deltathree, Inc. (OTCPK:DDDC) Q2 2008 Earnings Call August 14, 2008 10:00 AM ET
Peter Friedman - General Counsel and Secretary
Dror Gonen - President and Chief Executive Officer
Richard B. Grant - Chief Financial Officer and Treasurer
Welcome to the deltathree second quarter 2008 conference call. (Operator Instructions) I would now like to turn the conference over to our host, Peter Friedman of deltathree.
I would like to welcome you all to the deltathree second quarter 2008 conference call to discuss the company’s operational and financial results for the quarter ended June 30, 2008. Joining me on today’s teleconference is Dror Gonen, deltathree’s Chief Executive Officer and President, and Richard Grant, deltathree’s Chief Financial Officer and Treasurer.
I would also like to remind participants that today’s earnings call is also being webcast live and a replay of this call will be available online, both at deltathree’s corporate website at www.deltathree.com.
Before proceeding, a brief Safe Harbor Statement, except for historical matters discussed herein, the matters discussed on today’s conference call include forward-looking statements and are made expressly pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.
Investors are cautioned that these forward-looking statements reflect numerous assumptions and involve risks and uncertainties that may affect deltathree’s business and prospects and cause actual results to differ materially from these forward-looking statements. A discussion of factors that may affect future results is contained in deltathree’s filings with the Securities and Exchange Commission, which are available on the Internet at www.sec.gov and the deltathree corporate website.
All such forward-looking statements are current only as of the date on which such statements were made. Except as required under US Federal Securities laws and the rules and regulations of the SEC, deltathree does not have any obligation or intention to update publicly any forward-looking statements after this conference call, whether as a result of new information, future events, changes in assumptions or otherwise.
It is now my pleasure to turn the call over to Dror.
And thank you all for joining me today as I have my first opportunity to host the quarterly conference call and report to you all on our operational and financial activities since assuming the role of CEO and President of deltathree just a few short months ago.
Since joining deltathree, my focus has been on analyzing the company’s business, its strategic focus, and its operating structure in order to stabilize the core business and ultimately position the company for success in the global market of VoIP services.
Following my review, and in conjunction with Board of Directors’ review of company strategy, new team initiative, we have taken definitive steps to restructure, streamline and stabilize the business. This process has involved much change and while some of the changes have involved difficult decisions, such as reduction in headcount, they are the right changes and necessary changes to help ensure we proceed on a path most beneficial to deltathree’s long-term success.
We have already seen some initial signs of stabilization, as exhibited by second quarter sequential revenue and adjusted EBITDA results. In large part, based on the actions we have taken to date, I believe the changes which we are implementing are positive for the company’s near-term and long-term positioning and will further our primary objective of stabilizing the business.
Let me take a moment and outline our key fiscal objectives looking forward, which include first refocusing and reinvesting in our global reseller business, as we view this part of our core business as one of the most attractive segments of the global voice communications market. While we enhance our reseller offerings and deploy new applications based on our customers’ physical needs, such as enhanced product solutions, we are also continuing to support our service provider, consumer and joint customers.
Second, we are placing an enhanced focus on what we view as higher growth international VoIP markets. These markets include the regions such as the Middle East, Africa, Asia and Latin America. Supporting this enhanced international support, we are also realigning our sales force to focus on local market sale representatives to accelerate our efforts with local, on-the-ground expertise and reach.
Third, we are further reducing our operating expense structure and improving our quarterly operating cash flow. Specifically, from the beginning of 2008 until today, we have reduced the number of our full-time employees from approximately 120 to 42. In addition, we have recently completed the sublease of our New York offices to a third party.
These near-term objectives are center to our goal of returning the company to generating positive cash flow from operation, which we believe will then provide a solid platform for deltathree to test complementary areas of the VoIP market.
With that broader perspective in place, I will stress that we are very much focused on the first phase of our strategic objective and are also currently reviewing a range of alternatives with regard to raising additional capital to provide additional near-term balance sheet flexibility and fund our strategic objective.
We have initiated this process and will report back to you at the appropriate time regarding any development on this front. With our strategic initiative aimed at stabilizing our resellers’ operations already in place, I believe deltathree will be better positioned to more effectively penetrate key segments of the VoIP market and reestablish a long-term growth trajectory.
With that, I would now like to turn the call over to Rich for the financial overview.
I’ll start today’s financial review with a look at our statement of operations. Revenues for the second quarter of 2008 totaled $5.4 million, in line with the $5.4 million reported in the sequential comparison and down from $7.6 million in the second quarter 2007. Service provider and reseller revenues accounted for approximately 85.2% of total revenues during the first quarter, with 13% related to direct-to-consumer VoIP revenues and 1.8% related to other business activities.
Moving on to our gross margin, gross margin for the first quarter 2008 was 25%, a slight drop in sequential comparison of 27% for the first quarter of 2007 and slightly down compared with the gross margin of 27%, again for the second quarter of 2007.
