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Daegis Inc. (NASDAQ:DAEG)

Q1 2015 Earnings Conference Call

August 26, 2014 5:00 PM ET

Executives

Tim Bacci – Chief Executive Officer

Susan Conner – Chief Financial Officer

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Daegis First Quarter Fiscal 2015 Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. This conference is being recorded today, Tuesday, August 26, 2014.

With me today to lead the discussion and take your questions is Daegis’ CEO, Tim Bacci; and Chief Financial Officer, Susan Conner.

The Company’s earnings release was issued at 3:00 PM Central Time today and is available in the press release section of the Company’s website at daegis.com. A recording of today’s call will be available for replay on the Investor Relations section of the Company’s website.

Before we begin, I’d like to remind you that the comments made on today’s call may include projections or other forward-looking statements regarding the future operations, opportunities, or financial performance of Daegis within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements involve a high degree of known and unknown risks and uncertainties, and actual results and circumstances may differ materially from those discussed. Please refer to the risk factors and other disclosures contained in Daegis’ most recent reports on forms 10-K, 10-Q, and 8-K filed with the Securities and Exchange Commission for a more detailed discussion of the factors that could materially affect results.

The forward-looking statements made in today’s conference call are based on the information available as of today, August 26, 2014, and Daegis assumes no obligation to update such statements to reflect events or circumstances after today’s date.

In addition to reporting financial results in accordance with the Generally Accepted Accounting Principles, or GAAP, Daegis reports non-GAAP financial results. In the press release, a complete reconciliation of the non-GAAP financial measures to the applicable GAAP measures. Although not a substitute for GAAP presentation, the Company believes that non-GAAP information allows for meaningful year-over-year comparisons and more clearly identifies the actual operating results for the business. The Company uses the non-GAAP information internally to monitor their financial performance.

I would now like to turn the call over to Tim Bacci. Please go ahead, sir.

Tim Bacci

Thanks, operator. Good afternoon, everyone, and thanks for joining us on the call today. I’ll begin with a business overview, and then we’ll turn the call over to Susan, who will walk us through the financial results. We’ll then take your questions.

We released our financial results about an hour ago. There are two takeaways that should be noted. First, we remain challenged on the top-line. Our resulting revenue for the quarter is not where we wanted it to be. Though we’re making progress on the sales front, it hasn’t translated into the revenue that we’re looking for.

On our previous conference call, I spoke to longer sales cycles and challenges with the sales hiring process. The former is going to be an ongoing reality as we move away from transactional sales to client relationships that are more strategic in nature and larger in total dollar value.

The latter we’ve resolved by implementing an internal recruiting process that’s generating more qualified candidates, while being more quantitative from an assessment perspective. Second, we continue to see the positive results from restructuring and realignment of the business that took place over the past 18 months.

The operations are running very efficiently, and as noted in our recent 8-K filing and again in our press release today, we’re able to refinance our debt resulting in notable savings and interest costs. Susan will go into greater detail in her portion.

Looking back, I stepped in as the CEO in January of 2013 serving on Board a little over 18 months, which is an appropriate time, especially in light of our continued shortfall on revenue to assess what assumptions were correct versus incorrect, what we’ve learned over the timeframe, and where we believe the real growth opportunities are for the business.

The conclusions were as follows: A, there’s still lot of noise from a competitive perspective in the eDiscovery segment of the market, resulting in some pricing pressure in a more difficult time dislodging incumbents. That said, our ability to rapidly develop and deploy new technology will continue to distinguish Daegis, giving us a competitive advantage.

B, the environment for standalone opportunities at Archive and eDiscovery remains very competitive. The combined solution that Daegis offers is unique, is needed and difficult to replicate. It’s clearly where the market is going. C, there’s a resurgence in application and email migration to either modern environments or to the cloud or both. And D, we’re at the very nascent stages of mobile application development at the corporate level, specifically for enterprise to employee use, something that we’re well-positioned to take advantage of with our TD Mobile development platform.

Distilling all of this down, it simply means that as a technology provider, Daegis is competitively well-positioned to meet a broader spectrum of governance application and data management needs for our clients.

Additionally, it’s been clear to me for several months now that a direct sales strategy in isolation won’t be enough to scale a revenue as desired. So, both the regional and global channel strategy for all of our product offerings is necessary. This doesn’t imply that we’re late in acting on this, but rather there were some necessary advancements required in our product offerings, specifically with our application and email migration tools, and with our recently developed cloud based hosted archive. This productizing gives systems integrators and value added resellers the ability to directly sell, install, and support all of our products.

We’re currently in active discussions with several channel partners and plan to put the right resources in place to grow this accordingly. This type of balance between direct and indirect sales is nothing new to technology companies, and if executed on correctly, it could increase our market penetration and corresponding revenue significantly.

