Zi Corporation (ZICA) Q4 2007 Earnings Call March 25, 2008 11:30 AM ET
Ray Catroppa – Investor Relations
Milos Djokovic – President and Chief Executive Officer
Blair Mullin – Chief Financial Officer
Tony O’Callaghan – Credit Suisse
Joey Morell – Private Investor
Tom Folks - Private Investor
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Zi Corporation Fourth Quarter and Fiscal 2007 Results Conference Call. (Operator Instructions) This conference is being recorded today, March 25, 2008. I would now like to turn the conference over to Mr. Ray Catroppa, Cameron & Associates. Please go ahead.
Thank you, Rod. Good morning and thank you for joining us for the Zi Corporation’s 2007 Fourth Quarter and Year End Results Conference Call. Before we start today’s call, there are a few items I would like to cover with you.
First, the news release announcing Zi’s results for fourth quarter and year end as of December 31, 2007, was disseminated over the news wires this morning and is currently available to download from either the Zi Corporation website at www.zicorp.com or at the Cameron & Associates at www.cameronassoc.com. You may also call Cameron’s New York office at (212) 245-8800 after the call and they can email or fax you a copy. Additionally, a replay of this conference call will be available on the company’s website.
I would like to remind everyone that this conference call may be deemed to contain forward-looking statements which is subject to the State safe harbour provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events and the future financial performance of Zi Corporation that involve risks and uncertainties. Listeners are
cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors, a discussion of which could be found in Zi Corporation’s most recent reports on Form 20-F and Form 8-K, as may be amended from time to time that are filed with the US Securities and Exchange Commission and available on Cedar & Edgar.
The financial information discussed in this conference call could be used in conjunction with the consolidated financial statements and notes there to included in the before mentioned reports. Zi Corporation’s results of operations for the fourth quarter and twelve months ended December 31, 2007, are not necessarily indicative of the company’s operating results for any future periods. Any projections made during this conference call are based on limited information currently available to Zi Corporation which is subject to change. Although, any such projections in fact is influencing them will likely change except for the extent required by law, Zi Corporation will not necessarily update the information. Such information speaks only of the date of this conference call.
On the call today from Zi Corporation are the company’s President and Chief Executive Officer, Milos Djokovic, and Blair Mullin, Chief Financial Officer. Today’s call will include opening remarks from Milos, which will include a discussion of the company’s sales, marketing and product development activities, and the near and longer term opportunities that Zi is addressing, which the company believes will accelerate future growth.
There will also be a review of the financial results by Blair Mullin and following that, management will then participate in a Question-and-Answer period. I will now like to turn the call over to Milos. Good morning, Milos.
Thank you for joining us. In our call last year, we called 2006 a year of transition for Zi. This year I’d like to characterize 2007 as a year of achievement, hopefully, one of many such years of achievement and growth in the future.
In 2007, we achieved record annual revenues of $13.1 million from our technology business, which are primarily software license sales for the mobile phone industry. As well, the fourth quarter revenue of $3.6 million tied the previous quarterly record set twelve quarters ago. At the same time, our net loss in 2007 decreased by 53%. Blair will provide you with the full details of our financial results but I want to emphasize that we have begun to deliver the results we said we would when we formulated our plans in late 2006.
We’ve begun to make excellent traction in the introduction of Qix™, our search and discovery product. In late 2006, we announced a major trial with T-Mobile in the UK, and in addition in 2007, we started a second trial with another major unnamed operator in Europe. While these agreements were for trial only and limited roll-out, we expect to see favorable results this year which could lead us to breakthrough agreements for Qix™.
Already in 2008, we have announced our first quarter American license agreement for Qix™ with TELUS, a leading national telecommunications company in Canada. This is a breakthrough agreement because in addition to producing revenue, it accomplished two very important things. First, it validates that Qix™ is a viable product in terms of the value that it can add to the network operator’s ability to service its customers. Second, it opens the door to working directly with a major manufacturer to affix Qix™ on feature phones, in addition to smartphones that we’ve previously developed Qix™ for.
As we add proprietary handsets to our Qix™ arsenal, the time to market with new operators will become even shorter and the vision to adopt Qix™ become even easier.
