Avistar Communications Corporation Q2 2008 Earnings Call Transcript

Avistar Communications Corporation (AVSR)

Q2 2008 Earnings Call Transcript

July 17, 2008 01:00 pm ET

Executives

 

Robert Habig - Chief Financial Officer

Simon B. Moss - Chief Executive Officer, Director

Analysts

 

Chris Lahiji - - LD Micro

Joe Noel - Emerging Growth

Michael Willer – Private investor

Braden Ferrari - Spencer & Clarke

Jeff Howard - Howard Partners

Presentation

 

Operator

 

Good day every one and welcome to Avistar Communications Second Quarter 2008 Earnings Conference Call. This call is being recorded. With us today from the Company is the Chief Executive Officer, Simon Moss, and Avistar’s Chief financial officer Bob Habig. At this time I would like to turn the call over to Mr. Habig. Please go ahead sir.

Robert Habig

 

Thanks very much Dana. Goodday, I am Bob Habig, Chief Financial Officer of Avistar Communications Corporation. I’d like to welcome you to Avistar’s second quarter 2008 conference call. Joining me today is Simon Moss, Avistar’s CEO, since January 1^st of this year, and the primary driver of the organizational, financial, cultural, and technical restructuring that we’ve have been going through.

By way of additional introduction, Simon came to Avistar from the CEO position at Mantas Inc., a financial services compliance and analytics software provider. Over his four year role there, he achieved a significant operational turnaround, simultaneously growing revenues and profits and positioning that company as the recognized leader in its field. Mantas was acquired by Oracle in 2006. with the exit generating a significant return for it’s primary investor. Prior to his Mantas role, Simon was a partner at PWC and a founding member of IBM’s risk management practice, among other senior level assignments in the financial services industry.

Before I turn the call over to Simon, I’d like to remind the participants on this call of the following Safe-Harbor statement, which qualifies forward-looking statements, a copy of which can be found on the website as well.

Statements made in the course of this call that are not purely historical. or forward looking statements, including statements regarding the company’s or management’s intentions, hopes, believes, expectations or strategies for the future. Because such statements deal with future events they are subject to various risks and uncertainties and actual results could differ materially from the company’s current expectations. Factors that could cause or contribute to such differences include the risk factors discussed in Avistar’s filing with the US SEC available at the website www.sec.gov.

All forward looking statements in this call are based upon information available to Avistar as of the date of this call and Avistar assumes no obligation to update the forward looking statements discussed in this conference call. We will have a question and answer session at the conclusion of the call and perhaps to state the obvious, we invite your questions and feedback as well.

Let start off by discussing the Avistar turnaround strategy and its results. The turnaround in the company is a complex and difficult challenge, however we are making great progress and you’ll hear our second quarter’s results reflect that progress. Over to you Simon.

Simon B. Moss

Thanks Bob. Good afternoon everyone. I appreciate the opportunity to speak to directly with you and in fact candidly with you. I believe this is the first time we actually done one of this calls in few years and so on I am pleased we have restarted it and you should look forward to having these every quarter. In my short time at Avistar, its certainly has been interesting. I joined Avistar primarily because it shows several strengths in the company. It really has very impressive scale deployment for its collaboration products and though discerning and smart customers by the likes of UBS and Deutsche Bank globally. And it’s very impressive and extensive in intellectual property portfolio codified in 80 odd patents covering fundamental aspects of a very growing market in unified communication and the company’s potential role within that market as a provider of technology and in partnership with large unified communication players. But after joining, we quickly saw a number of really fundamental flaws that needed to be addressed for the company to prosper.

We’ve been looking at really an enviable market opportunity through a key hole. We’ve been limiting our distribution to direct sales with only a standalone video application and an application which was much more dependent on hardware infrastructure than the marketplace wanted. So, it became very clear, very quickly that we have to completely alter, in this order, our operational finances and productivity in our product portfolio, and then frankly now go to market strategy.

