Intraware, Inc. F2Q09 (Qtr End 08/31/08) Earnings Call Transcript

Intraware, Inc. (ITRA)

F2Q08 Earnings Call

October 9, 2008 5:00 pm ET

Executives

Peter H. Jackson - Chairman, President, Chief Executive Officer

Wendy A. Nieto - Chief Financial Officer, Executive Vice President

Presentation

Operator

Welcome to the Intraware fiscal second quarter 2009 earnings conference call. The company’s release made earlier today is available from its website at www.intraware.com. (Operator Instructions) I would now like to turn the call over to Wendy Nieto, Chief Financial Officer of Intraware.

Wendy A. Nieto

Thank you for attending Intraware’s conference call to discuss financial and operating results for our fiscal second quarter ended August 31, 2008. With me today is Peter Jackson, Chairman, Chief Executive Officer and President of Intraware. The format of the call will be as follows. Peter will discuss operating highlights from our second quarter and industry trends. I will provide details of our financial results as well as guidance for the third quarter of fiscal 2009. We will then open the call for your questions.

Before continuing I’d like to remind you that during this call, in addition to discussing the actual results of this past quarter we will be making some forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and beliefs and are subject to a number of factors and uncertainties that could cause our actual results to differ materially from those described in these forward-looking statements.

These include without limitation statements regarding our expectations of the company’s performance in the third quarter of fiscal year 2009 and in future quarters, new product developments and introductions, developments with our partners, and our expectations as to future trends and events in the market generally. Actual results could differ materially from those anticipated in the forward-looking statements.

For a detailed discussion of the factors and uncertainties that could cause our actual results to differ materially from those described in these forward-looking statements, please refer to the risk factors described in our most recent Form 10-K that was filed with the Securities and Exchange Commission and any update to those risk factors contained in other documents that we file from time to time with the SEC. Those documents and reports can be viewed on the Investors page of our website. We undertake no obligation to update or revise any of our forward-looking statements whether as a result of new information, future events or otherwise.

Let me also mention that the company meets regularly with current and prospective investors to discuss historic and non-material aspects of our business. If you’re interested in scheduling such a meeting or require additional information, please call us using the phone number on today’s earnings release.

I’ll now turn the call over to Peter Jackson.

Peter H. Jackson

As Wendy mentioned, I would like to begin by discussing our operating highlights before addressing the broader industry landscape and how we are holding up on what I would call enthusiastically a dynamic environment.

Intraware’s fiscal 2009 second quarter results exceeded our expectations. Revenues increased, profit margins improved further, and we achieved another quarter of positive cash flow. During the second quarter Intraware reached $4.7 million in contract renewals, new customers, professional service engagements and variable billings.

More specifically we signed an international Fortune 500 technology company as a new SubscribeNet customer. We renewed or extended 11 of our existing SubscribeNet contracts. We entered into four professional service statements of work, increased the total annual contract value of our SubscribeNet customers by approximately $400,000 to a total of $11.9 million making this the eighth consecutive quarter this metric has increased. And we added approximately 100,000 end users to the SubscribeNet service pushing total end user adoption to $2.8 million.

Variable billings hit an all-time high yet again and in doing so provided additional value to the customer above the $11.9 million in total annual contract value. Once again the increase in variable billings can be attributed to the value proposition Intraware provides its customers who continue to recognize the important role we play in assisting their efforts to cut costs, enhance customer experience, improve controls and provide greater insight into their end users. This technology and service oriented value proposition is a key element of our framework.

Moving on to SubscribeNet. In the second quarter we signed a new contract with a top tier technology provider based on two key market differentiators: Agnostic support for third party commercial licensed systems and a lean technology and process for supporting multi-tier distribution.

We also extended our relationship with a number of our existing customers reflecting their combined commitment to Intraware’s SubscribeNet service as well as our continued focus to penetrate further into several key accounts. We succeeded in upselling a number of new functionalities including electronic license management, try before you buy and self registration for developer networks.

We continue to invest in developing new partnerships and as a result we saw traction this quarter across the operational ecosystem including digital light’s management, financial systems and customer support tools. We expect a number of these new partnership opportunities to begin to pay off before the end of the year.

This quarter we also solidified a new relationship with a global mid-market division of one of our key partners and have cross-trained their sales force. This new level of penetration could significantly expand the value of the partnership to Intraware.

