RMG Networks (NASDAQ:RMGN) Q4 2016 Results Earnings Conference Call March 2, 2017 9:00 AM ET
Robert Robinson - SVP, General Counsel and Secretary
Robert Michelson - President and CEO
Jana Ahlfinger Bell - EVP and CFO
William Gibson - ROTH Capital Partners
Eric Gomberg - Dane Capital
Good day, ladies and gentlemen, welcome to the RMG Networks Fourth Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to Bob Robinson, General Counsel. You may begin.
Thank you, Operator. Good morning everyone and thank you all for joining RMG's fourth quarter and full year 2016 earnings conference call. Joining me on the call today are Bob Michelson, Chief Executive Officer and Jana Ahlfinger Bell, Chief Financial Officer.
RMG issued its fourth quarter 2016 earnings press release today, which can be found on the Company's Investor Relations pages at ir.rmgnetworks.com along with the slides accompanying the remarks during this call. These slides can also be found by registering through the webcast link.
Before we start, I would like to remind everyone that some of the statements that will be made today on the call will be forward-looking. These forward-looking statements are based on the Company's current expectations and beliefs concerning future developments and their potential effects on the company.
All forward-looking statements involve risks and uncertainties that could cause actual results or outcomes to differ materially. Such projections and statements of expectations should be interpreted in conjunction with the risk factors and other disclosures that may affect our results, all of which can be found on the Company's Form 10-K, Form 10-Qs, Annual Report and other related SEC filings.
During this conference call, we will also disclose a non-GAAP financial measure, adjusted EBITDA. Recoverable GAAP financial information including income or loss from continuing operations, the GAAP measurement most directly comparable to adjusted EBITDA is found alongside the non-GAAP financial measure in the fourth quarter 2016 earnings press release which I previously referenced and which is available on the Investor Relations section of our website. Reconciliations between GAAP and non-GAAP financial measures are provided in the financial tables at the end of the fourth quarter 2016 earnings press release.
At this time, I would like to turn the call over to Bob Michelson, our Chief Executive Officer.
Thank you, Bob, and good morning everyone. It's a beautiful day in Dallas, sunny and about 17 degrees, hopefully its great weather wherever you are.
Thank you for joining our fourth quarter and year-end 2016 earnings call. 2016 was a year of significant strategic and financial progress for RMG. Over the last 12 months we have developed and deployed compelling business strategies, recruited a world-class leadership team, streamlined our cost structure and delivered enhanced products and services to our customers. As a result of these many efforts, I really couldn't be any more pleased to indicate that we are seeing the fruits of our labors converting into solid financial progress.
Including positive adjusted EBITDA for Q3 and as we are reporting today, positive adjusted EBITDA for Q4, resulting in two positive adjusted EBITDA quarters in a row. I really can't leave out at the beginning in this call, we have good visibility for positive adjusted EBITDA for the full year of 2017.
Q4's positive adjusted EBITDA of over $200,000 was fueled by a terrific performance in North America or quarterly sales orders increased by over 40% on a year-over-year basis. As will be detailed later in the call, the sales orders associated with our international operations lagged in Q4. However as of today, the indications we see international operations point to positive sales growth for 2017. This is in addition to North America's continuing positive sales growth trajectory.
Now for some details. For the full year 2016 adjusted EBITDA improved by over $4 million underlying this profitability was a significant improvement in our gross margin and a measurable strengthening in our balance sheet with the successful rights offerings that generate $4.4 million in cash. This $4.4 million fusion of cash positions us well to advance and accelerate our growth strategy in 2017.
On a side note, our rights offering oversubscribed. Our two largest shareholders owning more than 50% of the Company's outstanding stock, actively participated in the offering. Also myself and our CFO, Jana Bell both brought shares in the recent rights offering.
