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8-K - WORLDGATE COMMUNICATIONS INC | v195137_8-k.htm |
EX-99.2 - WORLDGATE COMMUNICATIONS INC | v195137_ex99-2.htm |
WorldGate’s Second Quarter
2010 Earnings Conference Call
George’s
Introduction
Hello
everyone and welcome to WorldGate’s second quarter 2010 earnings conference
call. As a reminder, today’s call is being
recorded. On the call with me today is Chris Vitale, our Senior Vice
President and General Counsel, Joel Boyarski, our principal accounting and
financial officer and Jim Dole, our new Chief Financial Officer.
First let
me introduce Chris.
Chris
Vitale
Thank
you, George. Hello everyone.
WorldGate
intends to utilize the Safe Harbor provisions of the United States Private
Securities Litigation Reform Act of 1995 with respect to the forward-looking
statements made during this presentation. The forward-looking statements include
statements regarding WorldGate's operating strategy going forward. These
statements are based on WorldGate's current expectations and are subject to
risks and uncertainties set forth in WorldGate's 2009 Annual Report on Form
10-K. As a result, WorldGate's actual results could differ materially
from these statements. This presentation is being made on the 24th of August,
2010. The content of this presentation contains time-sensitive
information that is accurate only as of the time hereof. If any portion of this
presentation is rebroadcast, retransmitted or redistributed at a later date,
WorldGate will not be reviewing or updating the material that is contained
herein.
George
Thank
you, Chris.
I’d like
to start the call off with some very exciting news. Earlier today we
received official notice from ACN that our new Ojo Vision Digital Video Phone
has passed their network certification and technical acceptance
process. What makes this especially significant is that this
acceptance formally fulfills the last remaining condition to ACN’s agreement to
purchase a minimum of 300,000 Ojo Vision Video Phones. Already, we
have shipped more than $7.8 million Ojo Vision Video Phones to ACN in the second
quarter, and they continue to order and we continue to produce and ship
thousands of new video phones for them monthly. To the best of my
knowledge and the knowledge of everyone involved in our two companies, this is
the largest agreement for the purchase of video phones in the
world. For WorldGate and indeed for video telephony in the
telecommunications industry, this represents an important
milestone. We’ll be going into more detail on this and the other
positive impacts that result from this certification throughout today’s
call.
Now let’s
transition to the financial results portion of our call and take a few moments
to review a couple of changes we made in our finance team last
month. We announced that our CFO, Mr. Joel Boyarski, would be
retiring from WorldGate at the end of October, and at the same time announced
our new CFO, Mr. Jim Dole. During this transition period, Joel has
remained very active as our principal accounting officer and principal financial
officer and is now serving in a senior advisory role until his
retirement.
I want to
express our company’s very sincere appreciation to Joel for his service, his
many contributions, and his personal commitment to the success of WorldGate over
the past decade. Joel has been an important member of the senior
management team and was instrumental in leading WorldGate’s financial
operations. Joel, I know this is your last conference call with
WorldGate and I’d like to give you a moment to say a few words.
Joel
George
Joel,
again thank you very much and we all wish you the very best.
Now I am
going to turn the call over to our new Chief Financial Officer, Jim
Dole. It was clear to us that Jim’s extensive telecom service
industry experience with more than 25 years of strategic planning, mergers and
acquisitions, business development, financial management and capital markets
experience, combined with his success as an enterprising, forward-thinking,
results-driven entrepreneur, made him the ideal Chief Financial Officer for
WorldGate.
I have
asked him to share with you his thoughts on why he joined our company, and to
then review the second quarter financial
results. Jim…….
Jim
Thank you
George for the introduction.
Good
afternoon everyone. I wanted to begin my comments by mentioning how
pleased I am to be joining WorldGate. I’m excited to be involved in a
company that is well positioned to take advantage of what looks to me as an
exploding market for video applications. I couldn’t be happier in
working with George and the rest of the great team at WorldGate to help grow the
company in this dynamic environment.
