My notes on the end of year conference call
I have listened and taken notes on the conference call via StreetFusion which Spyglass management gave on Wednesday morning after releasing the fiscal year end financial results. Statements made address some of the questions posted here in recent past; some of the information was completely new to me. What follows are the notes:
Participants.
Gary Vilchick, Executive Vice President and Chief Financial Officer
Martin Leamy, President and Chief Operating Officer
Doug Colbeth, Chairman & CEO
Gary Vilchick
Review of financial performance
49% growth in revenue in quarter as compared to same period year ago.
$9.2 million in revenue with technology revenue up 67% and professional up 32%.
Revenue was up 29% from third quarter results
Licensing: 50% of quarter revenues from licensing, including from SurfWatch vs 42% in first nine months. Other license revenues came from a balance of Mosaic, Prism and Microserver. The Microserver provided deployment royalties from Xerox.
Professional services: 32% growth over prior year.
GI and MS Solution Centers went from zero in the first quarter to 50 professionals.
$12 million run rate and should continue to expand into 2000 fiscal year.
Gross margin contribution increased by over two million from prior year and was key to profitability. 69% gross margin due to heavier licensing vs 64% in first nine months. It will be impacted though by higher mix of professional services in next fiscal year.
Operating expenses were $6.4 million, an increase of $1.2 million in quarter. Costs came from R&D software engineering on interactive TV and mobile, higher recruiting expenses, legal activity, and one bad customer. Full year though, Spyglass realized savings of $4 million, or 15% reduction in operating expenses.
Second profitable quarter in 99.
Two cents per share compared to a 5 cent loss. Excepting one charge, Spyglass was profitable for the last nine months of 1999.
They worked aggressively to reduce days sales outstanding by fifteen days prior quarter under accounts receivable. They have $30 million in cash and in short-term investments.
In fiscal 1999
40% increase in total revenue
70% increase professional services revenue
$32 million backlog of orders
$3.9 million incremental gross contribution
$4.1 reduction in operating expenses
$8 million bottom line performance
$9.5 million addition in working capital
Martin Leamy
Spyglass Solutions
1) Finished first version of Internet ScreenPhone on MS CE software platform. In position with new projects with other customers.
2) Expanded Acadia Center high speed Internet + cable access with GI set-top platform. The Center contributed $1.5 million in quarter's revenue
3) New Delivery Organization in Asia, particularly Japan, including technology licenses and services
4) Nokia exclusive worldwide distribution rights WAP microbrowser. Spyglass will add value to this technology with downstream customers of Nokia.
5) SurfWatch was sold for $29 million to allow focus on core services and geographical expansion.
6) New customers, including Toshiba, Stanford University, Seiko Epson, VM Labs, Riverbed Technologies.
7) Under technology developments, significantly improved Spyglass Prism (wireless devices) and Spyglass Device Mosaic (Cable set-top boxes). They are in early implementation stages with customers using Prism, Mosaic, Microserver. Addition of new technologies will occur by combination of building in house or by acquiring third parties. As Spyglass is the WAP Nokia exclusive reseller, it will expand product offerings to wireless phone operators and manufacturers.
Marty also said the following: "Now, updating you on our Professional Services business, we are excited by several new, unannounced customers which we will begin working with over the -- (then he corrects himself) which we began working with over the past several months. Some of these customers are large entities which we believe there will have opportunities for long term strategic partnerships."
GI and Microsoft are very successful relationships. Spyglass is unique from most other firms in giving complete solution through broad range of services. Marty named a few, including software integration, porting, project management, and strategic consulting. Professional services were $4.0 million in ?97 to $16 million now, or 98% compounded annual growth rate. Spyglass gives multi-facet solutions, strategic, customer base expansion through such as cable content providers, device manufacturers, telcom operators.
Doug Colbeth
He noted he was proud to have Martin Leamy on board as President and COO. He said he is the kind of person to take the company to the next level. He noted Marty's experience at Platinum managing 500 people and over eight years dealing with fifteen acquisitions and raising his division from $20 million to $200 million.
The two Solution Centers will provide at least $20 million each over three year period. He is very pleased with ramp up and Spyglass's contribution. The Centers allow Spyglass to be very well positioned to building other strategic relationships.
He discussed the April, ?99 acquisition of Navitel, which brought in over 20 engineers with experience developing platform with CE.
Throughout 1999, two segments developed for Spyglass which have produced significant partners which he believes will have good chance to be market leaders.
(1) Under Mobile data services, his list included Nokia and Seiko Epsom
(2) Under Interactive TV, he named companies like Sony, GI, Motorola, Worldgate,
GTE, LG Electronics, IBM, & Phillips.
Spyglass sold SurfWatch because its PC based centered and traditional corporate based distributed product was not consistent with Spyglass' model. JSB is better suited to being SurfWatch's parent, and he is excited about Spyglass being an equity holder in JSB. Spyglass will remain a reseller of SurfWatch, which will allow Spyglass to continue to market the product to companies like WebTV and Comcast. Spyglass will use the money gained from the sale for strategic opportunities like joint ventures.
Fiscal 2000 Strategy is top line revenue growth of 50%, excluding SurfWatch revenues for ?99.
He reiterated higher percentage of anticipated revenue from professional services. He wants to provide complete system integration due to heterogeneous information appliance environment.
Colbeth listed five areas of focus:
1) Continued significant investment in leading edge application of cutting edge technologies; currently they represent 15% of overall revenues. He wants to push the envelope of Spyglass being experts in information appliance market with its higher margins and licensing revenues in the out years.
2) Interactive television and mobile data going into the foreseeable future.
3) Company-wide focus of new strategic Solution Centers. These provide predictable financial results, increasing revenue, strategic access to other companies. He said watch GI relationship turn into business with cable operators beginning in 2000.
With MS Screenphone, business will translate beginning with telcos' business customers.
4) Worldwide expansion
Although it will put some downward pressure on short-term profits, he said we are in an international market with Europe leading in mobile services and Asia with consumer electronics. He wants to make sure Spyglass invests in those markets.
5) Aggressive corporate development. These include acquisition opportunities, increase portfolio of technologies and professional resources and customer base; they also include joint ventures and other strategic opportunities.
6) Increase focus on employee recruiting and retention.
The management team answered from a couple of persons calling in:
Revenue line with SurfWatch, how much due to JSB licensing agreement? Gary said licensing of Spyglass content filtering technology is $2 million recognized fourth quarter and $1 million payable next year. Gary noted Spyglass retains ownership of the SurfWatch patent and will work to recognize the value of that patent.
Gary said Xerox royalty represents 5% of revenues from Xerox's successful digital document centers.
Operational expense elaboration:
The bad debt was $120,000
Recruiting expenses $300,000 directly due to ramp up of Solution Centers
Legal expenses $150,000. Spyglass has passed the deductible, so no more legal payments (for current shareholder class action lawsuit.)
Doug said Spyglass will start to see benefits of the Nokia Web browser agreement in the March quarter. WAP arena will take off, particularly toward services. Potentially there will be a larger relationship than merely client technology with arrival of server side applications and content. Spyglass is in the first step of a multi-step strategy.
Doug noted with a priority given to build-up of Europe and Asia, Spyglass will be merely moderately profitable in 2000. In last two years, Spyglass has come from -.70 earnings to -.12.
All my best,
Osman. |