Finally, we are seeing the highest level of partner commitment to our upcoming user conference [SNUG] in its five year history. This signals to us that partners understand the value of working with Intraware and it bodes well for the continued growth of our existing partnerships.

In addition to investing in our partner channel we continued to invest in our products and services. During the second quarter of fiscal 2009 we made several improvements to our SubscribeNet service including enhancements related to entitlement search membership reactivation and self-administering page content; enhancement to further reduce web allocation security risks; improved application failover capability for license implementations; enhancements related to channel manager, license generation and registration and evaluation sites which will enable our customers to better track the information they manage and transfer.

Many of the improvements we made during the quarter were based on feedback received from our customers. We take great pride in our commitment to serving our customers and we believe our responsiveness to their fluid feedback demonstrates this commitment.

I would now like to comment on zAthlete our worldwide social networking and user generated content site. zAthlete was launched late last year with the objective of developing a state-of-the-art platform for athletes, teams and their fans involved in athletes of all sorts and levels. We continue to experience strong end user growth as we support users in all 50 states and 55 different countries across 60 different sports. Furthermore our age demographic covers athletes and fans ranging from age 13 to 80.

All of this is now available in multiple languages including English, Spanish, Italian, French, German and Portuguese. We continue to add functionality and user interface and plan to launch additional enhancements this fall. Enhancements include better graphics and navigation, additional functionality for teams, sports community pages and additional premium content. Although we are still in beta mode, we currently are exploring ways in which we can leverage and modify zAthlete to derive additional revenues for our business and value for our shareholders.

We continue to be cautiously optimistic about our opportunities both within our existing customer base and with new customers. This is traditionally a busy time as companies begin planning their new calendar year initiatives and budget. While entering this season, this year feels similar to last but I would be remiss to say that there is an added layer of uncertainty. Like any other company we’re apprehensive about the current macro-economic condition and its potential impact on our business.

It is important to note however that we have benefited during difficult times in the past. Given the heightened importance of cost savings and revenue generation during these times, Intraware’s value proposition is centered around capturing revenue that currently slips through the cracks due to operational inefficiencies and excessive costs. In addition, our strong and loyal customer base is well established and we think more resilient to periods of economic uncertainty.

Ultimately our focus on entitlement management has allowed us to create and maintain a flexible business model that provides a valuable service for our customers and reoccurring revenue stream for Intraware. We continue to see solid opportunities to help our customers with their license management challenges and look forward to expanding our service offerings further into the partner eco system.

Our enthusiasm for the business and the opportunities for growth have only increased. Looking ahead we continue to develop our unique technologies to support a fast-growing customer base in both SubscribeNet and zAthlete. So while the SubscribeNet end user has accelerated in the last year and is nearing 3 million users, it took us nearly 10 years to reach 1 million users and just two years later we have nearly tripled that user base.

With zAthlete we believe the increased membership and application development are key in driving adoption and remain focused on taking advantage of the trend to create private networks for individuals. As a result we see growth opportunity in zAthlete that can ramp at a faster rate than SubscribeNet. We see Web 2.0 adoption occurring at an alarming pace. The social perspective of a network service like zAthlete is a critical element of today’s website and functional benefits of these networks far exceed what competing Internet services have been able to provide.

This next generation platform leverage is the latest technology and seamlessly connects to other sites allowing users to quickly communicate with friends and associates and to have a simple access to all the content they are entitled to view. The combination of mobile management, digital media, inbox versus email, friendship address book connections, blogs, blogs and entertainment have application developers racing to capitalize on a very viral and organic growth opportunity.

I believe this trend will rival the adoption of email in the early 90s and I’m proud to say that we are actively engaged in this exciting trend. Networks will continue to enter market places and those that succeed will have done so by building valuable functionality and critical mass. 2008 to 2009 should produce some big winners and we think we are well under the curve on both functionality and end user base.

Finally, Intraware’s value proposition is being realized by more companies as they increasingly have raised two major trends in the software and technology world. Software is a service that continues to be an attractive alternative to perpetual licensed software solutions particularly amongst small and medium businesses and enterprises with geographical diverse work forces.

Software as a service solution has added benefits that also are picking up momentum in the market place that is benefiting from being a green alternative. Green initiatives at the government and corporate level are increasing and Intraware is at the forefront of this trend. The cost of producing and delivering software is no longer limited to financial or operational considerations. Technology companies and their customers are becoming increasingly aware of the environmental burden associated with the production of technology products.

