Rimage Corporation Q4 2007 Earnings Call Transcript

Apr.14.08 | About: Qumu Corporation (QUMU)

Rimage Corporation (RIMG) Q4 2007 Earnings Call February 20, 2008 10:00 AM ET

Executives

Bernard P. Aldrich – President, Chief Executive Officer & Director

Robert M. Wolf – Chief Financial Officer, Treasurer & Secretary

Manuel M. Almeida – Executive Vice President Sales & Marketing Americas

David J. Suden – Director

Analysts

Chuck Murphy – Sidoti & Company

Greg [Inaudible] – Doherty

Operator

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Rimage Corporation fourth quarter earnings 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. (Operator Instructions) This conference is being recorded Wednesday, February 20, 2008. I would now like to turn the conference over to Bernie Aldrich, President & Chief Executive Officer. Please go ahead sir.

Bernard P. Aldrich

Good morning and thank you for taking the time to participate in our fourth quarter earnings conference call. Joining me today is Rob Wolf, our Chief Financial Officer who will review our recent operating results in some detail. Also with us is Manny Almeida our Executive Vice President of Sales & Marketing along with Dave Suden. We’ll be pleased to take your questions at the conclusion of our opening remarks.

Since Regulation FD prohibits us from providing any forward-looking statements unless they are simultaneously released to the public, we have provided financial guidance for the first quarter of 2008 in this morning’s release. It is important to understand that this guidance is subject to a number of risks that could affect our anticipated performance. These risks are set forth in our filings at the Securities & Exchange Commission which we urge you to review.

Turning now to the subject of this conference call our fourth quarter sales were $28.2 million compared to $30.5 million in the year earlier period. Our earnings came to $4.5 million or $0.45 per diluted share up 25% from $3.6 million or $0.34 per diluted share in the fourth quarter of 2006. For the full year 2007 Rimage reported revenues of $108.9 million up from $103.3 million in 2006. Net income was $15.8 million or $1.52 per diluted share up 20% from $13.1 million or $1.26 per diluted share in 2006. These full year results made 2007 Rimage’s sixth consecutive year of improved sales and earnings. Also as announced in this morning’s release Rimage’s board of directors issued a 500,000 share repurchase authorization which comes in addition to the previous 500,000 share buyback authorization. Since no shares were acquired in the fourth quarter of 2007 under the prior authorization a total of one million shares are now available for repurchase.

Turning now to our recent operating results Rimage’s fourth quarter sales were generated across a range of markets primarily by our global distribution channel. Strengthening our distribution channel has been and remains a primary management focus and we believe the progress we have made in this area will enable our channel to drive a significant portion of Rimage’s sales in 2008 and beyond. As previously forecasted we reported no significant orders from national retailers for producer hardware during this period which was a primary reason for our lower revenues in comparison to the fourth quarter of 2006. However, our fourth quarter earnings benefited from increased channel sales of Rimage’s producer equipment. We also benefited from an improved average selling price on this product line. These factors helped drive our fourth quarter gross margin to 48% from 45% in last year’s fourth quarter when our gross margin was affected by a right down of approximately $648,000 related to the low end 360i product line.

Our fourth quarter earnings also benefited from lower operating expenses reflecting the completion of several product development and SAP initiatives. A significant portion of Rimage’s highly profitable growth over the past two years has been generated by our ability to successfully penetrate the retail and medical imaging markets with our digital publishing solutions. The large retail orders that we have received for our producer hardware are an indication that our equipment has become the retail industry standard for the on-demand publishing of digital data on CDs, DVDs, and Blu-ray discs. The same is true of our digital publishing solutions in the medical imaging market where our systems have become the industry standard for PAX installations in large US hospitals and clinics. We continue to see good opportunities in these markets both here and overseas that we will pursue aggressively in the years ahead.

