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Executives

James Powers – Chairman, President and CEO

Jim Dunn – SVP, CFO & General Counsel

Analysts

Don Mckernan [ph]

iLinc Communications, Inc. (ILC) F1Q09 (Qtr End 06/30/08) Earnings Call Transcript August 14, 2008 11:00 AM ET

Operator

Good morning and welcome to the iLinc’s earnings conference call for the first quarter of fiscal year 2009. Today's conference call will also be accompanied by an online presentation using iLinc's award-winning web conferencing software. You may view this online presentation by going to ir.ilinc.com/public/join. After the live call, a recording of today's presentation will be available at iLinc's website at www.ilinc.com. All participants will initially be in a listen-only mode. After the company’s remarks you will be invited to participate in the question-and-answer session. (Operator instructions) This call is being recorded Thursday, August 14, 2008.

At this time, I would like to introduce Dr. James M. Powers Jr., Chairman, President and Chief Executive Officer of iLinc. Please go ahead, Dr. Powers.

James Powers

Good morning. I'm James Powers, Chairman, President and CEO of iLinc. Our agenda for this morning's earning web conference is as follows. Jim Dunn, our Senior Vice President, will read the required Safe Harbor disclosure. I will provide an update of the audio asset sale and a summary of our financial results for the first fiscal quarter that ended June 30, 2008. Next I will discuss iLinc's future prospects and our positioning in the rapidly growing web conferencing and unified communications market. Finally, Jim will provide a more detailed financial overview, and I will then offer some closing remarks. Jim?

Jim Dunn

During the course of this presentation, we anticipate making forward-looking statements regarding future events and the future performance of the company that involve certain risks and uncertainties. These forward-looking statements may be qualified by words such as expect, anticipate, project, assume, intend, believe and plan. Please understand that any forward-looking statements reflect management's judgment as of today and that this judgment may change subsequent to the broadcast.

We are undertaking no responsibility to update any forward-looking statements provided as a part of this broadcast, and as such, actual results may differ materially from those in these projections are forward-looking statements. Those factors which impact the company's performance in any forward-looking statements may be found in the company's filings with the Securities and Exchange Commission, particularly the company's most recent Form 10-K and Form 10-Q. James?

James Powers

Thank you for participating in iLinc's quarterly conference call and online meeting this morning. iLinc has a fiscal year that ends March 31st. So our remarks today are to discuss the results of our first fiscal quarter of fiscal 2009 for the period ending June 30, 2008. As previously announced, we completed in June the sale of our audio conferencing assets. We sold those assets because of the perception by customers that audio conferencing was a commoditized product, which of course cause continued downward rate pressure.

We also perceived trends in the web conferencing and unified communications markets that we believe will negatively impact audio conferencing as a stand-alone service business. To be clear, we did this transaction as a very positive event for iLinc. The sale provided over $4 million in cash at a time when capital would have been costly and it provides a substantial gain that bolsters our bottom line.

Before discussing our financial results in comparisons to prior periods that provide two important reference points. First, because of the sale of our audio assets, we reclassified all audio conferencing income expense and the resulting gain into a discontinued operations section on our income statement. Second, with the shift from our traditional software purchase model to a more predictable Software-as-a-Service or SaaS model, traditional comparisons to the same three-month period last fiscal year may not be relevant or meaningful. Therefore my remarks today will focus on comparisons between the June quarter and the more recent, and in our viewpoint, relevant March quarter.

So with that said, iLinc reported today that it earned total revenue of $1.9 million for the June quarter, which is a 24% decrease over the same three-month period last year. But more importantly, iLinc increased total revenue by $353,000 or a 23% increase when compared to the sequential March quarter. Particularly subscription of SaaS revenues provided by our direct sales staff increased in June to $126,000, a 78% increase over the March quarter, with like increases in transaction counts and backlog that I will discuss momentarily.

