GlobalSCAPE Moderator: Mendy Marsh November 10, 2010 3:30 p.m. CT Operator: Mendy Marsh: Good evening. My name is Zarona and I would like to welcome everyone to the third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. For those of you on the stream, please take note of the options available in your events console. At this time, I would like to turn the show over to Ms. Mendy Marsh, chief financial officer. Thank you Zarona. Good afternoon. Thank you for joining our earnings call today. This is Mendy Marsh, chief financial officer for GlobalSCAPE. Joining me on the call this afternoon is Jim Morris, GlobalSCAPE president and CEO. Before we begin, I would like to remind everyone that today's call including the question and answer session may include forward looking statements regarding expected revenue, earnings per share, future plans, opportunities, and expectations of the company. These estimates and plans and other forward looking statements involve known and unknown risks and uncertainties that may cause actual results to differ materially from those expressed or implied on the call. These risks are detailed in the company's Form 10-K released on March 30th, 2010 and in other statements made by the company. The statements included in this conference call were based upon information known to GlobalSCAPE as of the date of this call and GlobalSCAPE assumes no obligation to update the information contained in this call. With those safe harbor statements presented, I'll continue with summarizing our financial results for the quarter ended September 30th. As covered in our
press release today, our revenue for Q3 increased to approximately $4.8 million as compared with 4.3 million in the same quarter of 2009 representing an increase of 11 percent. Compared to revenue for the second quarter of 2010 of 4.5 million our Q3 revenue increased 7 percent. Maintenance and support revenues increased to approximately 2 million in the third quarter of 2010, a 27 percent increase when compared to the third quarter 2009 M&S revenues of 1.6 million. Maintenance and support represented 42 percent of our Q3 total revenue. This continued increase in M&S is notable because these sales provide a baseline of revenue that is regularly recurring with little work so our sales team can concentrate on bringing in new customers and larger deals. Net income for Q3 was approximately $233,000 or 1 cent per diluted share. This compared with net income of approximately $576,000 or 3 cents per diluted share in 2009. Both revenues and net income in the third quarter of 2009 were positively impacted by a single large order from the US Army of which approximately 1.2 million was recognized in revenue. Operating expenses increased 32 percent from the third quarter of 2009 and 5 percent from the second quarter of 2010. As in prior quarters, the largest increase in our expenses is due to personnel cost. We have added ten people since the third quarter of 2009 and several of them are in senior positions with higher salaries. Legal fees also significantly increased in the current year due to the Uniloc lawsuit which was dismissed with prejudice in September and no payment was required by us. In the December quarter, we expect our legal expenses to return to a more normalized level of approximately $60,000. As mentioned on the last earnings call, the dollar amount of our expenses is expected to increase through the December quarter. However, in 2011 we anticipate these expenses representing a lower portion of total revenue. Our cash on hand was 10.1 million at the end of the third quarter, a 23 percent increase from the end of 2009. At this point, I'd like to turn the call over to Jim Morris. After Jim's comment, we will then open up the lines for questions and answers. Jim?
Jim Morris: Thank you Mendy and good afternoon everyone. As Mendy mentioned, our financial performance continues to track with our previous statements and expectations. We have grown revenue from 4.4 million in Q1 to 4.5 million in Q2 and now to 4.8 million in Q3. This is in line with our previously stated emphasis on growing our top line revenue this year. In fact, Q3 revenue is the highest in GlobalSCAPE's history for core revenue as I'll discuss core revenue later in the call. Why the focus on revenue growth this year? This is the primary means for demonstrating increasing market traction and driving institutional investor interest, both of which are necessary to continue increasing shareholder value as we have done during 2010. We are on track to set a new revenue record for the company this year and look forward to setting another record in 2011. I am pleased to take a few minutes on this earning call to tell you what's behind the revenue growth. Four key drivers through the third quarter: enterprise sales revenue, revenue in our WAFS product has stabilized, increased maintenance and support revenue and our leadership in process focus. Enterprise solution sales continue to grow. Sales of EFT Server and associated modules have increased significantly over the last two years now accounting for almost 80 percent of our product revenue. EFT version 6 which was launched in March of 2009, provides the client a straightforward upgrade path from our base course server to this feature rich enterprise version. This emphasizes the value of our add-on modules as a key aspect of this solution suite. We are seeing upgrades from the core server to the enterprise edition and we are also seeing strong growth in module sales. Our EFT Server promotion announced in September is contributing to this increase in modular sales. Previous declines in WAF sales have slowed. In the past, certainly for much of 2008 and 2009, EFT sales increases were offset to a significant extent by declines in WAF and CuteFTP sales. WAF sales have stabilized in the last few quarters and even increased in the first nine months of 2010 compared to a year ago. We believe improvements in WAF sales performance are a direct