What I
would like to discuss today is our 2nd quarter
2010 financial results and briefly highlight the impact of new product shipments
on the June 30 balance sheet and the impact of the subsequent certification of
the phones by ACN will have on our financial statements. Lastly I
will discuss the increase in the WGI revolving loan agreement that took place
several days ago.
2010
Financials
Let me
start with a review of the financial results. The company has been
hard at work this last year developing and refining its newest voice and video
product and service offerings which, as you will hear about today, is now being
actively rolled out to market. As we walk through the financials I
will point out some of the impacts of these development efforts.
Revenue
for the quarter ended June 30, 2010 were $124 thousand reflecting a decrease of
13% when compared to 2009’s second quarter results and a sequential decline over
the first quarter of 2010 of 57% . The decline in revenue is
primarily attributable to decreased shipments of our legacy phones as we
reposition to sell our new products.
Gross
margin in the second quarter were $92 thousand reflecting a 33% decrease when
compared to 2009’s second quarter results and a 16% sequential decline versus
the first quarter of 2010. The decrease in gross margin is primarily
attributable to the decline in the revenue previously discussed.
Operating
expenses for the quarter ended June 30, 2010 were approximately $2.8 million
reflecting a 12% increase when compared to the second quarter of 2009 and a 1.8%
decrease versus the operating expenditures reported in the first quarter of
2010. The increase in operating expense versus 2009 reflects
increased staffing, especially in our engineering and sales functions, as we
invest in completing development of our new products and continue to build our
sales distribution capabilities. The 1.8% decrease from first quarter
to the second quarter reflects continued investment in our sales capabilities
offset by a decrease in General and Administrative staffing and
expense.
The net
loss for the period ending June 30, 2010 was approximately $3 million compared
to a loss in the second quarter of 2009 of approximately $4.3 million and a loss
of approximately $2.8 million in the first quarter of 2010.
Cash at
the end of the quarter was approximately $630 thousand and the revolving loan
balance was $2 million.
Certification
Let me
now turn to the news regarding the shipping of the new phone and how the recent
formal product acceptance will impact the financial statements. WorldGate began
shipping the new phone to ACN in May and shipped $7.8 million of units during
the 2nd
quarter. No revenue was recognized in the 2nd quarter
related to the shipment of phones as ACN had not yet indicated acceptance of the
product in accordance with the terms of the Master Purchase
Agreement. Instead, WorldGate recorded approximately $7.8 million of
deferred revenue related to the shipments.
Now that
ACN has indicated full product acceptance we will begin to recognize revenue
immediately upon future shipments of phones to ACN. Likewise the $7.8
million in deferred revenue from the 2nd quarter
shipments and the associated costs will flow through the 3rd quarter
income statement. The product acceptance also will trigger the
revenue recognition of $1.2 million in software development funds which was also
included on the balance sheet in deferred revenue at the end of the 2nd
quarter.
Revenue
generated from sales to ACN will be reduced to reflect the fair value of the ACN
2009 Warrant and ACN 2010 Warrant earned through the shipment and acceptance of
phones to ACN. The pro rata value of the warrants earned in relation
to the units shipped in the 2nd quarter
was approximately $2.8M.
Liquidity
I would
now like to review a recent step we have taken to improve our liquidity to help
support our transition efforts as we introduce the new products.
On August
11, 2010 WGI Investor LLC agreed to increase the revolving line of credit by $2
million, bringing the total commitment to $7 million. In addition,
the master purchase agreement as amended on March 30, 2010 provided two other
initiatives that assist in funding the Company. The amendments
included:
1.
|
ACN
will pay WorldGate 50% of the purchase price for video phones ordered five
weeks in advance of delivery of the phones to ACN. The
remaining 50% of the purchase price will be paid upon
delivery.
|
2.
|
ACN
was to have begun to order up to 80 thousand video phones as soon as
practicable after we provided a demonstration of a working video
phone.
|
As I
stated earlier, ACN began to order phones in May of this year. Now
with the final acceptance of the video phone in hand, ACN is obligated to
purchase the remaining balance of its 300,000 phone commitment.