In the June quarter, iLinc earned net income from continuing and discontinued operations of $1.2 million. We knew that our shift from a software purchase model to a SaaS or subscription model would result in lower short-term revenue and short-term losses. In late fiscal 2008 we began shifting our sales model and accordingly began to right-size our overhead. So, fiscal 2009 provides in some measure a new beginning for iLinc. And having paid the price in fiscal 2008, we are ready to reap the benefits of those changes. So we view the results achieved in the June quarter as a very good start to fiscal 2009 and thereafter.

I will provide more details concerning our increasing SaaS model success, but first I want to circle back to the use of audio conferencing sale proceeds. As we indicated, we received over $4 million from the sale of our audio assets. Because of the market opportunities that I will describe in a minute, we expect to invest at least $1.5 million of our $4 million in cash together with cash flow from operations in sales and marketing activities that are designed to foster SaaS sales success. We therefore expect to retain approximately $2.5 million of this cash in fiscal 2009 to bolster investor and customer confidence and for other strategic purposes.

We understand that importance of retaining most of that cash, especially given the losses sustained in fiscal 2008. However, we also believe it is critical at this time to invest in sales programs that maximize the opportunity presented to iLinc and seize upon the positive trends in the growing web and video conferencing markets. Yes, there is a delicate balance that must be struck but one that we believe we have well in hand. Jim Dunn, our CFO, will provide more information concerning our financial results and operational plans in a few minutes.

With that background, let me briefly share with your positioning and then share some key Software-as-a-Service sales metrics that give us so much confidence. With the recent sale transactions of companies in the web conferencing space at multiples are four to eight times revenue. iLinc is one of the few standalone web and video conferencing providers that is focused exclusively on these growing markets. Also SaaS revenues of most companies are valued by investors in the four to six times revenues range. So we should benefit by demonstrating success in growing our SaaS revenues. We continue to compete effectively with the market share leaders from a feature and functionality standpoint and are taking steps to expand our distribution.

To support our view, Gartner recently identified iLinc as a visionary provider in its recent web conferencing market analysis. Although we are small, we are clearly very competitive in web conferencing in collaboration with the likes of Cisco, IBM, and Microsoft. Likewise the web conferencing market shows no signs of slowing with compounding annual growth rates of approximately 20% well into 2012. Furthermore, trends in unified communications in IP-PBX space serve to support our expanding indirect distribution strategy. As indicated, we are aggressively seeking distribution of our product on an indirect and OEM basis with new unified communications and IP-PBX providers who compete with Cisco, Microsoft and others who are ready to possess a web conferencing product.

We already partner with several in the LMS and CRM space, and also already provide a fully branded product to a major IP-PBX provider. The web conferencing and unified communications market continues to grow rapidly and we are well positioned to take advantage of that growth. To supplement our direct sales staff, we expect to continue to grow our existing relationships by adding at least two new OEM partners that provide significant distribution of iLinc on an OEM basis this fiscal year.

As a foundation to our positioning and plans, we continue to sell into a who’s who list of customers that use our products to enhance worker productivity and increase worker effectiveness while reducing cost. Sales in the June quarter added notable customers such as Thesis [ph], the states of Iowa, Alaska and Vermont, general dynamics, and Takeda Pharmaceutical, the largest pharmaceutical company in Japan.

With the recent launch of iLinc 10, we continued to improve one of the most rock-solid, time-tested products in the industry. Those prospective customers do an exhaustive analysis of our software product against the market share leaders often report that iLinc is head and shoulders above the rest. To further IP-PBX and other indirect strategies, we enhanced iLinc 10 by providing easy integration designed to faster immediate indirect distribution.

So with that background, let’s look at the progress we have made with our new SaaS model. We began offering a SaaS alternative to our traditional software model in April of this year. To further track our progress with the transaction’s growth, we lost internally a program we call the March to 1500 [ph]. From the beginning of our fiscal year until the end of calendar 2009, our goal is to add 1,500 transactions from new and existing customers with an average annual contract value of $7,300. In doing so, we will build significant backlog, increase visibility and importantly compounding monthly recurring revenue that the market values highly.