On the intellectual property front, the company had succeeded in licensing its patents to video conferencing companies, had not entered into a single meaningful partnership. And because of that we had benefited from some episodic licensing settlements. And the company frankly, had over built its cost structure hoping for a more predictable volume of licensing deals. This misalignment between costs and predictable revenue, and I’m afraid the false sense of comfort it brought was a fundamental weakness in the company’s operating model. It’s apparent now that the investment community realized this alignment during the third and fourth quarter of 2007 and it’s been my primary once taken over the firm to restructure to a leaner, far more efficient and leverageable company, all based on a single solid business plan and I believe that we have beginning to succeed in those objectives.

When I took over CEO on January 1st of this year, we embarked on an aggressive turnaround path. The first event of the year was related to funding operations and in January we closed the convertible debt financing of $7 million led by Leucadia National, a firm of very significant reputation, they were joined by seven insiders including myself and the majority of the Board of Directors and Founders. And frankly I remain impressed with the support of the Founders who have invested heavily in this company, both before and after its IPO. I brought a new management team for the customer facing positions and begin to over haul all of the previous go-to-market strategies by drastically diversifying our distribution, marketing, licensing and partnering approaches.

Reworking our technology that had fallen behind and addressing what we perceive to be the deficiencies in the culture of the organization; communications, market dialog, and people. Now all of this sounds like a very significant investment. We at the same time however, focused at drastically reducing the operational cost structure that we making in the company extremely vulnerable.

We are now on track to reduce that cost by the end of the year by 40% versus 2007. And just to make this adventure just a little bit more interesting still, this is undertaken during a time of unprecedented challenge in our intellectual property asset, while we were experiencing one of the larger market turn downs side in a very long time. So addressing all of these challenges certainly has not been a cakewalk, but it’s been a satisfying challenge and I believe the second quarter is indicating progress against that. The team has shown remarkable resiliency, creativity and focus and it is a team I am very proud to be associated with.

Now Bob will cover financials more fully, but there are several metrics we have achieved in the second quarter which I’m particularly pleased with, really three; a greater than 50% improvement in revenue versus the first quarter generated through improved results in both product sales and services. tThe third best bookings quarter we have had in five years and that result was generated with 40% less cost in our sales business that in Q1, allowing us for the first time in a number of quarters some backlog to improve our visibility for the next couple quarters forward.

Finally, revenue and cost ratios across the firm, the’re approaching market norms, giving us a clear path to achieve sustainability, profitability and true leverage of the top line growth. The challenge of the firm I have said, but I would like elaborate on the challenges of the firm faced really related to the cost structure that was not sized to predictable revenues resulting in volatility in our quarterly bottom line performance. This imbalance became apparent during 2007. The primary objective of the company has been to moderate its rates of spending and line our operational costs to those predictable revenues while at the same time continuing to address product competitive issues, market engagement, and sales challenges, , and the overall financial health of the firm.

Most of the restructuring was accomplished by the end of the first quarter 2008, and the second quarter recorded significant progress as a result of those difficult, but necessary actions.

For the second quarter 2008, total operating expense, including income from settlement and patent licensing proceeds and the cost of products and services revenue was $3.2 million, reflecting a decrease of the approximately $1.9 million or 37% from the first quarter 2008,and a reduction from $5.3 million recorded in the second quarter 2007, a decrease of $2.1 million of 39%. Yet at the same time, productivity revenue sales and market engagement have all significantly improved. There are still risks, there is still a significant challenge of course, but we believe we made some extremely good progress and built a very effective foundation.

The tough decisions we made during the first quarter now make the performance target that we set ourselves reachable. And I believe that we can say the difficult task of restructuring the firm is largely behind us. Revenue growth, this is critical. Revenue growth can now be highly levergable and our focus at this point is moving into the top line.

Now to discuss some of the more interesting developments that occurred during the second quarter. I’m sure what might be at the top of your minds, relative to our self-performance and prospects, is the status of Microsoft’s challenge to our patent portfolio and the decisions coming out of the U.S. patent office.

In summary, —and frankly without getting into confidential details, the dialogue does continue with Microsoft, it’s common knowledge now that Microsoft challenged our entire US patent portfolio in the US patent office. After considering the basis for the requested review, the patent rejected 19 of the 29 challenges in their entirety and the majority of one additional re-exam request.

