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EXHIBIT
99.1
WorldGate
Communications, Inc.
Script
for Earnings Conference Call, dated November 16, 2010
George
Hello
everyone and welcome to WorldGate’s third quarter 2010 earnings conference
call. As a reminder, today’s call is being
recorded. I’m George Daddis, President and CEO of WorldGate. Joining
me today is Chris Vitale, our Senior Vice President and General Counsel and Jim
Dole, our Chief Financial Officer.
Before we
begin, let me turn it over to Chris for a moment to review the Safe Harbor
statement.
Chris…
Chris
Thank you
George and good afternoon 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 16th of November,
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.
1
I would
like to point out that during this call certain non-GAAP financial measures will
be discussed. These non-GAAP measures are used by management to make strategic
decisions and forecast future results, and the Company believes that these
figures provide a helpful method of evaluating the Company's current
performance. A full reconciliation of the Company's non-GAAP financial measures
to GAAP financial measures is included our Form 10-Q for the quarter ended
September 30, 2010, which is available on our website.
George...
George
Thanks
Chris.
With
that, let’s jump into our results for the quarter. There are four key
components that I’d like to highlight from the quarter that have contributed to
very solid results and set the stage for 2011.
First, In
August, during our last earnings call, we announced that the Ojo Vision had
passed all acceptance testing and the last remaining condition to ACN’s
obligation to purchase a minimum of 300,000 Video Phones. This paved the way for
executing on what we believe to be one of the largest, if not the largest
purchase contract for video phones in the world.
This
brings us to our second milestone for the quarter -- the subsequent shipping of
video phones to ACN – in record volumes. WorldGate shipped over 65,000 phones
during the last two quarters that are being deployed in over 21 countries. As
previously announced, we anticipate a total of 100,000 orders by
year-end.
These two
key elements, in conjunction with other revenue elements, led to booked revenue
in excess of $15 million in the third quarter. These revenues include all ACN
shipments occurring since last May. And during this period, we have met our
internal budget targets on unit pricing, unit manufacturing costs, and SG&A
expense.
2
This
brings me to the third key component: the September launch of our Ojo Vision
video phone. With the ACN contract well underway, we aggressively
began engagements with OEM equipment and consumer service opportunities. The
response to the Ojo Vision video phone has been very positive. In particular, we
are engaged in formal lab and technical evaluations with more than 20 OEMs of
small, medium and large telco, cable, VoIP and service providers. In
addition, we have a couple new partners selling consumer services - see our
website for our growing list, and check back often -or visit ojophone.com to
purchase the phone for yourself!
Our
R&D team continues to push our technology platform forward by adding new
features such as 3-way video calling and continuing to internationalize our
phone for deployment in countries across the globe. We’ll discuss our
strategic product plans more fully later on.
Finally,
once the Ojo Vision and our service platform hit the market, businesses began to
approach us with an interest in a commercial version of our solution. This is
leading WorldGate to introduce a unique daily collaboration video solution into
our portfolio of solutions that fills a gap in the commercial market between
basic audio telephony and expensive video conferencing rooms. I’ll go into a bit
more detail on this in a moment as well.
With
that, I’ll now turn the call over to Jim to run through the detailed
results. I’ll be back to discuss these four components in greater
detail.
Jim…
Jim
Thank you
George and good afternoon everyone.
3
Thank you
for joining us today to review our3rd Quarter
financial results. As George mentioned it’s been a very eventful
quarter.
On
October 5th we provided a bit of a preview to these results when we announced
that we shipped in excess of 65 thousand video phones prior to September 30 and
anticipate taking orders for over 100 thousand video phones this
year. We are thrilled to see the successful development and
launch of the Ojo Vision translate into record setting revenue for the company –
we believe we are truly creating a solid platform to grow our
business. As George mentioned, our results were positively
impacted by the product certification we received from ACN. I will
spend some time discussing the impact this has had on our revenue for the
quarter along with discussing the other key measures we use to evaluate our
progress.
Finally,
I will conclude with some general comments on our liquidity including an
increase in funding that we completed during the quarter.
2010
Financials
Let’s
start with a review of the 3rd quarter
financial results.
Revenue
before the revenue discount for the quarter ended September 30, 2010 was
approximately $15.4 million which represents an all time record for quarterly
revenue.
The $15.4
million of revenue during the third quarter includes the shipment of phones
during the third quarter and the revenue recognition of phone shipments to ACN
made in the 2nd
quarter. Again total phones shipped exceeded 65 thousand for revenue
recognition purposes. In addition we recognized revenue of $1.2million in
software development funds.