Finally as of today, the Company is debt free with no borrowing from our line of credit. During the fourth quarter we delivered sequential revenue growth in the second consecutive quarter of positive adjusted EBITDA but more importantly we demonstrated traction in each of our strategic growth areas including substantial sales order growth in, one, our largest customers, two, our supply chain sector, three, our new channel partner Airbus and four, with a great start from our newly launched products RMG MAX.
The tenants of our launch from strategic plan of working and I would like to review a few of the core components that illustrate our progress. First is a continuing strengthening of our core North America business. As you recall the U.S. is represented over 65% of our global revenues. Accordingly we have focused substantial energies in this area by rebuilding our sales leadership, rebuilding our sales team members and adding many new processes. Today I can report that these efforts have proven to be fruitful as in 2016 the North America sales team not only delivered positive year-over-year sales order growth in every quarter of 2016, they also achieved more than 25% year-over-year increase in sales for the full year.
Further the productivity per rep increased 30% in 2016 over 2015. Additionally the average size of deals closed increased by over 50% in Q4 2016 versus 2015. Finally during the fourth quarter, the North American sales organization closed eight deals each over $200,000 versus only one deal over 200,000 in the fourth quarter of last year.
These were significant milestones for the Company and milestone that clearly demonstrate the efforts to turn around North American sales organization of paying off. I'm extremely pleased with the progress our team is delivered and believe we now have solid foundation from which we can leverage and grow further in 2017 and beyond.
Our North American revenue was up on a year-over-year basis both during the fourth quarter and the full year our international revenues continued to be down impacted by the negative currency impact of the weaker British pound and weakness in the Middle East due to sustained low oil prices. However in early 2017 we are beginning to experience a pick-up in client activity which gives us confidence that we will see improvement in both Eurasia and the Middle East in 2017. We remain optimistic on the long-term outlook for international markets given our strong pipeline and key partnerships in the region.
The second area I'm highlighting is the customer progress we achieved in advancing our supply chain solution area in the fourth quarter. As we discussed in previous calls, our strategy to penetrate this segment has included developing a robust solution establishing RMG's industry expertise and credibility, building a significant sales pipeline, converting the sales pipeline to paid pilots, and finally converting these pilots to large customer roll-outs.
During the fourth quarter we made progress in each of these areas. Our sales pipeline now stands at over 150 opportunities and most noteworthy our pilot programs have advanced nicely. To illustrate the progress further, I want to highlight one particular customer situation.
The customer, a global manufacturing company initially contracted with us to design and install our proprietary visual supply chain solution featuring an innovative internal communication software platform and one of their main distribution centers with the goal to enhance this productivity. The results of this pilot were meaningful. Our customer saw improvement in employee productivity due to an increase in the flow and timely and critical information to the employees.
Based on this success, the customers are now beginning to implement our solution in an additional facility. We received the first rollout order for this additional facility with $250,000 contract during the fourth quarter of 2016. This is significant milestone for us and just the first stage what has the potential I think a major company-wide rollout with the possibility of dozens of locations implementing the RMG's supply chain solution worldwide in 2017 and 2018 and beyond. Each of our current supply chain pilot programs has the potential to be $1 million or more and we are increasingly confident in the rollout of these programs in 2017 and the years beyond.
The third area I'm highlighting is the extension and recent impact of our new partner [indiscernible]. As we have discussed in our past several calls, we have elected to incorporate the key strategy to accelerate the growth of our revenues by establishing and leveraging strategic partners to promote and sell our products. Using this third-party sales channel is an ideal conduit to promote faster revenue growth without a proportionate increase in sales costs.
During the fourth quarter we made progress with each of our very key partners all of which are established industry leaders in our key solution areas. Let me first provide an update on our partnership with Airbus DS Communications, the leader in 911 call handling systems in the United States. The partnership has enabled Airbus to integrate RMG's visual communication solution with real-time display into Airbus's next generation 911 software system.