Microsoft has subsequently asked the patent office to reconsider it’s rejection of 5 of the 19 requests. Although there have been a number of aspects to this situation, it appeared to be totally unprecedented. One element that is especially remarkable is the patent office’s action in rejecting such an extremely high percentage of Microsoft’s request. Since the performance of re-examination began, the patent office has been inclined to accept these external requests to check their own work, reflecting an acceptance rates of about 90% over the years. By comparison, in regards to the Avistar patent portfolio, the patent office agreed to review only about 30%. We expect that even with those remaining patents the US PTO has agreed to reconsider, they will accept this process confirmed and therefore be even stronger.

Not surprisingly, the re-examination process has influenced our technology partnering and licensing discussions with other companies some of which are well underway. We are hopeful that these discussions will progress well and now the re-examination process is already revalidated and strengthened so much of our portfolio.

We believe the results during the second quarter are a testament to our team and our newfound ability to deal with market challenges. And despite the challenge to our patent portfolio, our product bookings, revenues, costs, and bottom line, all improved dramatically as compared to the first quarter. It’s a vector that we hope to continue.

We’ve recognized that the company can’t save its way to prosperity. So it made the productivity gains that we posted during the second quarter, more notable when we consider in context to the quarter’s revenue performance. As I mentioned previously, we saw a 50% increase in revenue versus the first quarter, with a 41% reduction in the associated sales and marketing expense and that increase was generated through improvements in both products and service revenue lines.

When you consider that we are in the process of moving our existing clients and our product portfolio, in general, to a software-based product portfolio, away from a less competitive hardware portfolio and at the same time as we are altering our distribution channels, the second quarter results were especially impressive.

Now talking about our go-to-market strategy. Historically we really limited our market presence and prospects by relying solely on selling to single vertical financial services companies through a single distribution approach, that being of direct sales or people making direct calls. Additionally in the past we viewed our product as world class with standalone video collaboration application by partnering video application. By partnering with large technology companies and selling through large global distributors and resellers, we recognize that our value proposition lies in providing functionality and components to better enable other’s products and portfolios and also in multiple markets globally. We expect to see real growth in this model by the end of the year. And as we now have over a 100 resellers and distributors in place, we entrained and included Avistar in that portfolio.

In other words this is larger than Avistar’s previous direct sales go to market strategy by several orders magnitude, but at the same time with the reduced sales and marketing costbase. We are also discussing broad multiyear distribution arrangements with several large global firms, I can’t talk too much about that but we expect to announce a lot more about that as they come to closer during the third quarter. We are hopeful this type of technology licensing and distribution strategy will become a significant aspect to our top line focus, with a benefit of recurring and more highly predictable revenue. This is our focus for the rest of 2008.

And now onto other matters, we are arguably the only company that can show in production, and this is key, in production, the type of global scale of desktop video and collaboration that many others promised but cannot deliver. And now we expect to leverage the benefits of more efficient operations and enhanced world class products and supportive partners to generate our results. As a blend of technology and product distribution, in June we announced the security community network, or SCN initiative, enabled by Avistar product and technologies.

This new transformational platform will be rolled out this month for testing and have found the customers (indiscernible). On successful completion of the testing, we will begin to engage the market for significant participation, linking buy side, asset managers, sell side, brokerage houses and issuers, notably corporate treasuries into the community of shared interests. We expect with oil over $140 a barrel, though I believe its dropped a little bit since we came up with this number, and travel budgets being slashed significantly, this project will begin to demonstrate its capabilities to expand Avistar’s product distribution over the balance of 2008.

To that end we have launched another initiative named Green Workday an innovative way for companies of any size to reduce their carbon footprint by over 20% and reduce travel cost by up to 30%, evidence of the significant value proposition of an Avistar implementation. This week Yamaha announced their participation and we expect more success as additional partners join and awareness grows. Do feel free to get more information from the website, www.greenworkday.org, or you can find the link on the Avistar, website www.avistar.com.

In addition the firm has gone through a major redesign of its technology portfolio, migrating it to be a software, rather than a hardware based solution. This includes firewall traversal, w scalable software based MCU rated first in the market and ability to link in any other room system into single network global video solution and the integration of instant messaging and data sharing facilities. All downloadable directly to any desktop, any laptop, anywhere in the world, it really is a remarkable achievement of our development and product management team have managed to deliver this in a such a short period of time under the very significant time cost and market constraint.