Of course as Intraware’s SubscribeNet solution is web-based, it provides a compelling solution in light of both trends. We intend to capitalize on both trends in order to provide added value at a lower cost to our customers.

That concludes my formal remarks. I’d now like to turn the call back over to Wendy to take you through the financials for the second quarter of fiscal year 2009 as well as provide you with our guidance for the third quarter.

Wendy A. Nieto

Despite the economic uncertainty, in the second quarter of fiscal year 2009 we continued to see the positive trends of revenue growth, improved gross profit and positive cash flow. We believe this is driven by multiple factors including the strong fundamentals of the business, competing in a rapidly growing digital asset delivery market, and servicing a Tier 1 customer base. We continue to see attractive opportunities to grow our business with both existing and new customers.

During the second quarter both revenues and earnings exceeded previously provided guidance. Total revenues for the second fiscal quarter of 2009 were $3.4 million, a 7% increase over $3.2 million in the same period of fiscal 2008 and $3.2 million during the first quarter of fiscal 2009. Increased revenues were primarily driven by completed new customer implementation.

Intraware’s investment in growth along with the compelling market solution has allowed us to capture gains through improved gross profit margins. We made significant strides across this front in the prior fiscal year and we anticipate additional year-over-year improvements to our gross profit margins for fiscal 2009. Gross profit margins for the second quarter of fiscal 2009 were 69%, an improvement over the same period in fiscal 2009 and first quarter of 2009 both of which were 67%.

Net loss for the second quarter of fiscal 2009 also beat our previously provided guidance and was $105,000 or $0.02 per basic and diluted share compared to a net income of $144,000 or $0.02 per basic and diluted share in the second quarter of fiscal 2008 and a net loss of $223,000 or $0.04 per basic and diluted share in the first quarter of fiscal 2009. The quarter-over-quarter increase in net income was due to revenue increases combined with stronger gross profit margins on a year-over-year basis.

Non-GAAP operating income for the second quarter of fiscal 2009 was $196,000 compared to income of $219,000 in the second quarter of fiscal 2008 and an improvement on income of $73,000 in the first quarter of fiscal 2009. We believe that it is important to leverage our existing capabilities and invest in new areas of our business to provide additional long-term growth in a controlled and measured fashion.

Although we have increased operating expenses related to new product offerings, we remain focused on maintaining positive non-GAAP operating income. We believe we are on track with our annual goal of achieving positive non-GAAP operating income for the full fiscal year.

We define non-GAAP operating income as operating income before depreciation, amortization and non-cash stock-based compensation. Management considers these charges to be items that are not indicative of the performance of the underlying business. Reconciliations between non-GAAP operating income and loss and income and loss from operations are provided on the website under Conference Calls of the Investor section.

Moving to the balance sheet, we continued to build our working capital and remain debt free. As our financial metrics have improved over the years we have been able to grow and support investment into the business through positive operating cash flows.

Receivables were $2.1 million as of August 31, 2008, an increase from $1.5 million as of August 31, 2007. The increase in accounts receivable is the result of higher billings in the second quarter and timing of payments. Although collections were very strong during the quarter, a few large payments lagged into the first weeks of the third fiscal quarter. Therefore DSOs were 57 days as of the last day of the quarter. We expect our DSOs to generally be in the 45 day range in future quarters.

Deferred revenue as of August 31, 2008 was $4.7 million, an increase of 25% on a year-over-year basis and an increase of 7% sequentially over the first quarter of fiscal 2009. SubscribeNet revenues are typically recognized over future service periods once all the conditions for revenue recognition rules are met.

Therefore deferred revenues consist primarily of SubscribeNet billings or payments received in advance of revenue recognition, which for us typically begins once the service or added functionality for our customer goes live. Since deferred revenues represent revenues to be recognized in those future periods, we believe this is another positive business indicator.

We are also pleased to report that Intraware was cash flow positive on an operating business for a fifth consecutive quarter. We provided $143,000 in cash from operating activities in the second quarter and a total of $582,000 for the six months ended August 31, 2008. This is a $1.1 million improvement from the corresponding period from the prior fiscal year. Importantly we expect to drive positive cash flows from operations in subsequent quarters in fiscal 2009 and beyond.

Lastly, as of August 31, 2008 we had $12.6 million in cash and cash equivalents.