We are tracking the number of subscription transactions and are well underway toward that goal. Specifically in the June quarter, we added 50 subscription transactions from our direct sales team with an average contract term of 21 months. And we added a total of 129 transactions against a goal of 120 for the quarter. We achieved our goals in June quarter with those June transactions having an average transaction size of $7,300 per year. So, right on the number. The graph provided is one of many that we will be maintaining in sharing each earnings call. We are excited by the opportunity to build long-term subscription revenue and believe that market factors make achieving our goals tangible and immediate.

Now Jim Dunn, our CFO, will review the details of our financial results and operational results for the first fiscal quarter of 2009. Jim?

Jim Dunn

As James indicated, iLinc sold its audio conferencing assets during the June quarter on terms we believe to be very favorable to iLinc. The sale of our audio conferencing assets provided to us $4.1 million in cash, a gain on the sale of $1.9 million and the ability to further focus on our award-winning web conferencing asset. Therefore when looking at iLinc’s financial results and historical filings, please be mindful that pursuant to SFAS 144, iLinc has reclassified all audio conferencing operations as discontinued operations as of March 31, 2008 and thereafter. As a result, we’ve eliminated all audio conferencing revenues and associated expenses from continuing operations in our income statement and have reclassified revenue and expense from a historical period basis for comparative purposes.

Therefore my remarks will focus on results from continuing operations unless otherwise indicated. As James emphasized, iLinc shifted its direct and indirect sales focus in the March quarter away from our historical software purchase model and toward a more predictable and valuable SaaS model. Consistent with that shift, total revenues quarter-over-quarter in this early stage were relatively flat while subscription revenues began an upward trend. Looking specifically at our Q1 fiscal 2009 or June results, iLinc earned revenues of $1.9 million, which is a 24% decrease over the same three-month period last fiscal year. And likewise for the June quarter, iLinc reported a loss from continuing operations of $415,000 as compared to a loss from continuing operations of only $60,000 during the same three-month period last fiscal year.

iLinc earned net income of $1.2 million or $0.04 per basic share from continuing and discontinued operations as compared to a net income of only $78,000 during the same three-month period last fiscal year. Again because of the shift in sales focus and revenue model and the reclassifications resulting from the audio sale comparisons to the same three-month period last fiscal year are frankly less meaningful than comparisons to more recent periods. Therefore the remainder of my remarks will focus on comparisons to the most recent March quarter as we believe it is a better indicator of iLinc’s current position as well as future prospects.

So comparing revenue earned in Q1 of the June quarter to March quarter, iLinc grew revenue by a total of $353,000 or a 23% increase. Revenue from licensed software sales increased $380,000 when compared to the March quarter. Importantly, revenue from all subscription sales increased a respectable 9% to $469,000 in the June quarter. We earned service and maintenance revenues of $866,000, which were essentially flat when compared to the March quarter after excluding $82,000 decline in non-core custom content revenue, an agreement which ended in the June quarter.

With the focus on subscription sales, we expect maintenance and hosting revenues from software sales to remain relatively flat for the remainder of this fiscal year, yet provide a healthy source of recurring revenue as a financial foundation for our new and growing SaaS model. To that end, we continue to see steady renewals of maintenance and hosting agreements from our traditional software customers at annual renewal rates exceeding our historical 88% renewal average. With gains in revenue over the March quarter, we also saw declines in our cost of sales and corresponding increases in gross profit.

With the removal of lower margin audio conferencing revenues and cost of sales from our income statement, the true leverage of our high quality software product line is revealed. We achieved a gross profit of $1.6 million in June, which is an increase of $419,000 or 35% over the March quarter. Gross margin percentages likewise increased from 77% in the March quarter to 85% in the June quarter. We expect to see gross margins continue to improve in this fiscal year as they reach in our sustained above the 90% level as subscription revenues grow likewise. As we see continued success with our SaaS or Software-as-a-Service revenue model, please recall that this compounding revenue is being added on top of an existing and recurring revenue base of maintenance and service revenues that currently provide over 45% of our total quarterly revenue.