We expect this product portfolio, combined with the new distribution network, and the licensing strategy, and the new operational cost structure to both fix this firm and position it quite brilliantly to address the potential $20 billion unified communications markets that we seek to address.

A little long, I apologize, there are lot of moving parts in the turn around of the company. We are making great success, but at this point, I would like to hand this over to Bob to discuss the financials of the quarter and their outlook, and then I’ll share with these some concluding perspectives Bob.

Robert J. Habig

 

Thanks Simon. So the first quarter saw a transformation of our cost base as Simon explained. The intention of these actions that we took was to better assure the viability of the company and set up a financial model that would produce significant leverage with revenue expansion. Second quarter reflects the results of that strategy, so just briefly going through the metrics. Second quarter 2008 revenue was $1.8 million, representing over a 50% improvement from the $1.2 million revenue figure generating during the first quarter of 2008. And the second quarter 2008 revenue was about the same as that accomplished during the second quarter of 2007 if youadjust for the large $4 million lump sum licensing amount from RADVision that was recorded in that quarter. The cost to deliver these revenues in sales and marketing however was 49% lower. Product bookings during the quarter surpassed $1 million representing one of the highest results in last five years.

Management views the result of income from settlement and licensing line found in the operating expense section of the P&L, which records patent licensing proceeds when they are generated through the filing of a claim in the courts, as a key metric of top line performance, in addition to GAAP revenue.

We began to provide a better view of this combined metric of revenue plus income from settlement and licensing earlier this year. Income from settlement and licensing was flat as compared to the first quarter of 2008, and we are not projecting real growth in our patent licensing business over the balance of the year for that reasons that Simon spoke to.

For the second quarter of 2008, we’ve reported a net loss of $1.6 million or $0.05 per basic undiluted share. This result compares to a net loss of approximately $3.8 million or $0.11 per basis undiluted share reported for the first quarter of 2008, and thats $388,000 profit or $.01 basic undiluted share for the second quarter of 2007, the latter of which was heavily influenced by the $4 million RADVision licensing agreement, which we spoke about and which occurred in that quarter.

On an adjusted EBITDA basis, the metric management is using as the key indicator of bottom line progress, during the restructuring we improved by over 50% compared to the first quarter of 2008 and the fourth quarter of 2007. We expect to continue sequential improvement in adjusted EBITDA during the balance of the year. We used $3.2 million of cash for operating activities in the second quarter of 2008 as compared to the $4.8 million used in the first quarter of 2008 and 2.2 million used in operations in the second quarter of 2007. Cash, cash equivalents and short-term investments or $5.7 million at June 30^th, 2008. We expect to further moderate our cash burn in both Q3 and Q4 and believe that we have adequate financing through both our existing cash balance and remaining line of credit to accomplish cash break even from operations. Given our progress in cost management and operational productivity, the management team’s focus during the third quarter will now be on top line growth.

Let me turn the call back over to Simon to share a few final comments.

Simon B. Moss

 

Thanks Bob. So overall well focused quarter and we focused at specific objectives, we hit those objectives, we are very comfortable with the performance of the team in that sense so far. The progress in our business and the go forward prospects really in this was our key factors to the NASDAQ listing panels decision at the beginning of July to grant Avistar an exception their continued listing requirements, allowing us until August 29^th to establish compliance for the $35 million market value criteria. Actually this is pretty significant and we have immensely appreciate it. We believe that the panel agreed with us that the turn around of Avistar was well underway and that deserved additional time to evidence the progress in its financials.

Although the management team is now solely focused on the operational turnaround,we do believe that we are currently undervalued. A couple of perspectives where this is concerned; we have brought in over $50 million from licensing intellectual property to the traditional application companies including Polycom, Tandberg, Sony, RADVision and VCON-Emblaze. And we are in discussions with a range of other companies in the more generalized collaboration space.

And secondly, as we’ve previously disclosed, evaluation of our pattern portfolio conducted by a (indiscernible) last summer came to assessment between $315 million and $500 million. Although the analysis is subject to number of assumptions, and hasn’t been updated since it was issued,the estimate clearly indicates potential for significant value creation through just this one aspect of the company’s operations. The approach from monetizing our intellectual property will be heavily oriented towards the licensing our technology to the benefit and developing the UCmarket as opposed to patent licenses in the past. We think this approach will create a number of mutually beneficial partnerships and its leverage of our assets will significantly impact the bottom line more so than anytime in the company’s history.