Earlier this year, we also unveiled our latest development for Qix™, including the introduction of Qix™’s Updater, a content updating feature that allows operators to add new advertisements and content at any time and allows operators to push these updates to mobile users worldwide. We believe that Qix™ provides the platform to help mobile operators push advertising to their customers which is a revenue stream that we believe that we could participate in.
Next, I’d like to talk about Decuma™, our handwriting recognition technology. In 2007, we found license agreements representing the breakthrough in the growth of Decuma™, such that Decuma™ should represent up to 10% of our revenue in 2008. We’re feeling very bullish of our opportunities and that Decuma™ will make a solid contribution to both the top line and the bottom line of our business.
Perhaps the biggest achievement of all in 2007 was the growth of our predictive text business, eZiText™ and eZiType™. In 2006, we saw severe competitive pressures on particularly our Asian customers, resulting in customers leaving the business, as well as, having higher bathetic expense incurred by Zi.
In 2007, thanks to improved sales and account management, we’re able to achieve 9% growth in predictive text—revenues compared to 2006, as well as, much lower bathetic exposure.
Predictive text continues to be a very important business segment for us since it represents our core business product and the majority of our revenues. We expect to see similar growth rates in 2008 as we saw in 2007. Already in 2008, we’ve found license agreements with a significant new OEM and our late discussion with the top five OEM to license eZiText™, eZiType™ and Decuma™.
In January of this year, we announced the new license agreement for eZiText™ and eZiType™ with Norway-based Trolltech. Trolltech has integrated eZiText™ and eZiType™ as part of the Qtopia Greensuite Initiative, which offers pre-integrated market leading partner components on top of Qtopia Phone Edition.
In the fourth quarter, we announced a license agreement with a global printer manufacturer. This agreement is representative of opportunities for eZiText™ and eZiType™ outside of our traditional customer base, which we’re presuming on an opportunistic basis.
Before we move on in this presentation, I know that it’s frustrating for some investors that we sometimes do not mention the names of customers that we are working with. Believe me, when we announce new trials and agreements, I’d like to announce the name of the customers and the specific devices and the platforms involved. Unfortunately, many instances, we’re precluded by agreement by making such disclosures and even when we are allowed to mention the customers’ names, we’re often limited in the detail we can provide about the agreement itself.
I also want to comment though on a few other important achievements in 2007. As many of you will recall at the beginning of 2007 when we had two major legal issues that needed to be resolved. That being the settlement of all matters relating to the Receiver for the Lancer Funds, our largest shareholder, and any of the litigation with the University of Texas over alleged patent infringement. As many of you know, we managed both issues to our favor: The Receiver of the Lancer Funds with a non-cash settlement that resulted in all parties agreeing to terminate any and all actions of each other and the University of Texas with a victory over the plaintiff as a result of the court declaring that we did not infringe. The University has filed an appeal which will likely be heard in early 2009 at the earliest, as the date has not yet even been set. We believe firmly that we did not infringe but we’ll have to play this out.
I’d also like to have a few words about out NASDAQ listing. As you know, we received a notice from NASDAQ that we’re not in compliance with the minimum bid price requirement for continued listing on the capital markets. As a result, we were given a period of 180 days to comply. Also, as we reported earlier that at the end of the 180 days, we can and believe we do qualify for a second 180-day period in which to comply with a minimum bid requirement. Our intention is continue to produce improvements in our reported financial results while working hard to make sure we’ve told our story to enough current and potential investors.
In summary, eZiText™ and eZiType™ revenues for the company grew by 9% in 2007 and we expect similar growth rates in 2008. We signed license agreements for Decuma™ and the revenues from them should commence in 2008. In fact, we shipped almost half a million units of handwriting in Q4 last year.
Qix™ is on trial with two operators in Europe. We have a significant relationship with TELUS that we signed around Qix™ and we expect to see a unit shipped in either the third or fourth quarter of this year.
All the above will result in higher revenue growth rate than we’ve seen in the past and continued improvement to the bottom line.
I’d now like to turn the presentation over to Blair Mullin to discuss our fourth quarter and full year of financial results for 2007.
Thank you, Milos. Total revenue for 2007 increased 11% to $13.1 million from $11.8 million in 2006. This represents a record year for revenue from our technology business segment. The previous revenue record included revenues from other operations that have since been discontinued. Revenue for the fourth quarter of 2007 was $3.6 million, which is an increase of 13% from $3.2 million of the fourth quarter of 2006 and 7% from $3.4 million of the third quarter of 2007. This revenue level ties an important record for the technology segment since the third quarter of 2004 when Zi had a large amount of revenue from a major customer.