Core operating expenses for the second quarter, excluding costs of revenues in the current quarter, reorganization expense charge, write-down of intangible assets related to Go2Call and a restatement of deferred revenues, totaled $3.1 million, down approximately 20.7% sequentially. Total employees stood at 42 as of quarter end.
As part of our restructuring efforts, we’ve leased our space at 75 Broad Street and have taken a short term lease in Manhattan. Over the next two years based on today’s cost structure will save us approximately $1.5 million in subleasing the space as substantial savings in our restructuring efforts.
Notable expenses occurring in the second quarter of 2008 included a reorganization charge of approximately $585,000, most of which related to the New York office sublease, which we accrued as shortfall between the rental amounts we’re receiving from the sub-tenant and the rental amount we need to pay to the landlord, legal cost and brokerage fees associated with the sublease, in addition to the cost related to the headcount reductions.
Second, we are recording a $75,000 write-down of intangible assets related to our prior acquisition of Go2Call. The write-offs stems from management’s conclusion that we’ll not invest significant resources into a segment of business that the company purchased as part of the Go2Call transaction.
Further restatement charge related to the deferred revenue, where we added additional $396,000 to deferred revenue liability. During the quarter ended March 31, 2008 the company took a $200,000 amount charge in initial estimates to deferred revenue liability.
As part of the continued review of the deferred revenue liability, the company determined the amount was insufficient and should be adjusted for the quarter ended June 30, 2008 by the additional $396,000, putting the total amount of the adjustment for the six months ended June 30, 2008 to $596,000. Management has included that the error in the deferred revenue liabilities is not a result of current operations but rather most likely occurred during the year December 31, 2005 and possibly years prior.
Both included in the general and administrative expense category is approximately $200,000 related to one-time charges to settle the GIPS litigation cost and the consultants that the Board hired. If we aggregate the one-time charges, we see that included in the quarter ended June 30, there was $1.7 million in one-time charges, or we could say that the loss before these charges was approximately $1.5 million.
Looking at the bottom-line, the company reported a second quarter 2008 GAAP net loss of $3.2 million or a loss of $0.10 per diluted share, compared to a GAAP net loss of $1.6 million or loss of $0.05 per diluted share in the second quarter 2007.
Non-GAAP adjusted EBITDA loss for the second quarter of 2008 totaled $1.2 million or $0.04 per share compared to a non-GAAP adjusted EBITDA loss of $900,000 or $0.03 per share for the second quarter of 2007.
deltathree defines adjusted EBITDA as earnings before restructuring costs, restatement of the deferred revenue liability, the write-down of non-cash intangible assets related to the acquisition of the certain assets from Go2Call, non-cash stock-based compensation, interest, taxes, depreciation and amortization. The company uses adjusted EBITDA as a measure of the company’s operating trends. Investors are cautioned that adjusted EBITDA is not a measure of liquidity or of financial performance under GAAP.
The adjusted EBITDA numbers presented may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA, while providing useful information, should not be considered in isolation or as an alternative to any other measures of performance determined in accordance with GAAP, or as an indicator of the company’s operating performance liquidity generated by operating investment in finance activities, as there may be significant factors or trends that it fails to address.
The company cautions non-GAAP financial information, such as adjusted EBITDA, by its nature departs from traditional accounting conventions. Accordingly, it can make it difficult to compare deltathree’s results with the results from other reporting periods with the results with other companies. We have included a reconciliation of net income to adjusted EBITDA in accordance to Regulation G under the US Federal Securities laws in our earnings press release.
Looking at the balance sheet, the company ended this quarter with cash, cash equivalent, short, and long-term investments as well as restricted cash totaling approximately $4.2 million. Net operating activities during the second quarter of 2008 required the use of approximately $1.7 million in cash with short-term investments, down from $2.4 million in the sequential quarter.
As Dror discussed earlier, we are continuing to undertake a range of operational efficiency initiatives aimed at reducing our quarterly cash usage and fixed cost base. Some of which will have an immediate impact on our actions we have taken and should benefit the company in the second half of 2008 and beyond.
One of our key objectives remains a significant reduction in cash utilization that will allow the company to [inaudible] in the short-term. Days sales outstanding at the end of the second quarter 2008 was 16 days, roughly in line with the 15 days at the end of the first quarter of 2008 and in line with our target range.
At this point I would like to turn the call back over to Dror.
In conclusion, when I joined deltathree, I saw an opportunity to work with a talented team of professionals, an impressive portfolio of innovative communication solutions and a technology infrastructure with global scale and reach. Today, while there are clearly some challenges to address along the way, I intend to work toward returning the core business to profitability based an enhanced focus on our current resellers offering while also focusing on operational efficiency and capital liquidity.
In the long-term, I intend to leverage our technology, global market attraction and communications services expertise to penetrate additional attractive segments in the dynamic communications marketplace. Overall, I am confident we can find attractive new niches in the communications market and move successfully towards penetrating them.
I would like to thank everyone for joining Rich, Peter and me today. This concludes today’s call.
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