As
I referenced earlier, one of the key drivers of our results for the quarter is
the product acceptance we received from ACN in August. No revenue was
recognized in the 2nd quarter
related to the shipment of phones to ACN-- as ACN had not yet indicated
acceptance of the product in accordance with the terms of the Master Purchase
Agreement. Due to these terms, we instead recorded $7.8 million as
deferred revenue in the second quarter.
Now, that
these final conditions have been met, and product acceptance is complete, our
3rd
quarter results include approximately $7.8 million of revenue associated
with the shipments which occurred in the second quarter. The product acceptance
also triggered the recognition of the software development funds as
revenue.
4
Net
Revenue for the quarter ended September 30, 2010 was approximately $11.8 million
versus 2009’s third quarter revenue of approximately $98 thousand and second
quarter of 2010 revenue of approximately $124 thousand.
Net
Revenue includes approximately $3.6 million in revenue discount associated with
the 2nd and
3rd
quarter shipments of the video phone to ACN. The revenue discount is
the estimated fair value of the portions of the warrants held by ACN that vest
incrementally as ACN purchases video phones under the Master Purchase
Agreement.
I would
like to emphasize that the revenue discount is a non-cash charge associated with
previous issuances of warrants and has no impact on current cash
flow.
Gross
profit in the third quarter was approximately $(659) thousand after accounting
for the revenue discount of approximately $3.6 million. Gross profit
excluding the revenue credit would have been approximately $3.0
million. This is a significant increase over the gross profit of
approximately $92 thousand reported in the second quarter of 2010 and the third
quarter of 2009’s result of approximately $84 thousand. After
adjusting for the non-cash impact of the revenue discount, gross profit on
equipment sales, which makes up a vast majority of Gross Profit, were within our
expected results on a per unit basis.
Operating
expenses were approximately $3.0 million -- reflecting a 38% increase when
compared to the third quarter of 2009 and a 6.9% increase versus the operating
expenditures reported in the second quarter of 2010. The increase in
operating expense versus 2009 reflects increased staffing, especially in our
engineering and sales functions, and other product development costs as we
invested in completing the Ojo Vision product and building our sales
distribution capabilities. The 6.9% increase from second quarter is
primarily attributable to non-cash stock compensation and engineering costs
associated with the Ojo Vision product launch. As a matter of practice, we
continually manage our costs to align our expenditures with internal operating
plans.
5
With
that, the net loss for the period was approximately $4.0 million compared to a
loss in the third quarter of 2009 of approximately $1.9 million and a loss of
approximately $3.0 million in the second quarter of 2010.
For us to
continue to manage the business and measure our success it is important for us
to have multiple views of our results. One of the ways that we do
that is through a non-GAAP measure of performance known as Adjusted
EBITDA. We defined adjusted EBITDA as net loss before depreciation
and amortization, amortization of debt discount, non-cash stock based
compensation, expenses recorded as a revenue discount as a result of warrants
that vest incrementally based on ACN DPS’s purchases of video phones, and
interest expense. Adjusted EBITDA for the three months ending
September 30 2010 is approximately $580 thousand compared to approximately
($1.4) million in the third quarter of 2009 and approximately ($2.2) million in
the second quarter of 2010. We believe the increase in adjusted
EBITDA, even though it is positively impacted by one time revenues, is evidence
that the investments we have been making in developing the product and expanding
our capabilities in the business are beginning to pay off. And
finally, cash at the end of the quarter was approximately $1.1 million and the
revolving loan balance was $3.1 million.
Financial
Position
I would
like to close by mentioning the increase in funding we completed during the
third quarter.
In August
2010, WGI, our majority shareholder, agreed to increase the revolving line of
credit by $2 million, bringing the total line to $7 million. As part
of the agreement to increase the line, 8 million fully vested warrants were
granted to WGI.
This,
along with the other funding initiatives, including the general availability of
the Ojo Vision and the ongoing revenue associated with sales to ACN as they
purchase the balance of 300,000 videophones, along with the potential sales from
other distribution channels - provides us with the financial foundation
necessary to continue our momentum and begin to grow the company.
6
As a
matter of course, and as George has and will discuss in a moment, we continually
evaluate our business, our various options to drive growth, available financing
options and where we believe we need to make additional
investments. So while we believe we have sufficient funding to run
the business today, we will continue to evaluate the needs and opportunities of
our business plan and the funding support they require.