We feel
the increase in the line to $7 million along with the other funding initiatives,
including the ongoing profits from sales to ACN as they purchase the balance of
300,000 video phones not yet shipped at the end of the 2nd
Quarter, the advance payment terms provided by ACN as they order phones, and
potential sales from other distribution channels we are developing provide us
with the financial foundation necessary to begin to grow the
company.
As a
matter of course, we continually evaluate our business, our various options to
drive growth and consider where we need to make additional
investments. So while we believe we have sufficient funding to run
the business today, we continue to evaluate the needs and opportunities of our
business plan and the funding support they require.
We also
view the potential of a reverse stock split discussed on the last call and 2010
1st
quarter 10-Q through the same lens. Our execution of a reverse stock
split will depend on when we believe it will contribute most to the
business. At this point, we haven’t believed the timing is right to
execute a stock split and we will continue to evaluate the potential as we move
forward in implementing our business plan.
With that
I would now like to turn the call back over to George.
George
Thank
you, Jim.
Since our
last call a few months ago, we are seeing a significant acceleration in the
industry and market activity for video communications. Recent
announcements from equipment providers like Polycom, Cisco and most recently
Apple’s Face-Time mobile-to-mobile video calling launch, with expected coming
soon announcements from several other mobile providers, all clearly reflect the
increasing demand and importance of real-time video communications in our
everyday lives. Higher speed fixed and wireless broadband networks,
increases in digital telephony subscribers and business and residential
consumers are all driving forces behind the coming growth in the video
communications market. A market that I believe is already proven and
clearly on the move, but one that is still in the early adaptor
stage.
And now
with the certification and successful deployment in volume of our new Ojo Vision
Digital Video Phone by ACN and the imminent launch of our own Ojo Services
Digital Phone Service using our new Ojo Vision Digital Video Phone, WorldGate
has entered a new phase in the history of our company.
Let me
now share with you a quick update on our business progress.
Next Generation Digital
Video Phone Platform
First and
foremost is the development and deployment of our new video hardware and
software platform and our new Ojo Vision Digital Video Phone. As
mentioned earlier, today we received official certification and technical
acceptance from ACN. ACN has been a true partner in the development
and testing of our new Ojo Vision Digital Video Phone and we look forward to a
wonderful and growing relationship.
While we
are very pleased with the acceptance by ACN, we do recognize this acceptance is
approximately two months later than we had planned. This is because
we are committed to delivering only the highest quality, true-to-life video
communications experience possible. Further, the immediate roll-out of this
product to the extensive existing base of ACN customers required the absolute
highest standards of robustness to the widely varying network and bandwidth
conditions found in people’s homes. Observing the initial deployments of the
tens of thousands of units we’ve already shipped to ACN, I believe that this
additional effort has produced not only a successful and smooth introduction for
ACN but has resulted in taking the video quality and end user experience to a
new level.
In
addition to finalizing and launching ACN’s branded version of our new Ojo Vision
Digital Video Phone, which they market under their brand as the IRIS V Video
Phone, we also finalized, moved into production and started shipping the Ojo
Vision Digital Video Phone to our current Ojo Services partners and their
customers just last week. Please go to www.ojophone.com to
learn more about our various service offerings featuring our new video
phone.
As you
can imagine, many of our current and prospective Agent, Wholesale and OEM
partners have been waiting for the delivery of our new Ojo Vision Digital Video
Phone. And now that we have that in hand, here is how we are we are
moving forward with them.
First our
OEM prospects - Within the next couple of weeks, we will complete the software
development necessary to open-up the software of our Ojo Vision Digital Video
Phones to OEM providers, allowing them to easily configure and provision our
video phone based on their unique network requirements. Beginning
with our current list of prospects, this allows us to start working with
potential OEM partners in their own labs on their evaluation of our new Ojo
Vision video phone. As you can imagine, each engagement is
technically intensive and varies significantly in terms of both scope and
complexity. Depending on each prospective partner’s evaluation
process, product planning calendars and go-to-market approaches, a successful
implementation will take from three months to as long as a year.