We are pleased overall with the financial improvements we have been able to deliver year-to-date and we are focused on building on those accomplishments for the remainder of the fiscal year.

Turning now to the company’s business outlook for the third quarter of fiscal 2009. We are well positioned despite the challenging macro-economic conditions that exist today. Our service offerings support a strong ROI and we have had great visibility into our business due to recurring revenues, a contractual based business with high quality customers, and in many cases long-term committed contracts.

We remain confident in the strength of our business model and feel we are well positioned for future growth. Not only do we continue to see growth in the digital asset delivery market place, but our industry-leading technology, loyal and growing customer base and finally our steady revenue stream all gives us the confidence that there remains a significant growth opportunity for Intraware.

Given current business trends Intraware expects revenues for the third quarter of fiscal 2009 to be between $3.4 million and $3.5 million. The company expects net loss per basic and diluted share during this period to range between $0.02 and $0.04 per share. We continue to expect to achieve non-GAAP operating income for our 2009 fiscal year.

At the beginning of the year we set some key goals for fiscal 2009. They were to reinvest across the business in the coming year to enable growth and promote leadership, drive both organic and new customer growth to increase SubscribeNet end users by more than 50%, gain traction in zAthlete and begin to monetize this offering by year end, and achieve increased operating cash flow and positive non-GAAP earnings for the full fiscal year. The team has been doing a tremendous job and we are tracking nicely to these goals.

During the second fiscal quarter we continued to successfully drive solid financial results while improving our offerings and those of our customers. Today we remain focused on growing and enhancing our business, improving shareholder value and building upon the positive financial momentum through the remainder of the fiscal year.

I would now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) We have no telephone questions at this time. Let’s go to the company for some email questions.

Wendy A. Nieto

We would now like to address email questions received prior to the call. The first question that we received was inquiring about the status of the stock buy-back and if it has not been executed, why, and if it has, will management consider putting another buy-back in place.

We certainly see that as a way to deliver value back to our shareholders. I think that it is challenging for us to be able to execute on that plan as a management team just due to various restrictions and blackout periods. Certainly there are times that we would like to be buying shares but it has been problematic, so we’re currently reviewing the merits of a 10B51 stock buy-back plan that would really give us I think more flexibility and consistency in being able to successfully implement that buy-back program. But it is in place and at the end of the fiscal year we certainly would look at putting another plan in place.

Peter H. Jackson

Yes, there are a variety of things that we’ll get in place to where we’re just about to do it and then we’ll win a big contract and that becomes insider information that obviously we’re aware of and so our legal ends up telling us that you can’t publicize that and the company we went with told us they can’t publicize it until we go active with it that we can’t buy the stock because we know something you don’t know.

Or if we’re having better variable dealings in a quarter like we continue to do, then we have insider information the company’s doing better so the restrictions are a lot larger than I thought and certainly at these prices we’re getting close to trading in cash while we’re going pretty quickly, and we don’t see any stop to that.

I think that Wendy’s really pointed out a good point. I think doing the 10B51 is going to take us out of a lot of that restriction period and then we’ll figure out ways to get hold of those shares that continue to see influence in the market place.

Wendy A. Nieto

The next question. Is the subscription model a big advantage in the current financial crisis?

I think there are a couple of ways of looking at that both from just pure financial and just off of the value that we deliver to our end customers. I think for us there are some key points in the value we deliver and one being able to spread their payments out over future periods versus having a large upfront payment that may be at risk for a significant implementation cycle. We’ve been in assets for a while and we have a pretty streamlined elegant implementation process that has a lot of certainty in it, and I think with that it makes it a little easier for those out in the market place who are looking at this type of solution.

So I think the ease of implementation, the low risk, certainly the testimonials from our existing customers, us being able to point to the fact that we’ve never had a failed implementation, those types of things certainly add to the overall cost when you are looking at moving forward on a project. I think that it definitely plays well for us. It has in the past. I think when times are good and when times are tough, our service offering tends to do well in both areas.

Peter H. Jackson

I think that it’s painful for us when we announce a win at IBM or we win something with an Adobe or EMC or some of the companies I can’t name as my lawyer’s staring at me. But one of the things that is painful about not being in the license business is that all those wins that we had certainly in the last 36 months, if you could take a $3.8 million win and stick it into last year’s third quarter you shareholders would have definitely been worried about some spiky revenues.