During the fourth quarter before the official formal launch in general sales kick-off that was planned to occur in Q1 2017, we generated over $100,000 in sales of Airbus. As Airbus officially launched its VESTA next generation 911 system earlier in Q1 2017, we expect to see significant results this year with the partnership. We see the potential to scale this relationship and penetrate many of the 2800 Airbus customers. I look forward to the opportunity this partner provides for the immediate and foreseeable future.
I'm also quite pleased with our partnership with Ragan Communications, the nation's leading internal corporate communication consulting company providing services in support of employ communications. Ragan has established presence in internal communication market, a strong reputation and a wide reach and they have given us the platform to speak directly to a wider cross-section of potential customers which is ultimately accelerate sales.
In just a few short months, we've reached more than 200,000 companies and have more than 20 active and promising leads. These leads will take time to move to our traditional sales cycle so we don't expect to begin seeing an immediate impact on our sales for that couldn't be any more optimistic with the progress we've made thus far.
And finally Manhattan Associates, one of the leading global providers of software solutions designed to manage supply chain, distribution inventory systems. During the fourth quarter, we continue to make forward progress with the partnership formalizing joint sales plan and providing additional webinars and sales training. We continue to build more joint leads and look forward to capturing the momentum we are generating. As we continue to move this partnership forward, we expect sales opportunities with Manhattan to follow in typical sales cycles and believe we will be seeing our sales of Manhattan ramp-up throughout the year.
The fourth year is the traction we are staying with a newly launched product RMG MAX and INVIEW Mobile. I want to briefly update you on RMG MAX product which - as we discussed in our last call is a flexible large LED display solution for indoor and outdoor market applications that merits RMG's state-of-the-art visual communication solution with new cutting-edge LED panel technology. We have received positive reception from customers with the RMG MAX product and since introducing this products just a few short months ago, we have already closed the first sale of a custom RMG MAX solution and are working to deliver and install it for our customer within the next few weeks.
Because of the very large size of the RMG LED screens, the average order size beyond this category will often be larger than other average RMG deals. We believe we have an excellent opportunity to attract interest in RMG MAX from our current customers, many of whom are already providing - many of whom we are already providing other digital signage solutions too. Additionally there is significant opportunity just to penetrate new perspective customers too. Overall this is a rich potential greenfield for us to attack.
Further as you remember, during the third quarter we released a major upgrade to our INVIEW family of products with INVIEW Mobile. The enhanced functionality operating INVIEW Mobile is a major enhancement and during the fourth quarter we received initial orders to begin upgrading INVIEW customers to the enhanced mobile product. We are starting with these initial orders and are looking forward to operating a global INVIEW customer base.
In summary, I am more excited about RMG's prospects than I have ever been. We are making tangible progress in a key strategic initiatives which translated to improved financial performance in 2016. We enter 2017 in a strongest strategic position RMG has been in since going public and I’m increasingly confident that RMG now has the right sales organization, the ideal partners and a comprehensive suite of offerings that will allow us to deliver profitable growth for the full year and 2017.
I’ll now turn the call over to Jana to discuss our fourth quarter and full year financial performance in more detail. Jana?
Jana Ahlfinger Bell
Thank you, Bob, and good morning everyone.
Our fourth quarter financial result reflects improvement in our two key financial metrics, healthy revenue growth over the third quarter of 2016 and an increase in positive adjusted EBITDA. For the fourth quarter of 2016 total revenues of $10.7 million increased from $9.5 million in the third quarter of 2016.
Total revenue declined 9% from $11.8 million in the same quarter last year resulting from the revenue declines in our international businesses that Bob just discussed. Specifically, our Middle East revenues were down $2.4 million as compared to the fourth quarter of 2015.
Product revenue of $5.2 million increased 24% from the $4.2 million in the third quarter of 2016 resulting primarily from strong sales performance and larger deals in North America. Maintenance and content services revenue of $3.4 million declined slightly from $3.5 million in the third quarter of 2016. And professional services revenue of $2.1 million increased 16% from $1.8 million in the third quarter of 2016 resulting primarily from order growth and mix.