result of significant product enhancements we have made as stated in prior reports. CuteFTP continues to decline as an overall percent of total revenue, but the decline has been slower in recent periods and has much less impact on our overall revenue. We continue to increase maintenance and support revenue representing 42 percent of our total revenue which is up from less than 40 percent a year ago. This increase reflects growth in enterprise sales and enterprise customer retention. We also have seen an increase in maintenance and support contract sales and renewals through our EFT Server promotion. Leadership and process focus: Bill Buie assumed leadership of the sales team early in the second quarter of this year. He and his team have put emphasis on sales process and strategic account planning. We are executing better than ever as seen in the increased revenue over the past three quarters. The process and planning improvements also will carry over to our other solutions both current and planned. (Myriad) new solutions: we launched our Managed Information Xchange with an X or MIX solution in July. This implements our enhanced file transfer service solution with cloud infrastructure from Rackspace Hosting. Cloud computing is a $68 billion market growing at more than 20 percent per year. Drivers are cost-savings and predictability, service elasticity and increasing recognition that appropriately security is achievable in the cloud. We have signed up our MIX customers and look forward to growing our managed solutions line of business in 2011. We continue to expand our cloud roadmap and we are pleased to have Rackspace mention GlobalSCAPE as an early adopter of their hybrid cloud this past Monday on their Q3 earnings call. The hybrid cloud is a hybrid approach that tightly couple dedicated hosting resources and cloud computing resources which results in a very attractive solution that CIOs around the world are embracing. We released a major upgrade to our Mail Express solution in August. Microsoft Outlook users can now send large files up to 25 GB on demand and
with enhanced security. The IT organization now has greater visibility and insight into file movement through tracking and auditing capability. We have received initial orders for this latest upgrade to Mail Express and continue to work directly with end customers and through partners on expanding our footprint in the secured email delivery market which is a $2 billion market and growing at nearly 20 percent per year. In the area of partnership, we expanded our global channel sales network by partnering with Life Boat Distribution in Q3. Life Boat is an international distributor of sophisticated software products. They serve leading resellers and solution providers across North America, throughout Latin America and the Caribbean. With Life Boat distribution we are increasing our channel net worth growth potential by recruiting and training resellers from their existing distribution network. Growing our channel partners network will continue to be an area of focus in this quarter and in the future years. Why? Because it lowers our cost of entry into markets where we don't have a presence. We currently derive approximately 30 percent of our revenue through the channel and we will work further to enable our channel partners to grow channel business both domestically and internationally. We extended our partner relationship with a firm known as Network Automation. We deepened out OEM partnership with Network Automation in 2008 and embedded Network Automation automate product as an Advanced Workflow Engine or AWE, A-W-E module into our enhanced file transfer server solution. During the third quarter of this year, we expanded our partner agreement to become a worldwide reseller of Network Automation software solutions, AutoMate 7 and AutoMate Business Process Automation, BPA Server 7. Automation is the key area of interest to our customers as reflected in increasing sales of our AWE module. The network automation partnership provides a platform from which we can meet customer needs for automation without developing the organic solution here at GlobalSCAPE. We
established a subcontractor relationship with a company, McLane Advance Technologies or MAT. MAT is a global logistics and technology company based in Temple, Texas. In late September, we announced that GlobalSCAPE is part of a MAT industry team. They won a three-year $52 contract (recently) for an Army logistics program known as SAMS-E or Standard Army Maintenance System Enhanced. Under the new contract, GlobalSCAPE will provide professional and technical services to support the SAMS-E programming including secure FTP Server and CuteFTP. These solutions will be integrated into the overall SAMS-E environment. We may also deliver enhanced software solutions to SAMS-E under this contract with additional tasking. In support of this contract, we plan to hire additional staff to be located in Temple, Texas. This strategically important contract initially will not have a material impact on our revenue expectations for 2011. However, we intend to work with MAT to pursue additional government business opportunities both within the Department of Defense and other Federal organizations. In the area of leadership team additions, my investor presentation, I have highlighted the strength and the depth of our leadership team. The feedback I received from firms that our leadership team is the source of investor confidence in our strategy, plans and ability to execute. Through the first nine months of 2010, we made several key additions to our leadership team namely Bill Buie as the EVP of sales in the second quarter, Mark Perry, the VP of Managed Solutions in third quarter and we've made other internal assignments in the organization to continue to grow our business efficiently. Bill has been with GlobalSCAPE since April. He is the key contributor to our revenue growth this year. With Bill and his team executing at a very high level, we look forward to reaching new revenue heights in Q4 and in 2011. Mark is directly responsible for Managed Solutions line of business including the relationship with Rackspace. We are off to a quick start with initial customers and additional solutions on our product roadmap.