For our
Agent and Wholesale prospects, in addition to preparing the video phone, we also
began to prepare our “Turn-Key” Digital Voice and Video Phone Services
platform. We turned up the first couple of our Agent partners earlier
this year on our new services platform using an existing 3rd party
video phone called the Iris 3000. This allowed us to test and
exercise our new platform and all of the associated ordering, provisioning,
billing, network and customer care systems in a closely monitored production
environment. And as we neared the launch of our new video phone, we
updated all of our systems and made the necessary changes to be
ready. And on Monday of last week we successfully completed the
integration and launched our new Ojo Vision Digital Video Phone with our new Ojo
Services “Turn-Key” Digital Voice and Video Phone Services. This has
also allowed us to start shipping Ojo Vision Digital Video Phones to our
prospects for their evaluations. Our challenge in this agent market
align well with the traditional pros and cons of indirect sales channels: they
are an efficient way to reach a large market without large upfront investment
but require time to recruit, train, and become productive especially in a new
market category. And much like our OEM partner prospects, a successful
evaluation and implementation with our Agent and Wholesale prospects will take
from three to nine months depending on the their unique go-to-market
requirements.
As you
can see we have been busy preparing for our launch. And starting in
early September, after Labor Day, you’ll see the official Ojo Vision Digital
Video Phone “General Availability Announcement” press release. This
will also mark the beginning of our ongoing PR program to communicate our
differentiated and compelling video communication service
offerings.
Helping
to pull everything together as we expand our market presence, our sales and
distribution channels and our technological leadership, we announced our new
brand strategy and new corporate website earlier this month.
Going
forward, WorldGate is the holding company while our brand in the marketplace
will be “Ojo”. WorldGate itself will be organized into two divisions: Ojo Labs
and Ojo Services.
·
|
Ojo
Labs designs and develops innovative digital video phones featuring high
quality, real-time, two-way video.
|
·
|
Ojo
Services provides a turn-key communication services platform supplying
complete back-end support services with best-in-class customer
service.
|
·
|
Ojo
Labs, Ojo Services, Ojo Vision, Ojo Pro Vision, Ojo Video and Ojo Quality
are current brand names that you’ll be seeing at different times in the
market.
|
We are
also starting to leverage Twitter, Facebook and soon You Tube to help us promote
Ojo and video telephony. Please see all of this and more by
going to www.ojoservices.com.
Summary
I’d like
to close my prepared remarks by reviewing some of the key take-away
points:
·
|
Our
financial foundation continues to get
stronger.
|
·
|
We
have certification from our largest customer, ACN, and have shipped and
continue to ship to them thousands of new video phones
monthly.
|
·
|
Having
received this certification from ACN’s OEM agreement, we launched our own
next generation Ojo Vision Digital Video Phone and started shipping our
new Ojo Vision Digital Video Phone to our customers as part of our newly
updated Turn-Key Digital Video Phone Services
platform.
|
·
|
We
launched our new corporate and Ojo Services websites at www.ojophone.com
and www.ojoservices.com
and have started our new market awareness PR
program.
|
·
|
We
kicked off customer evaluations of our new video phone with some of our
prospective Agent and Wholesale customers and will be working with them
towards successful market implementations over the coming months and
quarters.
|
·
|
Over
the next couple of weeks we will complete the software development for our
OEM evaluation program and will begin working with an existing and
pre-qualified list of OEM prospects on their technical lab
evaluations.
|
As you
can see, we’ve achieved a significant milestone in the completion of the
certification and multi-million dollar initial shipments to ACN and are now
transitioning to our post-launch sales and marketing
activities. Having in hand our new product successfully deployed into
a major partner’s customer base in high volume and the network service
infrastructure we’ve built, I’m eager to take on the challenge of building
additional robust partnerships from the list of sales prospects we’ve already
engaged this year as well as future ones
At this
point I am going to ask the operator to come back and help us as we open the
call for Questions and Answers.