So in summary, we have to accept that the company was operationally flawed, but we also believe that we are making great progress in addressing those flaws. We expect to have an even better more compelling communication with you all at the end of the third quarter.

As investors in Avistar, you should monitor our progress really on the following near term milestones; Additional sequential progress in our costs and our efficiency ratios by the end of the year representing a 40% reduction versus 2007, and correlation to revenue to cost ratios at market norms. Initial revenues from technology licensing and our indirect channel strategy as that begins to gain traction and with the above progress points combining for a EBITDA positive exit rate coming out of 2008. And its sustainable EBITDA positive exit rate that we are looking for. So many thanks for your time I hope you I didn’t bore many of you too much. I look forward to share with you even more progress in the next three months as well as during the interim, and obviously at this point we will be delighted to take critic and any questions.

Question-and-Answer Session

Operator

 

Thank you sir. Today’s question and answer session will be conducted electronically. (Operator Instructions) And we will take our first question today from Chris Lahijiwith LD Micro.

Chris Lahiji – LD Micro

Bob, Simon good morning.

Simon Moss

 

Hey Chris. Good morning.

Chris Lahiji – LD Micro

 

I have a question, how did Ocean Tomo come up with that number between $300 million to $500 million?

Simon Moss

 

Bob, do you want to take that one.

Robert Habig

Yeah, I’ll take that one. So Chris, just by way of background for the audience, Ocean Tomo is a firm that does auctions of IP, they are fund that invest in IPs, basically Ross Perot’sinvestment vehicle in the area of intellectual property. They’ve got a methodology where they assess and schedule out potential inflows from different licensing partners over a period of time, with a pretty elaborate set of assumptions in terms of time periods, discount rates, percentage royalty of different of products geographically. So the full report was probably about 70 pages.

Chris Lahiji – LD Micro

I see. Have you guys ever decided to sell off patent that are not applicable to your core to which you are focusing on?

Simon Moss

 

Bob, if you don’t mind. The answer is, I can’t answer too much on that, but we are looking at everyway possible to monetize that patent portfolio. It’s actually very impressive, whether certain of the patents are specifically strategic to the direction we’re taking, I would suggest no. How to best monetize those patents, well there are lots of different alternatives. So, yeah we are exploring multiple alternatives on how to monetize those patents.

Operator

 

And we’ll take our next question from Joe Noel of Emerging Growth.

Joe Noel - Emerging Growth

Yeah hi guys just a couple of quick clarifications. Bob I think you said something about cash flow break-even timeframe and I missed that. I was hoping you could justgo over that again. And can you give me your headcounts, where was it recently, where it is now, that would be beneficial?

Robert Habig

Sure, yeah we were fairly notspecific in terms of the specific quarter for cash break-even. We see that occurring in 2009. In regards to headcount, year-end we were approximately 90 to 95 people, currently we are about half of that.

Joe Noel - Emerging Growth

What can you tell me about what you expect as the next step relative to the patent reviews?

Robert Habig

 

Simon do you want me to take that.

Simon Moss

 

No, I can answer that. I’d like to broaden the answer a little bit more as to talk about specifically next steps on in other areas. But obviously we continue our dialogue with our friends in Microsoft and we continue our dialogue on other areas. The US patent office is now going to go through and make a decision on reviewing the reexamined patents. We continue to have a very intelligent group of PHDs and Technical people who come up with new ideas for the market and we continue to protect those ideas and innovation.

So, we are constantly applying for new patterns and so we will continue all of those aspects. So I think for all of those three, to answer the question and to enforce question Chris answered as well, we’ll look to monetize some of those patents in different ways. We will continue our conversation with Microsoft and with others but from the intellectual property and on the technology licensing because patents are really a codification of the value of the technology. And the technology really is now, particularly with the new software products we have out, are extremely compelling, extremely competitive and I can say for the record, I very, very much doubt anybody in the market can match scale and the quality of the products that we put out globally. So the technology licensing component combined with IP is really part of the strategy we are taking so our next steps would be able to stimulate some contracts with some of the larger player to sell our technology as part of that portfolio.