Video on-demand and the production of DVDs that include any combination of pictures, video and music are two new retail opportunities. In the medical arena we have started targeting smaller PAX installations in such additional modalities as mammography. Beyond the retail and medial markets we also see significant untapped opportunities for our disc publishing technology in a number of large business service markets. Some of these include media and broadcasting, law enforcement, education, government, software and professional services. We believe business service applications will drive a significant portion of our growth over the next few years and we intend to devote considerable resources towards building positions in these areas similar to what we have achieved in the retail and medical markets.

Now, I will turn to financial guidance contained in this morning’s release. We believe the first quarter of 2008 should be another period of progress and improved operating results for Rimage and we are forecasting earnings of $0.21 to $0.26 per diluted share on revenues of $22 to $24 million. In closing, I want to say that we are optimistic about Rimage’s future. The new application and the markets we are pursuing in the Americas, Europe and Asia hold substantial long term opportunity and we are extremely well positioned to capitalize upon these opportunities. Thank you and now Rob will review our fourth quarter results in some detail.

Robert M. Wolf

First, I will run through a few highlights about our fourth quarter sales. Recurring revenues including sales of printer ribbons and cartridges, parts, blank CD and DVD media and maintenance contracts increased 6% in the fourth quarter of 2007 and accounted for 54% of sales compared to 47% in the fourth quarter of 2006. We expect consumable sales growth to accelerate in 2008 as our equipment is fully installed in the retail stores involved with the significant retail orders that we received over the past year. As of today Rimage’s publishing systems are installed in the photo departments in more than 3,500 stores nationally.

International sales increased 18% in the fourth quarter and accounted for 44% of total sales compared to 34% in the fourth quarter of 2006. Sales from our European operations which generated the majority of our international sales increased 15% in the fourth quarter whiles sales in Asian markets increased 39%. Currency effects increased worldwide sales by 4% in the fourth quarter of 2007.

Rimage’s gross margin was 48% in the fourth quarter down from 49% in this year’s third quarter and up from 45% in the fourth quarter of 2006 when our gross margin was affected by a write down of approximately $648,000 related to the low end 360i product line. As Bernie mentioned previously our gross margin in this year’s fourth quarter benefited from increased channel sales of Rimage’s producer line. We also benefited from an improved average selling price for this product line. We are currently anticipating a gross margin in the mid 40% range in the first quarter of 2008.

Moving down the P&L fourth quarter R&D expense came to $1.3 million down from $1.6 million in the third quarter and $2 million in the fourth quarter of 2006. The sequential quarterly and year-over-year decreases in R&D reflect the completion of several important product development initiatives. R&D spending in the first quarter 2008 is forecasted to be 5 to 10% above the fourth quarter level. Selling, general & Administrative expenses which includes stock compensation expense totaled $6.1 million in this year’s fourth quarter compared to $6.2 million in the third quarter and $6.6 million in the fourth quarter of 2006. In the fourth quarter of 2006 our SG&A included costs related to the implementation of our new enterprise resource planning system both in the US and in Europe. Following these one-time expenditures our SG&A declined to more normal levels during most of 2007 and we believe this expense category will be at or near the fourth quarter level in the first quarter of 2008. We recorded an effective income tax of 37% in the fourth quarter compared to 36% in the third quarter and 37% in the fourth quarter of 2006. We believe our effective income tax rate for 2008 will be in the range of 35 to 37%.

Turning now to our balance sheet Rimage is continuing to generate significant cash flows from internal operations. Cash and investments totaled $94.2 million at the end of the fourth quarter up from $84.9 million at the end of the third quarter and $77.4 million at December 31, 2006. No shares were repurchased during the fourth quarter under our existing 500,000 share buyback authorization. Stockholders’ equity came to $105.1 million at the end of the fourth quarter compared to $98.8 million at the end of the third quarter and $95.5 million at the end of December 31, 2006.

That wraps up formal remarks. Now, the conference call operator will poll you for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Chuck Murphy from Sidoti & Company. Please go ahead.

Chuck Murphy – Sidoti & Company

Just kind of looking at the numbers of the past few years you’ve grown EPS probably on average 20% and sales growth, at least for the last couple of years mid to high single digits, is there any reason you’d see a significant slowdown in those numbers in 2008?