Gross margins of 55.7% decline from 53.6% in the third quarter of 2016 resulting from typical seasonal revenue mix, as well as a combination of non-recurring credits received in the third quarter of 2016 related to the product and maintenance cost from a component manufacturer and resolution of a vendor billing matter that impacted our third quarter gross margins by 3.5 percentage points.
Total operating expenses were $6.6 million a 4% decrease from $6.9 million in the third quarter of 2016 resulting primarily from a reduction in professional fees and depreciation and amortization expenses.
Our GAAP loss from continuing operations of $1 million compared to a loss of $0.9 million in the third quarter of 2016. On a non-GAAP basis positive adjusted EBTIDA 223,000 improved from 85,000 in the third quarter of 2016. We define adjusted EBITDA income or loss from continuing operation with adjustments for our interest expense and other income, income tax loss from a change on warrant liability, depreciation and amortization expenses and stock based compensation expense.
Turning now to the full year results. Total revenue of $37.6 million declined 7% from $40.6 million in the prior year due to lower international revenues. Product revenues of $16.2 million declined 9% from $17.9 million in 2015 resulting primarily from the lower sales orders in the Middle East and the negative currency impact from the weaker British Pound. Maintenance and content services of $13.9 million increased 2% from $13.6 million in 2015 resulting primarily from various maintenance renewal initiatives implemented in 2016.
Professional services revenue of $7.5 million declined 19% from $9.2 million in 2015 resulting primarily from installation services performed in the first quarter of 2015 associated with the sale of large customer solution made during the fourth quarter of 2014.
Gross margin of 58.8% increased from 55.5% in 2015 primarily from improved product mix, lower headcount, proprietary hardware and warehousing and distribution cost. Total operating expenses were $26.7 million, a $5.6 million or 17% decrease from $32.3 million in 2015 resulting primarily from cost reduction plans implemented during 2015 and the continued focus throughout 2016 on cost control or cost through organization.
Our GAAP loss from continuing operations of $4.5 million significantly reduced from a loss of - primarily from our lower operating expenses. On a non-GAAP basis adjusted EBITDA loss of $0.6 million significantly reduced from $4.9 million in 2015.
From the balance sheet and liquidity standpoint in December we completed the successful over subscriber offering related private placement associated with the backstop agreement. The Company issued an aggregate of approximately $7.7 million shares of common stock at a price of $0.62 per share for gross proceeds of approximately $4.8 million.
After transaction expenses of approximately 400,000, the Company received net cash proceeds of approximately $4.4 million. We are pleased with the support from our existing shareholder base which drove the offering to the oversubscribed and allows us to raise the maximum amount avail.
At year end we had $5.1 million in cash and cash equivalents which included the proceeds from the capital raise and $1.3 million in borrowings under our revolving line of credit. Subsequent to year end, we used our cash on hand to pay off the outstanding balance under the line of credit. And finally, we entered into an amendment with our revolving line of credit and modifying effective January 2017 the minimum amount of adjusted EBITDA that we are required to maintain in 2017 pursuant to a covenant contained in our loan agreement.
Other than this one change, the amendment does not modify the terms of the loan agreement. As of the date of the amendment, we do not have any outstanding borrowings under the line of credit and we expect to use the line of credit to manage working capital in the future as needed.
Overall we finished the year in a much stronger financial position that will allow the company to pursue our strategic top line growth and investments in our technology roadmap.
Bob, I'll turn the call back over to you.
We are making steady and continuing progress against our strategic plan. We remain optimistic about our growth prospects and believe we are well positioned to increase annual revenues year-over-year and achieve positive adjusted EBITDA on an annual basis in 2017. We have committed to investing in our products, advancing our technological roadmap, improving our business efficiency, generating ROI for our customers and achieving long-term growth and shareholder value. We have established the track record of continued measurable progress and improvement in our financial results. We expect these results and trends to continue.