And the on the other side, which is our product business, we expect to keep our operations lean and tight, we expect to increase all the efficiencies of those operations.We expect to engage the market through a much more distributed, much broader go to market strategy, both to distributors and also reinforcing the technology licensing point. Time frames to that; if you allow me ask myself the question. We, the management team have given ourself the objectives to say we want to see significant top line growth to leverage operational advantage, or the operational efficiencies that we have got during the first quarter of this year. Whether that equates to cash breakeven, no we are planning cash break even towards 2009.

Joe Noel - Emerging Growth

Great that clarifies it. Thank you.

Operator

 

And we will take our next question from Michael Willer a private investor.

Michael Willer – Private investor

Hi, thanks for taking the call. I was just calling to see what’s the company’s capital market strategy? Thanks.

Simon Moss

Bob, do you have any comment on that?

Robert Habig

In terms of financing, Mike?

Michael Willer – Private investor

Yes.

Robert Habig

We don’t expect to be in the market looking to raise equity

Michael Willer – Private investor

Okay,

Robert Habig

No, we don’t think that’s necessary. We’ve got what we believe to be adequate cash balance reserve and undrawn line of credit to get us to cash breakeven. Atcurrent prices it just would be incredibly painful.

Michael Willer – Private investor

Great

Simon Moss

Yeah, and I’d, never say never. I’d love it if someone turned up with boatload of cash and help the strategy execute more smoothly than the risks that we have within the strategy. But at the moment, we believe we are on plan, we believe that we are doing well. We hope the second quarter is an indication of the success of that plan, and if we keep on that vector, we certainly do not expect to go-to- market.

Michael Willer – Private investor

Okay, thanks.

Operator

 

And we’ll take our next question from Braden Ferrari of Spencer & Clarke.

Braden Ferrari - Spencer & Clarke

Hi gentlemen. Thanks for the call. Simon, you’ve talked a little about valuation and Bob had brought up the independent evaluation that was discussed briefly. What is management team doing to build some more awareness about these numbers and evaluation for the market place?

Simon Moss

Yeah, it’s a good question. I think, that there is a wonderful dichotomy in this firm, which is evaluation between its IP portfolio and the actual market-cap of the firm. My job is to connect those two numbers, unfortunately the hard way, I have got totake that market cap number up. Our decisions are not being governed by pushing the stock price up, whether we were at $50 stock or an $0.80 stock as we are today. We are having to make fundamental operating business decisions. So, it’s logical to expand our distributions channels globally and in the new markets, it’s logical to bring our products up to much more efficient, much more competitive profile. It’s logical to address same the imbalance between predictable revenue and operational cost.

So, we are doing all of that, one would expect the market, when realizing the success of the strategy, realizing the very significant efforts that we are puting in and the successes that we are showing in a very complex turn around, will recognize that and begin to say okay they have dealt with the flaws, now the question how do you leverage the success. And we would expect the stock price to respond to that.

On the IR side, we are reaching out the analysts now. As you can see, we’ve started the quarterly communication conference call. We are going to be reaching out to you guys a lot more about where we are in the interim. We are going to be talking a lot more about our strategy and the success points and the milestones that we have with that strategy. So you are going to hear a lot more from us, in addition I am going to jump from some airplanes and hopefully you guys will entertain me and listen to me for half an hour as I make some personal calls with you. And Bob and I going to do a couple of road shows. We believe actually very vociferously in Avistar. We are not stupid and we are fully aware some of the challenge that it has and from the legacy that is inherited, but we are addressing them all. And we believe that there is very significant, very compelling future for this company moving forward, both in the size of the opportunity and unified communication. In the product portfolio that we have, in being able to address the challenges of realizing unified communications and the codification of those solutions in our patent portfolio. We just got to bring it to market and we’ve got to engage the market a lot more aggressively than we’ve done in the past and really that’s what my job is. That’s what the new management team’s jobs is and now we have dealt with some of the operational flows, we believe that we are in a highly leveragable position to realize great advantage from the success of that top line growth.