Bernard P. Aldrich

I think like all businesses your opportunities are continually moving, technology is continuing to move in different directions, that’s why as we explained we’ve been very fortunate over the last few years where we’ve had significant penetration within the retail sector also, we’ve made some very significant inroads within the medical. I think as look forward right now that’s why we’re really focusing in on what we call business applications where we see the real significant opportunities developing which is always kind of goes through our channels, it’s been the core of this business. And, we really feel that we will continue to drive the growth and opportunity on the revenue side in these business application areas. Now, it’s not to say we’re not going to continue to have retail and medical but we’re also going to continue – I think one of the strengths of this company is the broad range of applications and markets that we serve. Applications in the form of different types of solutions and I think the broad range geographically that we reach out to because as we see even take for example a market like medical, we know where the stages of medical and PAX systems installation are in the US, we know that per say in the European market they can trail that by a year or two.

Even outside of medical various applications have different lifecycles and are at different stages of their life. That’s why I think we’ve got some real significant bumps on the retail side where you saw those significant jumps and we will continue those and always push forward with this business and continue to drive the revenues in a broad range of new applications.

Chuck Murphy – Sidoti & Company

What would you estimate is kind of the mix these days between business services, retail and medical?

Bernard P. Aldrich

Well, I think the bulk of our business is still coming through the channel. If we roll our retail and medical together it’s probably approximately 30% of our business so that results in the core 70% of our businesses in what we would call business services applications.

Chuck Murphy – Sidoti & Company

And does anything stand out within business services? I know you mentioned in the press release media and broadcasting or law enforcement and a few others?

Bernard P. Aldrich

Yeah, I think what makes that such an interesting market if you go back historically where we’ve been strong in business services it’s been in the banking and finance areas, it’s been in telecommunication. As we look forward now we begin to see emerging opportunities as we said within that video sector, within applications involving archiving as a potential and I guess maybe Manny you could add a little flavor to that.

Manuel M. Almeida

Chuck, we continue to see applications that are relatively new to us and for example with the emergence of blu-ray now as the dominate next format the video market bodes us some real interesting possibilities for us because virtually most, if not all of video content today is distributed on some type of DVD, or blu-ray product. So, we see that as a key application; there are a number of other applications. Bernie mentioned the fact that we’ve been quite strong in the financial markets and check imaging and also statement imaging with the major telephone companies. We’re also beginning to see an emergence in other applications such as software distribution for corporations that have to produce software that goes out with their own hardware because there are constant changes and modifications to the software and the firm ware it doesn’t make sense to produce 10s of thousands of CDs each time. It makes more sense to tie our system to a MRP system and produce it on demand. So, we continue to see an awful lot of emerging applications still.

Chuck Murphy – Sidoti & Company

My final question and then I’ll turn it over to somebody else, you’ve beaten the high end of your guidance the last couple of quarters by 50% or so. Any reason to think there isn’t some upside to the first quarter estimate as well?

Bernard P. Aldrich

No comment.

Operator

Our next question comes from Greg [Inaudible] from Doherty. Please go ahead.

Greg [Inaudible] – Doherty

Rob, maybe my phone was cutting out a little bit, I missed some of your comments. I wonder if we can just go back to some of the color you gave around expenses?

Robert M. Wolf

Okay.

Greg [Inaudible] – Doherty

First of all, what did you say the stock comp expense was for the quarter?

Robert M. Wolf

We didn’t but I can’t tell you for the fourth quarter 07 it was very comparable to fourth quarter of 06, right around $450,000.

Greg [Inaudible] – Doherty

Okay. You mentioned moving on from some product development initiatives and SAP initiatives in the quarter as the source of maybe some expense savings. From an R&D perspective what were some of those? Can we better understand what you were spending your money on that didn’t occur in Q4? And then, what type of new initiatives are in front of you on that front?

