Convera Corporation F1Q09 (Qtr End 4/30/08) Earnings Call Transcript

Convera Corporation (CNVR)

F1Q09 Earnings Call

June 5, 2008 8:30 am ET

Executives

Patrick C. Condo - President and Chief Executive Officer

Matthew G. Jones - Chief Financial Officer

Participants

Edward Flynn – Trident Partners

Presentation

Operator

Welcome to the Convera Corporation Conference Call reporting financial results for the three-month period ending April 30, 2008. (Operator Instructions) Participants on today’s call are Patrick Condo, Convera President and Chief Executive Officer, and Matthew Jones, Chief Financial Officer.

Patrick C. Condo

Yesterday, we issued a press release containing the financial results for Convera’s fiscal 2009 first quarter, the three months ended April 30, 2008. Our call today will review those results. Following our presentation, Matt and I will respond to your questions. If your question is not addressed on today’s call, please contact our Investor Relations Department at 703-761-3700.

And with that, I will turn it over to Matt to review our results.

Matthew G. Jones

Prior to addressing the financial results for the quarter ended April 30, 2008, I would like to cover the company’s Safe Harbor statement under the Private Securities Litigation Reform Act of 1995.

The company’s remarks in today’s conference call may contain forward-looking statements that are subject to the risks and uncertainties, including, but not limited to, business and economic trends; our ability to continue funding operating losses; our ability to manage our expenses in line with anticipated business levels; our ability to develop, sell, deliver and implement our software and hosted services products; the impact of the delays associated with the development of highly complex products; our competitive strategy and the impact of competition; the impact of reduced IT spending and lengthier sales cycles; our dependence on sales to publishers and government agencies; our dependence on technology license from third parties; the uncertainty of newly emerging technologies, including the ability of the Excalibur offering to achieve market acceptance; general and economic conditions affecting our industry and markets; and other risk factors as set forth in the company’s Form 10-K Annual Report and our periodic filings with the Securities and Exchange Commission.

These risks could cause future results to differ materially than those expressed in any forward-looking statements made by or on behalf of Convera. All forward-looking statements are based upon information available to Convera as of the date of this presentation and Convera assumes no liability or obligation to update or alter such statements, whether as a result of new information or otherwise.

Now, to our first quarter results. As noted in yesterday’s press release, revenue for the first quarter of fiscal year 2009 increased to $402,000 or by 44% over the revenue recorded in the fourth quarter of fiscal 2008. Backlog increased to $4.7 million at April 30, 2008, from $4 million at January 31, 2008.

As of April 30, 2008, a total of 45 Excalibur supported websites from 25 different publishers are in production as compared to 39 such sites and from 24 publishers at January 31, 2008. As of today, there are 47 Excalibur supported websites in production of which 10 are generating ad share revenue.

A single customer accounted for approximately 80% of the revenue generated during this quarter. This customer accounted for 82% of the fourth quarter revenue.

Our Excalibur Vertical Search Services are targeted at providing the most relevant search information to these professional communities to increase loyalty, increase duration of user visits and increase traffic on the site. We expect the majority of our revenues from vertical search business over the next several quarters to come from two sources.

First are the contract minimum revenue amounts that we received on both our advertising revenue share based contracts and our capacity based contracts. Second, we will receive a percentage of the advertising revenue earned by the search sites that use our advertising revenue share based contracts. These contracts have revenue sharing based upon net of the advertising commission that percentages ranging between 20% and 50% of the net advertising revenues earned by the site.

While the majority of our revenues will come from those two sources, it’s important to note that the company can also generate professional service fees for customer website customization; training of staff; search engine optimization; website monetization consulting; website GUI development; vertical search site deployment and hosting services.

Now turning to expenses from continuing operations, total expenses for the first quarter of fiscal 2009 were $6 million. This compares to $8.6 million of total expenses for the year ago period and $7.8 million in the fourth quarter of fiscal year 2008. Total expenses for the first quarter net of non-cash charges for depreciation and stock compensation were $3.6 million as compared to $7.7 million for the comparable period of the prior year and $6.4 million in the fourth quarter of fiscal year 2008.

The decrease in expenses between the first quarter ended April 30, 2008 and 2007, is largely the result of the company’s efforts to streamline its business expenses and discontinued initiatives that were non-strategic to the success of its Vertical Search business plan. These led to overall lower staffing levels and compensation costs, lower marketing program costs, lower consulting costs and reduced level of professional fees.