Revenue increase with fourth quarter of 2007 and the full year of 2007 are attributable mainly to the growth in our core products, eZiText™ and eZiType™. It is interesting to note that revenue growth presented a steady transfer of the year to recap a quarter-by-quarter revenue: First quarter of 2007, $2.6 million; second quarter, $3.5 million; third quarter, $3.4 million; fourth quarter, $3.6 million. Except for an expected feasible dip from the first quarter of 2008, we believe the upward quarter-by-quarter trend should continue in 2008.
Revenue from our top five customers from 2007 represented 58% of our total revenues versus 50% in 2006. This increase is a result of greater penetration of our Tier 1 customers. As we increase in Qix ™, which is a product targeted at network operators, we expect to see a greater concentration of our revenues from large customers. This goes well for credit quality and collectability of revenues. It is also important because of the opportunities over time to increase penetration of existing customers by exploiting our reputation as an innovator.
Turning our presentation now to the bottom line, net loss for the year was $5.1 million or $0.10 per basic and diluted share, a 53% decrease from the 2006 net loss of $11 million or $0.24 per basic and diluted share. 2007 results include a $0.6 million gain from the sale of a non-core asset. Net Loss from Continuing Operations was $5.8 million in 2007, which was a 41% decrease versus 2006.
Net loss for the fourth quarter of 2007 was $1.7 million or $0.03 per basic and diluted share, as compared to a net loss of $3 million or $0.06 per basic and diluted share for the same period in 2006, and $1.3 million or $0.02 for the third quarter of 2007.
There are two major items that affected our bottom line in the fourth quarter. First was the accrual of $0.5 million of withholding taxes. These withholding taxes are necessary to be paid in order to repatriate the cash held in one of our Chinese subsidiaries. This cash was classified on December 31, 2007’s balance sheet as Restricted Cash. We intend to repatriate the cash in the foreign-most inter-company royalties as soon as we have completed the necessary processes with the Chinese government. While there’s no assurance that we’ll be successful in completing this repatriation, to date we have received most, but not all, of the necessary government approvals. When we do receive the final approvals, we intend to issue a press release because this represents a significant amount of cash on our balance sheet. The Restricted Cash balance was $2.7 million as of December 31, 2007.
The second major item affecting the fourth quarter loss was the depreciation of the US Dollar against other currencies. In our case, the biggest currency, in fact, was between the US Dollar and the Canadian Dollar. The total increase in cost in the fourth quarter versus fourth quarter 2006, due to this factor alone, was approximately $0.5 million.
Overall though, we are pleased with the progress we’ve made so far in driving the company towards profitability but we need to work to continue this trend. SG&A expense for the fourth quarter of 2007 was $3 million compared to $3.2 million for the fourth quarter of 2006 and $2.3 million in the third quarter of 2007, in increase of 6% and an increase of 28% respectively. SG&A in the fourth quarter was affected by this depreciation of the US Dollar against Canadian Dollar and fees relating to our Sox 404 compliance.
SG&A expense for the full year of 2007 was $10.5 million, compared $10.7 million in 2006. The major items affecting SG&A in 2007 and without which we would have seen a larger decrease were again the US Dollar’s depreciation against the Canadian Dollar, as well as, professional fees relating to our Sox 404 compliance, and also due to the audit by Canada Revenue Agency of our cross-border transactions.
Business taxes, which we have begun to break out separately in order to provide better detail, are at $0.7 million in the fourth quarter of 2007, compared to $0.02 million for the fourth quarter of 2006 and $0.01 million in third quarter of 2007. As noted above, these taxes increased as a result of our program to repatriate the Restricted Cash held in a subsidiary of China, which were essentially one time in nature. Business taxes for the full year were $1.3 million compared to $0.9 million in 2006.
The company continues to invest in new product features and enhancements to software language databases along with continued investment in Decuma™ handwriting recognition software and Qix™. PR&D expense, net of capitalized costs, for the 2007 fourth quarter and full year were at $0.7 million and $2.4 million respectively, but $2.8 million and $3.7 million in the respective prior year periods. The company capitalized $0.3 million and $1.7 million respectively in the fourth quarter and full year compared to $0.3 million and $1.4 million in the respective periods in 2006. The company expects net PR&D cost increasing slightly over the next three quarters.
