because what it means that you’re not only counterbalance the loss from this quarter, but you’ll add another $450,000. So as a shareholder that’s encourage and I wish you the best on that

Rick Etskovitz

Thank you. Thank you.

Operator

(Operator Instructions) We’ll go next to Sam Robotsky with SCR Asset Management. Your line is open. Please go ahead.

Sam Robotsky – SCR Asset Management

Good afternoon, Zack and Rick.

Zack Bergreen

Hi, Sam.

Rick Etskovitz

Yes.

Sam Robotsky - SCR Asset Management

Zack, I never heard you talk so much.

Zack Bergreen

Let the wonderful geniuses here to do all the talking.

Sam Robotsky - SCR Asset Management

All right. So the market at this point even though went up before you release the earnings and then the aftermarket went up a little more. The question now, let me understand what it means 600% and 400%. Monthly contract recurring revenue has grown 400%. What is our monthly contracted revenue so that we could put some color on that and what is the number of subscribers that you increased by 600%

Zack Bergreen

Well, let me define it for you first. Monthly recurring contracted revenue is the amount that the customer that we have, who have signed hosting agreements or paying us monthly for the use of our system. Our software and that’s – it based primarily on the number of users they had – they have. However for revenue recognition purposes, since many of those customers are not yet live, we do not recognize their revenue and those results are not reflected in the financial, nevertheless they’re paying us. And the number users or subscribers are the number of people that have access to our SaaS system among those customers that are our customers. We don’t directly address what those numbers are. So we keep that, that’s not probably the information.

Sam Robotsky - SCR Asset Management

Unfortunately, to have a percentage with the good percentage on a low number is difficult to sort of valuate, I appreciated you expect to make enough money in the next quarter that you been in covenant with the bank, do you have to pay a bank, the bank any money to extend and could you go to give any kind of range or number or range of numbers, is it $500,00, is it $2 million, is it $10 million, I mean some kind of range or something?

Zack Bergreen

So first question, you’ve asked that we are paying the bank a fee to have them for bear against the covenants on the loan document? And the answer is yes. We have to pay a small $4500 fee, and that covers us through the end of this third quarter.

Sam Robotsky - SCR Asset Management

Okay.

Zack Bergreen

As far as the number that were in 1,000 customers and so it’s – that’s where we are. That’s the color. It’s not that 10 million. We hope that we’ll be some day, but that’s not the case at this time.

Sam Robotsky - SCR Asset Management

Is something that happened in this quarter that you’re able to close on deals where you are in before where your number is pretty significant?

Zack Bergreen

Well, we sign some substantial companies as new customers who have large number of users. So that’s over the last nine months we brought some pretty significant customers on. And in addition, as we also mentioned we signed a significant customer in Europe in the third quarter which of course is not reflected any results yet and unfortunately because it’s a SAP customer. They won’t have any impact on our financial result in the third quarter either other than they will be paying fees and cash receipts and that will be good, but the impact of financial statements is just an increase in our deferred revenues on our balance sheet.

But it’s a timing situation and also believe that will be convert into revenue and I also its important to that particular customer is, this is just a few countries of this customer and there’s a significant interest and spreading the usage throughout the rest of the company which is more of that and number of customers that find their way.

Sam Robotsky - SCR Asset Management

Is there anything – what is the time frame it took to sale these customers, is it six, is a year and do you expect to get new customers on the same sales cycle? What is your sale cycle?

Rick Etskovitz

Now the sale cycle is – it’s long, its six months in a short case and it can go to 24 months. But we’re aware of that and when we talk about our pipeline, our pipeline edges. So they’re at least long fortunately sales cycle, but the company that we expect to close we’ve been talking to for quite a long time and the expectations that we have to close in the third quarter or these are customers where we’re at the final stages. We’ve been selected as a vendor that they want to do business with, they were in contract negotiations. So we have pretty good reason to believe that ultimately they feel what we concluded and we’ll able to recognize the results in our financials for those that are on-premise and for those that are SaaS, it will certainly have a lot of work to do and ultimately there will be significant revenue generates with us as well.

Sam Robotsky - SCR Asset Management

Alright, that sounds good. Zack, I hope you have a lot to say next quarter.

Zack Bergreen

Yes. We really have a very stronger pipeline of opportunities, larger opportunities, large and typically over a 1000 [indiscernible] deployment sale opportunity. And what’s encouraging is these opportunities are traditionally a large company, and so it’s validates our capabilities, validates uniqueness and frankly keeps us very, very busy. So yes I think we are certainly very encourage where the success we had in the past few months and certainly encouraged by the good and solid pipeline.

Sam Robotsky - SCR Asset Management

All right.

Zack Bergreen

One thing Sam, if I…

Sam Robotsky - SCR Asset Management

Yes. Sure.

Zack Bergreen

One of the reason are optimistic is where we started in this hosting business, customers are hesitant because we’re new at it and we did get some business. But now every customer that wants to do business with us goes – and thus reference Zack, and they talk to our customers they want to see and because of the successes we have they are generating more successes and when the customers, the perspective customers talk to existing customers they’re getting good reports and that is probably the best reference that we can have for building our business.

Sam Robotsky - SCR Asset Management

Sounds good to me, good luck.

Zack Bergreen

Thank you.

Rick Etskovitz

Thank you.

Operator

(Operator Instructions). And there are no further questions at this time.

Zack Bergreen

I want to thank you all for joining us today and hoping to see all of you at the next conference in coming quarter. Thanks again.

Operator

And thank you all today for joining us. This does conclude today’s program. We appreciated everyone’s participation. And you may disconnect at any time.

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