We also benefited from the termination of the hosting arrangement with AT&T for the San Diego Hosting Center, which decreased our costs without impacting search performance or redundancy and we expect will save us on a continuing basis about $1 million annually.

The further development of the Publisher Control Panel has also aided in our efforts to streamline costs, allowing us to support and launch a larger number of vertical search sites with reduced staffing levels in our engineering and implementation groups. We expect the future versions of the Publisher Control Panel that are in development will continue to reduce the time to deploy Vertical Search sites and do it in shorter periods and assist in our continuing efforts to streamline costs.

We expect to see further savings realized in coming quarters as the full impact of our streamlining efforts become apparent. We are expecting total expenses net of non-cash charges to range between $2.8 million per quarter to $3.4 million per quarter for the remainder of fiscal year 2009 and, therefore, the full year amounts to be in the $12 million to $14 million range. The net loss for the first quarter of fiscal year 2009 was $5.4 million or $0.10 a share which compares to a net loss of $7.5 million or $0.14 per share in the year ago period.

Turning to our balance sheet, as of April 30, cash and cash equivalents totaled $31.4 million which does not include the $4 million of cash proceeds we will receive from the escrow in the third quarter related to the finalization of the sale of the retrievable enterprise search business to FAST.

Increases in accounts receivable were principally due to revenue growth. The increase in the escrow prepaid and other assets was due principally to the payment of a $1 million working capital adjustment to FAST as required in the retrievable transaction. And this amount was accrued at January 31 as an offset against the escrow and receivable balance.

Equipment and leasehold improvements decreased due to depreciation, shareholders’ equity declined due to the net loss experienced during the quarter. All other components of our balance sheet are in alignment with the amounts reported in the prior period.

And with that I’d like to turn the call back to Pat for his update on the Excalibur business.

Patrick C. Condo

Recent reports by eMarketer have indicated that all online ad spending will increase 23% into this year despite all of the economic woes. Further, this report also indicates that search based advertising will make up 40% of web ad expenditures and that the ability to effectively measure targeted advertising is a primary interest.

Recent reports from IDC also indicate that the growth in major search portals was approximately 23% while growth in vertical media sites were close to 70%. All of these trends are manifesting themselves in the markets that we are pursuing.

Our goal is to build the largest collection of professional user base sites on the Internet. We have built a publishing platform that enables any publisher to launch a vertical site and generate traffic and revenue from that site, using our tools and services. As we increasingly automate the process, we have built into it efficiency and driven out both costs and time-to-market. The result now is that any publisher can use our platform with limited support from Convera.

This strategy now opens the entire world of publishing to Convera as a business opportunity. Presently we have chosen the business-to-business segment as the first to attack and have been successful in closing contracts and building pilot sites for 15 of the top 20 business-to-business corporations as ranked by revenue. As we gain momentum and launch vertical sites with them, we believe that the traffic to be in the hundreds of millions of searches per year translating to billions of page views which are advertising opportunities.

As word of our capabilities has spread, we are now involved in other segments of the publishing world, such as business-to-consumer and science and technology, both segments that are equal to or larger than the business-to-business segment alone. And they share similar characteristics, higher advertising rates, and more specific queries with a desire to control the look and feel of their site along with how it is monetized.

Last quarter and through May, we signed new customer agreements with the following companies: [inaudible], Access Intelligence and the Institute of Physics and we extended agreements with Scranton Gillette and with Aspermont. Aspermont was most significant in that we were guaranteed $1 million by them and will launch over 50 sites in the next two years.

We have also signed an important partnership with Yellow Bricks Corporation, a supplier of authoritative real-time data and news. We hope to offer our service to their customers as well as provide Yellow Brick to ours, and to that end we have several prospects today that we hope to close within the next few months.

We now have launched 45 sites through May with approximately 15 of those customers currently selling ads that are now on the sites and have a substantial number committed to launch and place advertising on the sites over the next few months. For 2009, our goal is to have over 100 sites launched by year-end and we are forecasting that we will exceed 150 sites under contract through this fiscal year as well.

Today, we have 30 unique publishing customers with 75 sites under contract and we expect to continue to grow that number during the year. As Matt indicated earlier the total contract value in backlog is now over $4.7 million and climbing on a monthly basis.

The addition of the new capacity-based license, coupled with the minimums instituted earlier and the advertising programs beginning to happen, give us the confidence to expect next quarter’s revenues to grow over 25%. Coupled with the impact of our expense reductions, we expect a significant drop in the cash burn rate from last quarter.