With that I would now like to turn the call over to the operator for Q&A.
[Operator Instructions] The first question is from William Gibson of ROTH Capital Partners. Your line is open.
Thank you. Hi Bob, you talked about Middle East sales in the U.K. and Europe picking up in the first quarter, are these new customers or is it old customers coming back or what's driving that?
It's a great question, let's break it into the two categories starting off with the Middle East and as we recall we look at 2016 where North America had performed well and the biggest negative impact on revenues was the Middle East and the question we certainly ask ourselves and U.S. shareholders to be asking us is what's going on in the Middle East.
We have seen a turnaround, I can tell you that obviously we have a plan for every quarter, for each of our geographies and our plan for Q1 for the Middle East we have already completed contractually all the sales required to hit our number for Q1 in the Middle East and that is a dramatic change from 2016 and specifically answering your question at least from credit customers or new customers, it is a combination I will tell you one of the things that has kind of driven a lot of the growth though is our new product MAX and the single largest order that we're expecting in this quarter to still come hopefully make it better is from a new customer. However the bulk of the growth in the Middle East has been from current customers who have added to what they have been doing with customer past.
In Europe, we see a similar rebound in revenues for Q1. I can't say we have totally completed our sales required for the first quarter nor would I expect in our business by two-thirds to the quarter to really finalize anything, I think the Middle East was a bit of an outlier hopefully we will continue seeing that.
But we are positive about the activity in Europe and the business there is generally all from current customers. However we have two in particular new customer projects that we help to close in the near term, I think it's a very nice balance.
Good. And then just one follow up on the channel strategy and the momentum there, do you expect it to be material in 2017 and by that I mean a contribution of over say 10% of revenue?
I would expect to be certainly in that ballpark and obviously we've gone after these growth strategies and a leadership team we are only going after those strategies that we think could each individually generally $10 million of revenue for us - we are not suggesting, we are doing that in this 2017 so, I don’t want to mislead anyone but we think each of these things can be really significant for us.
Good, thank you.
[Operator Instructions] The next question is from Eric Gomberg of Dane Capital. Your line is open.
Thank you. Good morning guys. It sounds like from the last question Middle East and Europe have picked up, is it fair to assume that U.S. is staying on trend in Q1 and that generally unless something goes quarterly in the next month this quarter should be at least seasonal.
Okay, that's good to hear. Kind of bigger picture question, obviously you have all this channel relationships some of the headwinds of last year it sound like it could become tailwinds this year, new product and in terms of - if you have evidence with the pilot program going to volume is there where you can quantify kind of what the sales funnel today looks like versus what it looked like 12 months ago today.
Yes, I mean clearly the - our pipeline is certainly a big driver that Jana and I look at quite regularly and challenge the teams and certainly if they’re not where they need to be we provide whatever guidance is necessary. As we look at the pipeline - this kind of pops some of these numbers that I have here, I think they are probably three things that we look at pipeline. One is the overall size of the pipe and as we look at first quarter of 2017 compared to the pipeline of 2016 it is similar time, it's up about 20%.
Second thing we look at, you heard us talk about we're focusing on larger deals and plus larger deals on our opportunities that are $0.5 million and more and the count, so the number of those opportunities are up by about a third which is great.
And the final thing we look at is, as you see average deal size in dollars mix of 17%. So all of the attributes of a pipeline have the errors pointed up in the green which gives us the confidence as we look toward 2017.
And just could you talk a little bit about RMG MAX what - how to think about what the size of that opportunity is not necessarily in 2017 but just overtime is it all that can be?
Well, it’s interesting what MAX is the state-of-the-art LED screen and we think of these as not just screen that we have done traditionally which tend to be may be two, three foot by two foot screens but much bigger ones that you would see in a lobby of a corporate headquarters for the sports facility or on a big retail setting and we have not been in that sector and but our customers buy those products and they need our software to drive those.