MIX and other hosted and managed solutions are sold on a subscription basis and can provide a base of recurring revenue that is additive to our current strong maintenance and support revenue strength. This recurring revenue is very attractive to investors and we will work to grow this aspect of our business in coming periods. In the area of strategic investments, we continue to focus on financial discipline as we make investments to grow the business this year and in future years. I sometimes receive questions about our earnings per share and plans for increasing EPS. In my experience and confirmed by industry analysts, growth in GlobalSCAPE top line revenue must proceed growth in the bottom line EPS. As we continue growing the business and penetrating other attractive markets such as cloud services, email security, and endpoint security with our partner CoreTrace, this top line growth is required investment as described on prior earnings calls. We are in a strong position because we have made such investments within our operating expense line without requiring additional capital, and we have continued to increase our cash at the same time. To be clear, opex as a percentage of revenue should decline in 2011 as we monetize prior strategic investments we made earlier this year. We believe we have established a strong platform for growing the business in 2011 and beyond through these strategic investments. Before I speak on expectations for the remainder of 2010 and provide my current perspective on 2011, I'll summarize some of the strategic investments to provide context for these comments. Key areas of investments include attracting and retaining key personnel including the leadership team as I mentioned a few moments ago; identifying, provisioning, training, and supporting partner relationships both with commercial channel partners like Life Boat Distribution and with government channel partners and contractor relationships such as Carahsoft and McLane Advanced Technologies and through technology partners including our partner in an investment in CoreTrace.
We will continue to make infrastructure improvements and additions including internal systems and cloud infrastructure enablement. We're developing new and enhanced solutions on our roadmap for cloud-based solutions including MIX and also enhancements to our Mail Express capability, which we have done in Q3 of this year. And we have other exciting solutions on our roadmap that should be released in the coming months. As I have mentioned before, we expect to set a new high-water mark for revenue this year exceeding the roughly $18.4 million in revenue recognized in 2007. I am very pleased with our projected 2010 financial performance. We expect to achieve this by growing core revenue whereas 2007 included a single exceptionally large quarter for almost $3 million for the United States earnings. Our core revenue annual run rate continues to grow during 2010 from under $17 million at the end of Q4 '09 to over $19 million at the end of Q3 this year. Our core revenue run rate provides you some indication of how the business is performing on an annualized basis. I emphasize core revenue run rate and growth because this is how we run our business on an ongoing basis. We, of course, seek large exceptional orders and plan to continue to do so, and we are pursuing several of them at any given time. However, we execute our plan for opex and earnings on the basis of our core revenue excluding large one off contract awards. For the remainder of the year in 2010, we intend to remain profitable. We have been and remained in a very strong position to finance our growth initiatives within our operating expenses. We will continue managing these expenses closely and planning for about the same earnings per share in Q4 as we achieved this quarter with EPS growth in 2011 as we continue monetizing the investments made in 2010. We have plenty of cash and are generating more on a sustained basis.
As Mendy mentioned in her prepared comments, cash and short-term investments grew to $10.1 million at the end of Q3. That represents an increase of seven percent from the second quarter. Overall, our continued growth in cash is a clear indication of running a sound and good business. We have excellent financials, and we are in a position to achieve additional growth, for example, through acquisitions should we find an opportunity that's right for GlobalSCAPE. The 2011 outlook for revenue, as I have mentioned before, we have grown our core revenue annual run rate from under $17 million at the end of '09 to over $19 million at the end of the third quarter 2010. This run rate gives me confidence in the revenue range I have presented during the non-deal road trip presentations made in the third quarter. I have stated that I expect 2011 revenue to be between $21 million and $25 million. While we do not report on sales or bookings, the nature of our business with more recurring and deferred revenue means that our sales during 2011 will grow faster than our rate of revenue growth. This means that our deferred and recurring revenue growth could exceed even beyond our current 42 percent. Growth in recurring revenue provides greater predictability for revenue in future periods and is very attractive to investors. The 2011 outgrowth per earnings. During 2010, as I have mentioned on this and prior earnings calls, we made strategic investments within our operating expense line. As we see the result of those investments, for example, in higher revenue, opex should decline as a percentage of revenue. Therefore, I expect our earnings will grow in 2011 at a rate greater than our revenue growth rate. Overall, I look forward to continued GlobalSCAPE growth in sales, top line revenue, deferred revenue, and earnings per share in 2011. We will continue to focus on our cloud offerings, other new solutions, enhancement to current solutions, and partnerships to grow our core revenue.
We will also continue to pursue large government and commercial orders that we'll currently consider exceptional and non-recurring have contributed significantly to growing our business and market footprint. Our goal is to have large contracts part of our annual performance. In conclusion, as always, I thank all of you for continued support and interest in GlobalSCAPE. We will be speaking next with you in March of 2011 to discuss our Q4 performance and full year-end results for 2010. In the meantime, please follow us through our blog post and through other information provided on our website and through press releases. If you have not done so already, please sign up for our investor relations mailing list, which is located on our website. Finally, tomorrow is Veterans Day. We thank all veterans for your service and hope that you enjoy the special day of honor for you. This concludes my prepared remarks.. END