Robert M. Wolf

I can tell you some of the things that we’ve completed there are certain products for example the introduction of the 5300 and the 5100 products in our professional line are a couple of items. Then, there were some products we had essentially had invested more money in previous quarters than we had in the fourth quarter so thereby we should see some additional product introductions coming fourth. In terms of what’s coming forth you will hear about those when we announce those in releases.

Greg [Inaudible] – Doherty

Okay. But, the R&D related to those new introductions has largely been incurred?

Robert M. Wolf

Yes. And, it’s timing, it’s all timing. Yep, that’s right.

Greg [Inaudible] – Doherty

Is it fair to assume though, I mean I don’t know how far in advance the company begins investing R&D for next generation products. If you’ve already incurred the majority of the expense for products yet to be introduced should we see R&D moderate further from these levels or will we already see investment ramping up for then that next introduction?

Bernard P. Aldrich

A lot of this is dependent on where we are next in the stage of development. But, our development projects can be two years or more. Also, it’s a combination of hardware development, software development, it’s also utilizing inside resources and then also outside resources. So, sometimes when you see spikes it may involve more heavier involvement without outside third party resources doing joint development. Then, as we bring it inside you can see a reduction as we utilize our assets we contain within this company. I think too, it also depends on where the emphasis if it’s hardware or software can also add a different flavor of costs to that. So incidentally, you’re always working on projects and like I said many of these projects are in the works for two years or more.

Greg [Inaudible] – Doherty

Okay. Then Rob you also commented on ERP costs and that was another part of your commentary that I didn’t catch.

Robert M. Wolf

Yeah, we did incur ERP costs in the fourth quarter 2006 which obviously did not repeat in fourth quarter of 07.

Greg [Inaudible] – Doherty

Okay. So, as I look at your overall operating expenses through the first nine months of the year they’re up about 10% year-over-year, they’re down about 14% year-over-year in the December quarter and we’ve talked about some of the moving parts be it ERP or R&D efforts. But, I’m wondering if you can talk a little higher level about the company’s rate of reinvestment back into the business? I know there’s a lot of infrastructure added last year from a sales and marketing standpoint. Is Q4 maybe an indication that we’re heading in to a period where the company’s going to be a little more focused on harvesting the earnings as a result of those investments? Or, should we continue to see operating expense investments at the rate of growth we had seen we’ll call it 06/07?

Robert M. Wolf

I think you’re going to continue to see us investing. I mean we’re still going to continue to invest. I think particularly as you look at these economic times and what’s happening out there in the marketplace we are very focused on staying in touch and driving sales. We’ve made additional investments in actual field sales people both here, in Europe and in Asia so those are going to be some pretty significant investments for us going in to 08. I think you’re going to continue to see there will be additional IT investments as we go forward here. I mean we have to continue – we did the initial round of investment over the last couple of years in our SAP, we may expand a couple more modules within that as we go forward over the next year or two. And, there will certainly be ongoing investment in R&D. In the toughest of times there is two areas we will continue to make sure we’re investing in, it’s going to be on direct sales and it’s going to be on research and development.

Greg [Inaudible] – Doherty

Okay. Then, Rob I think I know you had indicated R&D should be up about 5 to 10% sequentially. You made a similar comment around SG&A but again, I didn’t catch that.

Robert M. Wolf

Yeah, SG&A we said that it would be at or near levels of the fourth quarter. So, there might be a slight increase in SG&A.

Operator

(Operator Instructions) Our next question is a follow up from Chuck Murphy. Please go ahead.

Chuck Murphy – Sidoti & Company

Can you just kind of give us an update on the DVD on-demand business? The kiosks?