Legal costs for the 2007 fourth quarter were at full year were $0.6 million and $1.9 million respectively, compared to $0.8 million and $3.4 million in the respective periods last year. The decrease is related to the settlement of the matter involving the Receiver for the Lancer Funds and termination by the court of the patent infringement case with the University of Texas. We expect legal expenses to continue to decrease in 2008 versus 2007.
The company’s balance sheet ends on December 31, 2007, showed Cash and Cash Equivalents of $5 million plus $2.7 million that is classified as Restricted Cash as described earlier, Total assets of $15.7 million, Total Liabilities at $9.3 million, Current Ratio of 1.2:1 and Shareholder’s Equity at $6.5 million.
As a final note, I’d like to point out that we’ve completed our first year in which we, as a non-accelerated filer, were required to report our compliance with Sox 404. And please report that we were able to submit a clean report for the year end of December 31, 2007. This is a significant achievement for a small company and I’d like to thank our capable staff in several different countries for their hard work on this.
In my view, the company made so much financial progress in 2007. However, it’s important that we continue to drive towards profitability and achieve that milestone as quickly as possible. Our outlook for 2008 is that we will make significant further steps towards that goal.
That completes our review of the financial results. I would like to now turn the call back to Milos. Thank you very much.
Thanks, Blair. Before I turn the call over to the Operator for questions, I would like to remind everyone that should you have questions following the conference that are not addressed in our Q&A session, you may call Al Palombo or Ray Catroppa at Cameron & Associates, the New York office at (212) 245-8800, or our Investor Relations Department at (403) 233-8875, or send us an email at email@example.com. Thank you. We’d now like to turn the conference call back to the Operator so we can take your questions.
(Operator Instructions) Our first question comes from the line of Daniel Morris.
Good afternoon, Blair and Milos. Just a question—I’m wondering if you could give a little bit more color on the Palace Agreement. First of all, will there be any engineering that you will seize prior to shipping? And my second question regards to Qix™ also is do you have any timeframe when that unnamed European operator may make a decision whether to move forward or not?
Okay, let’s just address the unnamed European operator one. We are currently in trial. There are units in the market with them. They’re measuring performance. I’m supposed to find out the results and meet with their senior management in May.
Okay. Are there any engineering seize?
Yeah, on TELUS there are very little, if any, upfront seize associated with that project. What you will see is most of it is buried in the unit price. That’s just the way that deal was cut.
Our next question comes from the line of Tony O’Callaghan - Credit Suisse. Please go ahead.
Tony O’Callaghan – Credit Suisse
Hello, gentlemen. One of my questions has been answered. It really had to do with the length of time these trials would be ongoing in Europe and after the data is finally received and reviewed, how long would it take to roll out the products into the market?
Sure, so let’s talk a bit about that because we’re only talking about the one unnamed operator. In the case of T-Mobile, we’re expecting data in April. So, we’re hoping to when we get all that, that we’ll be able to report back to you guys the performance of that and obviously, based on those results, we’ll determine what kind of a deal, if any, we deal with them going forward. So obviously, they’ve got to see the positive results. We’re still feeling really good about it because they’ve been shipping a lot of units recently and in fact, we’re talking to them about the possibility of doing a download as well. So, that’s a way to accelerate more units in the market.
Tony O’Callaghan – Credit Suisse
Milos, a follow up to that, you were able to share the test data from these other companies with—?
In the case of T-Mobile, we have mutually agreed to release the data in the agreement. In the case of the other operators, we do not have the right to release the results.
Tony O’Callaghan – Credit Suisse
Okay, so in most cases you have to have the okay with the other companies?
In the case of T-Mobile, we’ll going to try to do whatever we can to get that information out to you guys.
Tony O’Callaghan – Credit Suisse
Right. What do you think is the likelihood that they will let you?
We’re going to be able to put it out so greater than 50%.
Tony O’Callaghan – Credit Suisse
Okay, because actually like that they see a test without the funds—the other operators.
It’s really important we get—especially now that the products come such a long way in the last couple years to get more new information out into the market and let other customers and investors know how significant this product really is, and more data points we can get out there the better. So, we know it’s really important to get this done and it’s something we’re working really hard at.
Tony O’Callaghan – Credit Suisse
Okay, thanks gentlemen.