We are in active negotiations with several existing customers to extend both Vertical Site Search agreement, as well as for the first time managing their existing site as well. This would enable the customer to combine the traffic from both sites into one and create greater revenue streams from advertising. Many of the customers in the pipeline are interested in pursuing this strategy and we hope to have news shortly on a few of those accounts.

In parallel to acquiring new customers, we are also focusing on how to help existing customers monetize their sites. Many of the customers that came online in the fourth quarter are showing rapid gains in traffic such as Canon PharmaLive, Vance and Aspermont and those in the past few months such as the United Business Media sites in both Spain and France.

Traffic has increased from 9.5 million searches in the fourth quarter to 17.8 million in the first quarter, a 187% increase, due primarily to the increased number of services and the search engine optimization and syndication work we are doing with our partners. We expect that we will continue to grow traffic an additional 25% into the second quarter.

As the traffic grows, the opportunities for advertising increase and as we approach the 25 million search per quarter number, we expect to gain interest from some of the larger advertising platforms which would provide both Convera and our publishing partners additional revenue upside.

We have built and deployed syndication tools, downloadable tool bars, improved our social networking tools and are developing new services, all aimed at increasing traffic. Search engine optimization and widgets are areas of development that we are pursuing and expect that they will have a substantial impact on the traffic our sites get over time.

The publishers are also doing several things to drive traffic as well. They are incorporating Vertical Search sites into their core strategy and marketing the sites through print publication conferences, webinars and by direct mail.

And finally, customers are looking to syndicate the search site through their existing properties and with partner sites to increase visibility, drive traffic and enhance revenues. We are now rolling out our Publisher Portal System that will enable all publishers to self-publish and create verticals on demand with little or no support from Convera.

Versions are now deployed to customers and UBM recently utilized one to self-publish the seven new U.S. verticals without Convera’s assistance. In the near future the Publisher Control Panel will enable customers to build verticals in less than eight hours, significantly shortening the time-to-market for sites.

And as we simplify the process our ability to expand into existing and new markets increases without having additional costs. This innovation will allow us to grow our business considerably beyond today. We expect that by mid year we will launch the third version of the software, targeting the larger audience that I had discussed earlier.

As we build verticals for publishers, we are also establishing a considerable asset, one of the world’s largest databases of authoritative customer contributed information for professionals, a Wikipedia of sorts for them. This database today exceeds over 400 million pages and is growing at a rate to exceed 1 billion pages within a short period of time.

The information contained, uniquely within our system, coupled with the Symantec network and the self-service aspect of the portals gives us a significant technology and business and time-to-market advantage over any company trying to enter the market we are in, and gives us future revenue opportunities, as a result of owning the information.

We are now focused on the following actions for this fiscal year. Helping our customers drive traffic with our tools and services. Acquiring more customers with a Publisher Control Panel and launching more sites.

In addition, with our new business practices of requiring minimums and the addition of the capacity-based license, our revenue streams will begin to grow substantially from last year’s base. The revenue coupled with the decrease in operating expenses that Matt mentioned will significantly decrease the time to achieve breakeven. And with over $30 million in the bank, we are not anticipating any need to raise capital and have more than enough to see us through breakeven.

We believe we are the only company that today offers this set of technical capabilities with an integrated suite of services. We believe that this offering is a principal differentiator when publishers are looking to purchase software to create a vertical search site. Ongoing development in the quality of the search and new services for site management and traffic generation will further distance us from the competition.

And finally, as our plan has taken shape, we have become engaged in many significant negotiations with companies that are looking to launch large-scale vertical portals with estimated volumes in the tens of millions of searches per year both in the US and abroad, as well as with companies that may offer us a broad-based advertising inventory that we can plug into our rapidly growing business-to-business network of sites. Our success in closing these deals cannot be guaranteed, but we are very optimistic regarding the results.

At this point, I’d like to turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Edward Flynn – Trident Partners.

Edward Flynn – Trident Partners

Quick question in regard to getting somebody to potentially pick up coverages of stock at this point. Now that you have been moving along and have a better idea of where you are headed, do you think we are going to be able to get some research on the stock?

Patrick C. Condo

We have been approached by several firms over the last two months who are interested in hearing the story. And we will be telling it to them and it will be their responsibility or not to put some coverage out.

Operator

There appear to be no other questions at this time.

Patrick C. Condo

Thank you very much for participating on the call and being shareholders. Should any of you have any questions, please call our Investor Relations Department at 703-761-3700. Thank you very much.

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