Bernard P. Aldrich

Well, let me clarify there are really two types of DVD on-demand that we’ve been talking about. One of them is specifically related to the photo category and it’s basically the conversion at the consumer level of CD to DVD. The question to be asked would be why? And, it’s really two-fold. It’s the ability of the consumer to rather than having to play a CD back on a computer being able to play it on home entertainment devices, on a DVD player. So, we very much believe it provides a richer experience for the consumer, it provides value for the consumer and it helps to expand the market because it has far broader reach than just computer penetration. The second part of that is an increase revenue flow for the retailer because there is a higher perceived value on the part of the consumer for a DVD versus a CD. So, it’s a good opportunity for the retailer, it’s a good opportunity for the consumer and of course it’s a good opportunity for Rimage in terms of providing media kits and providing additional equipment in to retail.

The second part of this vide on-demand is something that’s been talked about quite a bit over the last six months and that’s movies on-demand. Quite honestly, we see it slow to emerge so we’re perhaps not as – it’s not that we’re negative on it we’re just not as bullish. We think there’s been a lot of noise in the marketplace but it will take some time to develop.

Chuck Murphy – Sidoti & Company

And, as far as opportunities abroad, any difference in what people in Europe or customers in Europe are buying versus the US and Asia?

Bernard P. Aldrich

No. That’s one of the – when we talk about truly being a global market it’s not just about being that we have a presence in a global market it is that many of these applications are worldwide and that’s what really we’ve been able to leverage very well so we’re strong. Now, you may have some differences maybe the banking and finance might be a little different in Europe than it is in the US but when we look at – what we’re all about is managing information and they’ve got to do that all over the world so many of these applications that we’re in to particularly when we talk about business applications whether its within the government, whether its within law enforcement, whether its within education or software we can play a role in very similar circumstances whether it’s in Tokyo, whether it’s in Frankfurt, or whether it’s in Chicago. I think outside of a few unique markets it’s pretty much the same. I don’t know if Manny or Dave have anything to add to that.

Manuel M. Almeida

I would agree.

Chuck Murphy – Sidoti & Company

Okay. Manny, to go back to what we were talking about earlier about I guess it was media and broadcasting you were referring to can you expand on it a little bit what exactly you are doing for those customers?

Manuel M. Almeida

Sure. Media and broadcasting, if you think of it as video editing, post production, actual production of movie assets and other video assets generally ends up on DVD, all this content. I mean that is the generally accepted format on a worldwide basis so we identified that there was a significant opportunity in this market and we’ve now integrated with a number of companies that provide either editing stations, that provide post production stations. So, the key is the work flow and we are in the process of becoming very tightly integrated in to a number of different work flows in the video world so that it makes it very easy for a customer that’s for example producing an animation where you archive each of the assets from that animation so by the time you’re done producing a one or two hour DVD you might have hundreds or literally thousands of DVDs full of the assets that went into the making of the animation. It is a form of shelf archive, it is also a form of distribution of content and mastering of content. It is definitely a significant opportunity for us.

Chuck Murphy – Sidoti & Company

So would you say are these sold through distributors or direct?

Manuel M. Almeida

They’re generally sold through our traditional distribution and sometimes through our traditional VARs. We do and are finding that there is a slightly different eco system of resellers that services this community and we’re in the process of setting up distribution that very specifically targets this community of end users.

Chuck Murphy – Sidoti & Company

Any sense of what your sales to this market are right now and what they could be?

Manuel M. Almeida

A little bit. Bernie touched earlier on the breakdown between our business services and our traditional retail and medical. This clearly fits within our business services, at least as we measure it. And, if you think of business services of being roughly 70% of our business what we see today in the Americas only but within the Americas we see about 25% of our applications within those business services being some type of video related output so it’s pretty significant.

Chuck Murphy – Sidoti & Company

What do you think it could be in two or three years kind of thing?

Manuel M. Almeida

Well, that’s a wild guess. That’s just speculation. It’s growing.

Chuck Murphy – Sidoti & Company

I guess what would you say is the growth rate for that?

Manuel M. Almeida

It’s real hard to tell and if you look at what’s happening in that world the last year I don’t know what you would call it, it was a battle of two formats and I think it was a major setback in terms of just adoption rate but it’s over now and it certainly helps us to be able to focus on one format and drive it forward.