Braden Ferrari - Spencer & Clarke

Okay. Thank you.

Simon Moss

The market, we hope will respond to that. I hoped that answer to question because I tended to babble a little bit on that one.

Braden Ferrari - Spencer & Clarke

Yes it did. Thank you.

 

Operator

(Operator Instructions0. We will go next to Jeff Howard (ph) of Howard (ph) Partners.

Jeff Howard - Howard Partners

Hi Simon, how are you?

Simon Moss

Very well.

Jeff Howard - Howard Partners

In regards to the gross margins, how do you feel that they’re going to trend for the rest of the year and what steps you are you going to take to improve the gross margins?

Simon Moss

Yeah that’s an excellent question. If we look at the margins, they are no where near as good as we want them to be. We have our margin dependency or a margin profile similar to hardware provider. Our margins on maintenance are good. Our margins on services are good, but our margins on product are not as good as we need them to be. So the primary components of those margins are, what are the costs relative to delivery and so that’s more efficient work flow, that’s better productivity from our staff, that’s a cleaner more efficient fulfillment process and delivery process, but I think that the primary component of increasing margin is moving away from the hardware business and the legacy business into software. And we are ready at this point. All our future sales will be software based, software for MCU, software desktop, everything will be software and as a result, our cost of delivery, because it can be downloaded rather than packaged, It is all online a trainingThey can be distributed anywhere in the world. Oura margins we expect to push up quite considerably. For the critical mass of sales, as our distribution begins to gain traction, as our technology licensing begins to gain traction, combined with a much more margins focused piece of software or software portfolio rather than hardware. We expect to resolve the corporate margin issues.

Jeff Howard - Howard Partners

Okay, thank you

Operator

And we have a follow-up question from Chris Lahiji of L.B. Micro. Please go ahead sir, your line is open.

 

Chris Lahiji - L.B. Micro

Yes, I have a question, can you hear me?

Simon Moss

 

Yeah

Chris Lahiji - L.B. Micro

My questions in regards to C3, your desktop product. What distinguish your mechanisms does this product have over all the other video conferencing products in the market?

Simon Moss

You really got me now. Obviously, my job is based on zero objectivity relative to my product portfolio, but perhaps you’ll humor me on where we are with this. I think, it’s probably best to say there are three fundamental differentiators between what Avistar has put it into the market and what everybody else is. I concede that on paper and in marketing, we are probably behind. But improving demonstrable product in some of the most sophisticated and demanding clients on the planet, we are head and shoulders above anybody else.

So I think, let’s talk about the three. The first is scale. We are dealing with clients who are running Avistar in 45 countries 24 hours a day, sitting on Avistar doing two hour calls and really sitting on their existing network rather than having to deploy a very large and very expensive infrastructure to support it. And we do this 8,000 to 10,000 seats,. We scale it to over 20,000 now, a and the FCN endeavor we’re going to have to test to over 100,000 users, both within financial institutions but also across the market as part of the financial services supply chain. So the first point of differentiation is proven demonstrable scale. I can safely say that there is nobody out there that has the deployment scale with the quality quotient and the demands that are put on the software that Avistar has.

The second is how do we prove scale? Well that’s primarily because of the approach that we have to network management. I believe that two schools of thoughtin the market at the moment. The first coming from the more traditional hardware market, which is a unified communication brining instant messing, video phone, voice over IP, all of these together you can generate as many new business cases, business models, more intimacy with clients, reduction in carbon foot, you can do all this. By the way, you have to upgrade your network and that’s why we tend to see some of the traditional network and hardware players really pushing the unified communications and applications. The second school of thought is really from the application market itself, frankly the Microsoft’s of this world, who are saying no we’re going to put the intelligence of running the network into the application so you don’t need to do a wholesale network upgrade. And Microsoft has got it exactly right in what they are saying. And we believe very vociferously that Microsoft preposition, which is running the network, running the bandwidth and having an intelligence to run that bandwidth from the application rather than just making a bigger pipe, is the right way to go.