Looking at the expense side of the equation, total operating expenses decreased in the June quarter as compared to the March quarter by over $545,000 or down 21%. Specifically comparing June results with the March quarter, research and development cost decreased by $53,000, sales and marketing expenses decreased by $257,000, and G&A expenses decreased by over $225,000. The decreases in expenses were the results of reductions in headcount and operating expenses that were implemented late in fiscal 2008 as we plan to reduce overhead consistent with our shift toward the sales SaaS model.

We do not expect like declines in dollar amount of expenses next quarter or for the remainder of the fiscal year. Instead we expect consistent expense levels in R&D and G&A throughout this fiscal year with declines in the percentages as revenues grow. Also we expect to see increases in the dollar amount of sales and marketing expenses this fiscal year as we invest in new programs carefully designed to foster transactional growth from our new and existing subscription customers.

Looking at the balance sheet, operating cash increased from the March quarter by $560,000 to $1.2 million. We continue to service accounts payable and accrue liabilities primarily from return on working capital. And with the proceeds of the audio sale we are able to end the quarter with a combined cash and CD balance of $4 million. Commensurate with the sales bookings we increased our receivables balance while also increasing deferred revenue and backlog. Because few of our SaaS customers like to pay upfront, deferred revenue for the June quarter remained consistent with March levels, yet backlog increased significantly from $424,000 to $605,000 or a 40, 30% increase.

As our new SaaS model takes hold, we of course expect to see a steady but appreciable increase in backlog from subscription sales. We believe this increase in backlog going to result in incremental additional month of recurring revenue as a strong indicator of our prospects during fiscal 2009.

Concerning expected cash balances this fiscal year, we intend to retain a CD balance between $2.5 million and $3.0 million as we invest the remainder of our cash in sales and marketing activities designed to spur subscription sales and ultimately shareholder value.

Please recall that the data on our balance sheet is all long-term unsecured and interest-only. Importantly, $3 million of the $8 million total is not due until 2010, and the remaining $5 million of convertible debt is not due until 2012. In summary then, with the timely sale of our audio assets, the cash on hand provided by that sale and the successes we are already having with our new SaaS sales model, we believe we are well positioned from a fundamental position to take advantage of the market opportunities that James has described.

I’ll turn it now back over to James for some closing remarks.

James Powers

Thank you, Jim. In summary, I want to remind you that iLinc possesses one of the very best products. We offer varied licensing and hosting options and are very well positioned in a rapidly expanding, addressable market of web and video conferencing. Overall, our financial condition is solid and we plan to remain that way while we do everything possible to foster subscription transactional growth. We feel very confident and I can tell you that morale at iLinc is at an all-time high. Transactions within the web and video conferencing industry have provided new opportunities for iLinc and we have implemented strategic plans to take full advantage of the opportunities present.

So while we believe that our stock price is not representative of our value proposition, we remain dedicated to monthly recurring revenue growth that will eventually be revealed in stock price appreciation. Thank you again for your support. Let me now turn the call over to the operator for our question-and-answer session.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We have our first question from Don Mckernan [ph]. Please go ahead.

Don Mckernan

Good morning.

James Powers

Good morning, Don.

Don Mckernan

On your graph, you showed 129 new customers in the software as a subscription model. Is that correct in the most recent quarter?

James Powers

The 129 would represent all new contracts, all new opportunities that we close. So there would be some licensed opportunities in there that we won. There would be subscription and those are long-term subscriptions that can be up to 60 months. And there are even short-term subscriptions that can be month-by-month.

Don Mckernan

And so the next quarter – this quarter the goal was roughly double that?