And certainly IBM continues to tack on and tack on, and Adobe just tacked on and what not, but as Wendy pointed out when you take those revenues and you spread them out over three years or even longer because they can extend, it ends up sort of building this linear revenue growth path that you’re starting to see from us.

A couple years ago if you stripped out our reselling business, we were in the 2223 range where there’s subscribing a base service, and we’ve added well over a million dollars to that on a reportable basis. And as you can see from our guidance, that trend continues.

We’ve had to rough through some tough times when we win big contracts but we’re not able to report those to you. When you ask about it in financial times, we’re probably going into a financial year ahead of us that I haven’t seen in my lifetime just based on some of the economics that we’re reading out there. But there’s a tremendous comfort in this organization knowing that we’ve got a lot of stability in contracts in place that are going to take us through next year with some nice numbers.

All that being said, we want to take advantage of those green initiatives and take advantage of cost savings that companies are trying to find so that we find next year to be a growth year for us so we continue that linear and predictable growth revenues in the years to come beyond next year. For the immediate term the company’s in a very stable situation on a reportable basis and I can’t anticipate any [gashes] for you.

Wendy A. Nieto

The next question. After showing good growth for a while, sales have leveled off a bit for the last four quarters. Is there any specific reason?

I think today’s earnings call has addressed that as well as maybe overlooking the past pattern of certainly having three quarters of consecutive growth. And really when we look back over building out our business model, our online services revenues have actually increased every fiscal year for the last four years. I think that overall we’re certainly headed in the right direction.

And as Peter was talking about our contracts and the makeup of those contracts, I think we’re in a fortunate position to have those committed contracts that benefits the customer as well as gives us visibility into the future and a lot of times those customers have provided for a certain amount of uplift in growth within those contracts in future periods.

Really when you look at the business indicators of having increased end users that are certainly tracking at 50% growth rate, we had consistent increases in our annual contract value now for eight quarters and then our average contract value continues to grow. I think those are all great signs that certainly should translate into future growth.

The next question. What is the main goal of supporting zAthlete in multiple languages? Is zAthlete having any success at attracting foreign-speaking users?

Peter H. Jackson

I think the timing for that question is actually pretty good because there’s a new initiative that’s actually being adopted by the UN where they’re seeing these relationships across countries, the challenges between countries and everything else certainly [inaudible] on the political level but they sort of see the athletic connection amongst athletes certainly not, beyond the Olympics, and all the other athletes out there. We have a meeting in Philadelphia here in a couple of weeks with them as well and we see bringing the world together on the platform of athletics, the platforms of communities, the platforms of things that have to do with diet, exercise patterns, when people are learning from sport to sport or conditioning to conditioning.

We continue to utilize people creating that content, somewhat like a Wikipedia where people are bringing in all kinds of vital information about everything from equestrians to different places to ride your bike to terrain to timeframes to climates, things of that nature.

There’s a lot more I’d like to tell you about that we’re developing and we’re really excited about our year-end UI - that’s user interface for you non-techies - and the things that we’re doing that are going to really open up the development for us to not only attract and keep and become a steady use for people but also one of the things that I think is going to be important to shareholders is, how does this thing really make money? And we’ve been working really hard in terms of measuring that, and that’s going to be something that we’ll be able to address by the end of the year as well.

Wendy A. Nieto

The last question is, how confident are you in realizing revenues from zAthlete and the timing of those?

For us we certainly don’t provide any guidance far out. At this point in time we are doing a lot of work on the engineering side that provides for various models of generating revenues, and we’re pretty excited about those developments and look forward to sharing those in future releases. I think at that time it’s appropriate to talk about revenues but just from more of a strategic competitive nature. We’re not prepared to really provide much detail around the exact timing and the nature of those revenue streams.

Peter H. Jackson

Yes, I think that’s good Wendy. I think that showing any potential competitor out there or would-be competitor what these apps are about, because they’re going to be different in nature, would not be a good thing to do on the call right now. But I will say that I think we’ll be able to address some of those on our next earnings call and we look forward to doing that with you.

Wendy A. Nieto

That wraps up the question and answer portion of the call. I’ll send it back over to Peter for any closing remarks.

Peter H. Jackson

I’d just like to say thanks a lot for joining us on the call today. I know that the climate out there isn’t exactly; maybe there are not too many people on the call. But if there are out there, thank you for joining us on today’s call and we look forward to talking to you after the new year. Operator, you may now bring this call to a close.

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