Our next question comes from the line of Joey Morell, private investor. Please go ahead.
Hi, Milos. Two and three conference calls ago, you mentioned something about a contract you were working on that was going to yield somewhere in the eight figure bracket. I’m wondering if you’re still working on it and how close you are.
We’re still working on those opportunities. There are actually two of those right now that are that big but we are not able to say much more about it at this point.
Very good. Thank you so much.
Our next question comes from the line of Tom Folks, private investor. Please go ahead.
Hello, would you comment on any relationship you may have with Apple or Google, as well as, industrial partners that are coming up the next line? You mentioned about an SDK you were working on with Google. Is that correct?
So, actually let’s talk a little bit about that. The biggest problem we’ve had with Apple is we’ve tried to talk to them in the past before the iPhone was even released and they wouldn’t work with us. They were very secretive about the device and felt that their internal solution worked very well. I think if anybody has used an iPhone—I own one—the text input’s terrible. It’s one of the worst parts about the phone, but they’ve now started to open that platform and that just recently got announced that they have a contest going on for companies to build enhanced capabilities for the iPhone. We’re taking a hard look at whether or not that’s something we want to pursue. Again, one of the issues you have around certain platforms like iPhone and Google Phone is, at this moment, there aren’t a lot of units in the market of those things. I mean, they have a lot of buzz but there’s not a lot of market share but in the case of the iPhone, I mean, that’s something that’s still growing and people can see the results of that.
So, if an issue prioritizing that versus getting on a proprietary handset with a major manufacturer that has double digit percent market share and is shipping over 100 million units in the market—we tend to focus more on that because that’s where we’re going to make more money but we do know that there’s a strategic value being on iPhone and Google Phone and so forth. We believe that our technology actually applies really well to both devices—our platform, I should say—and I one case, we actually have an Asian manufacturer that is asking for us to do a version for the Google Phone’s somewhat predictive text products. So, it’s definitely a platform we’re looking at and we will address as the market needs us to and as we continue to promote things like Qix™ or some things like that in the market.
If I can follow up on that, can you open up your phone that you have—you said you have an iPhone—and actually do prototyping on it in your development group there?
Not previously. Now, they’ve introduced the capability where they’ve opened the phone up to developers but what I don’t know at this point is whether or not we can still get—our software tends to run at a lower level. It’s not an application that just sits on top of the operating system. We have to embed into anywhere you would put text on the device—things like that. It might actually be easier to do a Qix™ for an iPhone than would be to do eZiText™ so I can’t answer the question exactly right now but I know we are looking at it.
That you could do a prototype based on several teams and things of that nature?
Oh, absolutely, and compiling our stuff for the device and all that stuff is stuff we do all the time. That’s not an issue. It’s really a question of how much access to the phone are they giving us in this new SDK.
And what about the industrial marketplace you mentioned in previous conversation?
As to what perspective, Tom?
Essentially, I think you had an agreement—I think it’s a Japanese agreement—relevant to some industrial application. Hitachi—I think it was. Is that right?
Yes, that was the handwriting opportunity.
Any more focus there?
I can tell you right now that the Japanese market is a market that’s really hot for us. We have two major manufacturers over there that we’re talking to right now and a very late stage with on some product discussions. So actually, Japan is probably—I would say you’re going to see a lot more growth in Asia from us this year with just the way the pipeline’s looking.
Ladies and Gentlemen, if there are additional questions, please press *1 at this time. If you would like to withdraw your question from the queue at any time, please press *2. If you are using Speedco equipment, please make sure to lift the handset before making your selection.
At this time, there are no further audio questions. I will turn the conference back to management for closing and concluding remarks. Please go ahead.
Before we end this morning’s call, I want to thank everyone for joining us. The traction that we’re now gaining with both Qix™ and Decuma™, as well as, our continued growth of our core eZiText™ and eZiType™ business hold well our expectations of accelerated growth in the future. Our strong relationships with our base of key customers are among the many reasons we’re optimistic about 2008 and beyond.
I’d like to thank all employees for their work for 2007 and their continued support for Zi Corporation. We look forward to reporting to you the progress we make throughout 2008.
Ladies and gentlemen, this concludes the Zi Corporation’s Fourth Quarter and Fiscal 2007 Results Conference Call. We would like to thank you for your participation. Have a pleasant day. You may now disconnect.
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