James Powers

It’s not quite double. For this quarter, it’s about 180. About 180, up from 120.

Don Mckernan

180 new ones or 180 total?

James Powers

180 new ones.

Don Mckernan

Okay. And how are you tracking in on your goal thus far in the quarter?

James Powers

July, this graph does turn up. As you can see, for July, our target for that month was 40, and we achieved 45 in the month of July.

Don Mckernan

Okay. And what would be the revenue breakeven level in terms of your cash flow and your operating income per quarter?

James Powers

Per quarter, it’s about – it’s just under $2.5 million would be breakeven. Just under $2.5 million per quarter. And we are sitting now, as you know, just under $2 million. So, about $2.5 million.

Don Mckernan

When would you get there if you grow the business like we just talked about, 180 this quarter and if you kept up your targets?

James Powers

If you stay on track with that plan, it’s in the two to three quarters out. About two quarters out, possibly three.

Don Mckernan

And thereafter you would have rather significant leverage to the bottom line with your margin situation?

James Powers

Exactly.

Don Mckernan

And then you talked about two indirect distribution channels of sort of a larger scale, I think you said something of that effect.

James Powers

Yes.

Don Mckernan

Can you give us an idea of what you are trying to do in that space?

James Powers

Well, if you look historically, we began with more e-learning type partners. So many of those are fairly small and they represent a bulk of our international resellers. And on the larger scale, some integrations with, for example, mZinga, a learning management system distributor. And we are embedded in their product and distributed through them. And we are seeing results there. From the largest distribution opportunity that we have right now is with Mitel, formerly InterTel, and they are an IP-PBX company. And distribution through them in an integrated private branded product is working well. We also have resellers, large account resellers like Softmart that are distributing our product as pure software sales, not as a value-added reseller, but pure software distribution. But what we are speaking to there is most likely OEM distribution. And we are looking mostly in the IP-PBX space, in the telcom space, and possibly in the software. We’ve identified starting from a very large list that we identified about 60 that we felt like we are most likely strong partners there. That down to about 20, and we have methodically worked through those and we’ve got a – the list right now has about five on it that were working pretty aggressively. Nothing at this point that I can report, no agreements in place.

Don Mckernan

And eventually will your software license revenue go to zero because you are going into the subscription model?

James Powers

That’s a very good question. And it will not in our case. We still – we basically want to sell software in the way people want to buy it. So we have – we are unique and that we have an installable on-prem solution. We also sell perpetual license and we host it for them in a hybrid structure. And then our focus in our lead is around the SaaS model, the subscription model. But we envision, as we move in the future, the software license purchase or license sale model representing about 30% of our business. And if you look, for example, Don, at some of the sales that I’ve listed in the last quarter, we made sales to the State of Arizona and those are hybrid. So they are license sales. We made a sale to State of Alaska that was also hybrid. And we’ve made sales to government entities that continue to be installable solutions. So, many of those large customers that we listed, Aetna, Travelers, JPMorgan Chase, EDS, those are installable solutions and we look to continue to add licenses there. So, about 30%. One other note there that I would add, we lost iLinc 10, which is a very powerful web conferencing, web collaboration solution with multi-point video. That is just a fabulous solution. And we have the installed solution. The installed iLinc 10 is to be launched in another couple of weeks. So we are not stopping on that capability.

Don Mckernan

Great. Thank you very much.

James Powers

Thank you for your questions, Don.

Operator

(Operator instructions) We have no further phone questions at this time.

James Powers

Thank you for your questions, Don, and thank all of you for your participation this morning. We look forward to talking with you again after the September results as we continue to focus on growing our subscription recurring revenues. Thank you.

Operator

Thank you, ladies and gentlemen. This now concludes today's conference. Thank you for participating and you may all disconnect.

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Source: iLinc Communications, Inc. F1Q09 (Qtr End 06/30/08) Earnings Call Transcript
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