As is our
policy, we do not provide expectations or forward looking guidance on
financials, but I will confirm we still expect to take orders for 100 thousand
phones this year. I will now turn it back to George to go into
greater detail on some of the exciting new initiatives he referenced
earlier.
George…
George:
Thanks
Jim, clearly we have terrific momentum building with this quarter.
As I
mentioned earlier, since our launch of the Ojo Vision just 60 days ago, we’ve
made a lot of headway with potential OEM partners and have generated a
significant amount of visibility surrounding the launch and availability of the
product.
In
addition to ACN, we are actively engaged with more than 20 potential OEM
partners. We are not going to go into detail about who these are at
this point, but we can tell you that they are a mix of small, medium and large
telcos, cable companies, VoIP companies and others that are performing formal
product evaluations. Although we are very excited to have these evaluations
underway, I want to remind everyone that the OEM partnership process is a
lengthy one. Beginning with the formal evaluations, business case
creation, and continuing with go-to-market planning and subsequent market
implementation – it can take anywhere from 3 months to one year to begin to
generate revenue from these opportunities, depending on the
customer.
7
The
launch of the Ojo Vision has generated a significant amount of visibility
overall for us with articles, press interviews and several events (Comptel,
Pepcom, Wired store). You also may have seen us on “The View” in October on the
ABC network.
In
addition, we are looking forward to several product reviews being published by
key industry trade in the coming weeks. Be on the lookout on our
website and twitter for current updates and links to the published materials and
video clips.
Because
our passion is to deliver a true to life video experience unlike any other, we
will continue to provide product and software upgrades that benefit our end
users. As I mentioned earlier, the next upgrade is just weeks away
and includes 3-way video conferencing. This is an exciting new
feature that we believe will not only be welcomed by our residential customers,
but will be especially important in business environments.
Over the
past 6 months, the marketplace has been filled with exciting announcements from
a variety of service and equipment providers about video
communications. We believe WorldGate is in an exceptionally unique
position to take advantage of this excitement with its mature video phone
technology platform and its services infrastructure. With that said,
I’d like to give you some insight into our strategic plan for 2011 and beyond as
we grow our OEM equipment and commercial/residential services
segments.
On the
equipment side, we expect to continue to grow and develop our video phone
product line, expand our feature set, and work to address the needs of
businesses more fully, all while continuing to focus on manufacturing cost
reductions.
8
In our
services division, as I mentioned earlier, you will see a formal commercial
product introduction that will provide businesses with a true daily
collaboration video solution. With installed costs of just several hundred
dollars and service costs in the tens of dollars per month, we believe this will
be an unprecedented offering in the market -- a true business-enabled video
telephony solution available on the desktop that can be deployed with minimal
disruption, to an existing IT and telecom infrastructure. We believe this
offering will fill a significant gap in the marketplace – an affordable video
telephony solution that provides instant video collaboration from the office
desktop that does not cost tens to hundreds of thousands of dollars and months
of installation time to deploy.
Finally,
WorldGate sees interoperability in all its forms as strategic to our success. In
addition to our commitment to an open, standards-based deployment of equipment
and services offerings, we are following a three-point interoperability
plan:
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First,
Mobile based applications. Yes, we’ll have an app for that!
WorldGate is looking at deploying a video application available over many
mobile platforms including laptops and smartphones -- ultimately enabling
our users to take and make Ojo video calls while they are on the
go.
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Second,
we are and will continue to establish interoperability with leading voice
and telephony systems; such as other video phones and video conferencing
solutions.
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Third,
we are also exploring how we can work with other network providers to join
communities and together bring solutions to the marketplace for both
consumers and business customers.
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Of
course, in developing and executing on this plan, we’ll continue to
evaluate what capabilities make the most sense for our business, and make
investments accordingly. Directionally, I think it is important to
discuss where we see the industry moving, and that we continue to be on the
forefront of that movement as we look into 2011 and beyond.
9
In
summary -- a solid third quarter. We received product acceptance from
ACN and reaffirm our 100,000 order guidance for the year. We launched
the new Ojo Vision, it has been well received in the marketplace and we’re
gaining momentum. We are continuing to pursue partnerships that will
be beneficial to growing our business. We are continuing to expand
product functionality based on customer feedback as well as expand and explore
opportunities for interoperability applications to begin to grow our business
through 2011 and beyond.
Thank you
all for your time today …
Operator
– I think we’re ready to begin the Q&A portion of the call now…
10