Chuck Murphy – Sidoti & Company

Okay. Switching gears on you here, why no repurchases in the quarter?

Robert M. Wolf

Basically, we just did not meet the areas or the limits we had set internally for the quarter.

Chuck Murphy – Sidoti & Company

I’m just curious, you were buying back the stock probably around $23/$24 before.

Robert M. Wolf

Remember Chuck there are windows we have to abide by in order to buy stock so it’s a very shortened period for us.

Chuck Murphy – Sidoti & Company

Okay. I guess it really started coming down after the quarter.

Operator

Our next question is a follow up from Greg [Inaudible] from Doherty. Please go ahead.

Greg [Inaudible] – Doherty

Okay. I just wanted to talk a little bit about international. I know in your press release you make reference to some strengthened new management really jump starting Europe. I’m wondering if you can comment what were some of the challenges operationally in your international markets in the past? How are those being addressed or improved today? And then secondly, I know the press release references a currency benefit but I’m guessing that’s simply the translation benefit and maybe there is a demand benefit there as well in the sense that you’re able to be more price competitive with the weaker dollar? Can you talk a little bit about how those things blended together?

Bernard P. Aldrich

Sure. In Europe we did make a change, we brought in a new managing director about approximately nine months ago and what it was about was just getting ourselves refocused, evaluating our entire sales channel within the European market. We’ve operated over there very successfully for the past 10 years. As we saw our business developing and as we as a company began to look at selling not just a box but selling solutions we began looking at our partner base and making sure we had not only the right partner base but that we were focusing in and identifying the markets where we had real growth opportunities. I think in the European market it’s not secret we want to be strong in Germany where we’re based, we want to be strong in France, we want to be strong in the UK. We’ve taken steps to put new people in those markets. We also began to look at southern Europe, we have never been that strong when we get into Spain, Portugal, Italy and we’ve really started to put more of a focus there. We recently added a man in eastern Europe who will cover eastern Europe as well as Russia because we do see that as an emerging market and certainly one that has opportunity for us. Likewise in Asia, you know we established an office there about three years ago. We’re still in the process of building that market but we’ve just added a new salesman in Korea where we’ve never had an individual, we’ve added another one in China and so it’s a matter of really beginning to hone in on where the immediate opportunities are and begin going after them. As I said, we’re going to continue to invest in our area of sales because we’ve got to be out there in front of the customer, we’ve got to be in the marketplace and we need to do it in a very planned, focused manner because there’s many, many opportunities out there and we’ll be successful if we identify the primary ones where we can really go in and bring some value add and people will appreciate our product because as you know our product is not the low priced product in the market. So, we have to make sure we’re working with the right customer base and getting involved in the right applications and markets.

Robert M. Wolf

Then Gregg on your second question, if you look at from a standpoint of what the translation does, it is the main impact and we translate the Euro dollar sales into US dollars, that’s where we see in the increase. However, you have to keep in mind also we have to do a good job of monitoring Euro pricing because if we do not adjust for the currency changes that occur we do see Rimage Europe having trouble making sales especially in the area of consumables and open market products, it is that much more expensive over there.

Greg [Inaudible] – Doherty

So were you essentially a lower cost supplier over there with that currency? I mean, did you make price adjustments?

Robert M. Wolf

We would have to make price adjustments and what that means is looking at the pricing as it is and most likely in most cases reducing pricing. So, it’s difficult to determine the impact of that to our European operation but again, we do recognize the benefits of that translation when it comes over to US currency.

Operator

At this time we have no further questions in queue I would like to turn the conference back to management for their concluding comments. Please go ahead.

Bernard P. Aldrich

Okay. Again, thank you for joining us this morning and we look forward to sharing information with you again in April. That concludes our meeting today.

Operator

Thank you. Ladies and gentlemen that does conclude the Rimage Corporation fourth quarter earnings conference call. If you’d like to listen a replay of this conference you may dial 303-590-3000 and use access code 11108502. Thank you again for your participation today and you may now disconnect.

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