So in many cases our software are driving these screens that we haven't been selling and as we look at the overall market for a digital signage the fastest growing segment at a CAGR in excess of 10% is our large LED screens. It is clearly a $1 billion industry and we just want to get our fair share.
When we sent our press release and sent out notes to our current customers where we think the low hanging fruit is, we were presently, surprise is the right word but we had a number of responses from customers - we didn’t know you are in their business, we were getting ready to go buy something and coming talk to us.
And not in all cases but in many cases individual large LED screen could be $300,000, $400,000 $500,000. And so we have a number of these opportunities and going on with our current customers however we are not satisfied with saying, we're just going to our current customers, it's an opportunity for us to penetrate new customers.
So from a quantification standpoint, Eric, I don't have a specific number of what we are aiming for. However, I think the feeling is really high in this space. And the beauty of it is not only what allow us to generate revenue, it allow us to get into customer that we maybe would not have gotten into and we are also selling our digital signage software, and our media players and opening the doors to do another thing. So it's a really good introductory tool to grow our business.
Okay. Thanks for that, and sorry for hocking the call, but one last question if I could. Obviously, last year the number of partnership you introduced RMG MAX and INVIEW Mobile, I’m just wondering - I think the press release talks about continuing investment. Are you kind of in harvest mode with the things from last year? Or if we look at six months or 12 months, is there R&D going on where we could expect continued innovation from RMG where we may see new products or technologies that impact '18, '19 and beyond?
I love the strategic question because we simply spent a lot of time thinking about that. When I came onboard, one of the first things I said is, I wanted RMG to be a company of innovation. Customers align with and stay with companies if they perceive the providing advancements to help them be more successful. And in that pursuit, we needed two things. We needed to have a strategic vision, and then we needed to have somebody who is going to take that vision and create a roadmap and deliver against it.
And it’s been now about eight months since we brought onboard George Clopp as our CTO. And just to refresh everyone’s memory, George came from a company called Epsilon which is a $2 billion company, and they're smack at the intersection of data and analytics software and marketing systems and they have built, and they are probably the leading company worldwide on these advanced data analytics software systems for some of the best brands.
And we brought him in here to help us provide something for our customers which we think will differentiate us big time long term, and that is we are not only providing the plumbing and the software but rather we want to work with our customers so they can see how successful their communications are both the internal employees to employees open up, do they read, do they react to into communication and to retail customers, do individual customers buy things. And with data analytics, you can provide data back to our customers saying, this message reached this audience, it had this open rate, it had this results.
And to the best of my knowledge, there's nobody that has really married data analytics with digital signage. And so we are designing and building, we think some pretty interesting capabilities in that space. George also has a terrific background in developing systems in the SaaS world up in the cloud.
So we are very busy with innovation, and we expect to be in a position where we are going to be leading the industry. And it's really been a number years probably, at least 5 if not 10 years where the industry has perceived RMG as the innovation leader in digital signage software. And we are absolutely focused on that. We've got the leader in George to pull it off. And we’re not going to reveal our roadmap or any of our milestones but I can confidently tell you we have a really terrific player in place and I'm very satisfied with the progress we’ve made. Albeit, I think with a very effective use of budge because we strictly haven't seen a spike in our operating cost as we have been pursuing this strategy.
It’s very helpful. Thank you so much.
Thank you. And there are no further questions in queue at this time.
Operator, thank you. And before we wrap-up, I want to thank everyone for your continuing support both in the rights offering and participating in this call. I think this was - since I've been here 2.5 years as maybe my 10th call, and as I reflect upon the last 2.5 years and writing this script for today, it probably wasn't any more of a pleasant time that I’ve had and I was talking to my wife last night, and she said, you don't feel stressed out as you always do before these calls. And I said, well, I think we have a lot of fun things to talk about, and a lot of what we’ve built is coming to fruition.
So I am excited about the future and thank you guys for participating in the call today.
Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect. Good day.
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