We believe very strongly that we are the only company that’s done it. And we’ve done it at firms again like Deutsche Bank and UBS within some of the highly sophisticated, highly demanding clients who sit on mission critical trading networks. And we provided them with the type of scale and reliability that nobody else has. But the third component of that is; so if we talk about scale, that scale is really empowered by the design of our network management algorithms that we have. But the third is really the patent portfolio, which is we’ve had guys since the 1990s inventing this stuff. We’ve solved problems that many of the larger companies that are marketing unified communications haven’t even come across yet.

And this company, I must admit that I cannot take any credit for this whatsoever, these guys had the fortitude to actually protect those ideas and protect those solutions in the patent portfolio. And so we believe that we can go to the market more than any of our competitors and approach the large unified communications players and say we can give you a point of differentiation, we believe that you can address the unified communications market with our technology faster than you would be able to organically.

So, we’ve proven ourselves, we’ve proven ourselves because of the way that we had designed our product. We have designed our product because the genesis of the company with some extremely demanding global clients and we had the fortitude to protect and codify those solutions in our patents, which has positioned us very well from a competitive perspective with the larger firms. I’m sorry I babbleda little bit there, but I hope that was a short summary and I’d be delighted to put a much more articulates competitive differentiation as an e-mail to you guys if you require?

Chris Lahiji - L.B. Micro

No, it was great. It’s just that my big concern is that we’ve been hearing about all these big corporations going into videoconferencing and really expanding it within their enterprises, but it hasn’t happened over the last few years asquickly as some of the people have wanted. So, do you ultimately think that because of the high cost of travel and gasoline and airlines and such that are you guys seeing a pick-up in the interest year-over-year?

Simon Moss

Yeah I genuinely believe that it was this time last year, I would have said I think the market is embryonic and the unified communications market was probably going go in this sequence; which was e-mail first, then instant messaging, and then video or desktop video. Obviously there is a big rooms with video market, which dominated by firms like Tandberg and Polycom and I think those are quite excellent.

That’s not our strategy though, our strategy however is to enable the entire organization to communicate within itself and also with its partners, its clients, its counterparties and another entities in the market in general. So, what we are looking to do with our clients is connect the legacy rooms. So our new product has what’s called H323 interoperability. So, our desktop can connect to anyTandberg room, any LifeSize room, any Polycom room. So what we’re really looking to provide our customers is an ability to empower the way their organization operates. Now that has a lot of benefits, travel in an absolute certainty, we closed a 2000 seat desk and the client paid for the entire project out of their travel budget.

The second point however, is the price of this products has dropped. Several years ago, we were looking at multiple thousands of dollars a seat, now we’re looking at the much lower price, which reinforces a question earlier, which is corporate margins. We do have price pressure on that product. But we have restructured now to be able to generate the type of volume that we need to ensure that we grow successful on our plan. So I think that we are beginning to see a sea change in the way people think about how they do business together, how they do business with the market, how their supply chain works.

And yes, I believe the catalyst is definitely to some extent cost of travel, but it also margins, it also competitiveness, it also green issues, and it’s also the leverage of the traditional legacy investments in the rooms that firms have previously invested in. Certainly a lot of moving parts,but I would suggest that sequence of e-mail, IM, video has changed. And we’re beginning to feel a lot more confident and get the lot of feedback from the market that video is significantly more important now than has traditionally been, and so we really beginning to see a real pick-up on that.

Robert Habig

Just build on Simon’s comments, The SCN,the Security Community Network, that will be a great demonstration of cross enterprise community. And hopefully we will, put that model out there for people to consider that video has been frequently used within the enterprise. Sometimes, just to top–the top almost just as a perk, but the ability to put together communities, communities ofe shared interest, that’s pretty cool, that’s pretty exciting.

Chris Lahiji - L.B. Micro

Thank you gentlemen..

Operator

 

And gentlemen we have no further questions at this time. Mr. Habig I’ll turn the call back to you for any additional remarks.

Robert J. Habig

 

Great. Thanks very much Dina and thanks for all the participants today. We very much appreciate your interest in Avistar and we’ll be following up this discussion with a series of meetings as Simon mentioned with a wide variety of small and micro-cap investment managers over the next several weeks. We want to establish a dialogue and increase awareness in the investment community, specifically the investment community that’s most likely to appreciate and be interested in the Avistar story. So, if there are no further comments or thoughts or questions. Thanks again for your participation and have a great day.

 

 

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