Finally, I want to reiterate that as the market continues to evolve, we are seeing an increasing interest in our cloud based solutions, which we believe will result in more predictable recurring SaaS like revenue.

I remain confident about what’s unfolding here at Daegis and committed to do what’s necessary to achieve our goals.

With that, I’ll turn it over to Susan.

Susan Conner

Thank you, Tim, and good afternoon, everyone. I’d like to begin my remarks by discussing the refinancing of our credit agreement, which we completed at the end of the first quarter and was reported in our 8-K filing in the first week of August. I’m happy with the results as well as the working capital relief we are experiencing with the new terms in the refinancing.

Our debt, which previously matured on June 30 of 2015, has been extended until June 30 of 2017. We’ll also save a minimum of $200,000 a year on interest cost as we reduced our overall interest rate by 150 basis points and paid off the previous $1 million balance of the Term Loan B, which carried the highest interest rate of the entire facility.

Let me now move into our first quarter financial results. First quarter total revenue was $6.7 million, a 16% decrease compared to $8 million last year. Revenue for the Archive and eDiscovery segment was $4.1 million, compared to $5.4 million in the first quarter last year. The Archive and eDiscovery revenue decline is driven from lower professional services and hosting fees, of which the large account we’ve noted before where the legal matter is winding down, made up over $500,000 of this decrease.

As I’ve mentioned before, and as Tim noted during his remarks, we are keenly focused on moving to a more recurring revenue model where our software will be sold on a SaaS basis. With a shift from the short-term drop in revenue, as this revenue was recognized over the service contract period and not when the license is sold or a particular project is completed.

Revenue for our mobile application development, database, and migration tools segment was $2.6 million, up slightly compared to $2.5 million in the first quarter last year. As Tim previously mentioned, the increase was driven from the growing interest in our Composer migration business. Favored by regular enhancements being made to our software products, our company-wide maintenance revenues remain relatively constant compared to last year.

First quarter operating expenses were $6.6 million, down 17% from $8 million in Q1 last year and down from $6.9 million sequentially from Q4. Our restructuring efforts from last year are evident in our results and the sequential decrease is primarily due to lower selling expenses consistent with the lighter revenue. We delivered approximately $60,000 in income from operations, compared to a slight loss from operations of $24,000 last year.

GAAP loss improved to $247,000, or $0.02 loss per share compared to a GAAP loss of $633,000 or $0.05 loss per share last year. Taking into account our lower revenue, which was then offset by our lower operating expenses, adjusted EBITDA was $823,000 for the quarter, essentially flat when compared to Q1 last year. The year-over-year EBITDA margin did, however, increase by two percentage points to 12% from 10% last year. Non-GAAP net income was $240,000 or $0.01 per share, compared to non-GAAP net income of $53,000 or $0.00 per share last year.

With the subleases for real estate in New York and San Francisco being finalized, we have now completed the business unit alignment activities, and you will no longer see these charges related to this alignment as an add back to our adjusted EBITDA going forward.

Moving on to the balance sheet, our July 31, 2014 cash balance was $5.1 million, up slightly from $5 million in July 31 last year and down $2.1 million from April 30, 2014 due to $2.2 million of payments we made on our credit facility during the quarter. These payments bring our total debt outstanding down to $12.6 million at July 31 quarter end.

We continue to remain focused on keeping our costs in check while we drive towards the inflection point in our revenue growth.

Tim, back to you.

Tim Bacci

Thanks, Susan. Let me summarize everything coming in from a slightly different angle. Independent of which door we come in through at the corporate level, legal, IT, or finance, what we’ve learned is that typically there’s a need larger than any single point solution. It all revolves around managing massive datasets along with a mandate to migrate while mobilizing existing applications. Let me be clear, Daegis is not the only company that can meet all these needs on a services basis, but is the only company that I’m aware of that owns all of the necessary IP that enables all of this to happen. I look forward to future updates on our quarterly calls.

With that operator, we’ll now open the call for questions.

Question-and-Answer Session

Operator

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) And we’ll take our first question from [Peter Griva] (ph).

Unidentified Analyst

Yes, thank you very much. Given that your next quarter is partially completed at this point, not partially complete, but you’re well into the next quarter, what’s your prognosis for revenue for this upcoming quarter?

Tim Bacci

Well, Peter we’re not giving guidance, we typically don’t give guidance. And so it’s not something that we speak to. By the way, we’re hoping for the not too distant future to put ourselves in a position to do just that, but we’re not quite there yet. But there are some positive signs for us out there where the pipeline continues to build and we’re optimistic that in the coming quarters, and I’d say that (indiscernible) it’s difficult to put our finger on it that we’ll see net inflections point that Susan referenced in her portion of the script.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions) And seeing as there are no questions, I’d to thank you. Ladies and gentlemen, that does conclude the question-and-answer session. And Daegis would like to thank you for your participation. You may now disconnect. Have a pleasant day.

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