Roger S. Pondel - Chief Executive Officer and President Zeynep Hakimoglu - Chairman, Chief Executive Officer and President Narsi Narayanan - Senior Vice President of Finance and Corporate Secretary.

Les Sulewski - Sidoti & Company, LLC Ian Corydon - B. Riley Caris, Research Division George Melas-Kyriazi - MKH Management Company, LLC Austin W. Hopper.

Good day, everyone, and welcome to the ClearOne First Quarter 2014 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to PondelWilkinson's Mr. Roger Pondel. Mr. Pondel, please go ahead, sir..

Thanks very much, and good morning, everyone, and welcome to the quarterly conference call for ClearOne. Thanks for joining us today. On the call are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Senior Vice President of Finance. First, some housekeeping before we begin.

Please be advised that this conference call is being broadcast live on the internet, at www.clearone.com. A playback of the call will be available for at least 3 months and may be accessed on the internet at ClearOne's website.

Before we begin, I would like to make a cautionary statement and remind everyone that all of the information discussed on today's call is covered under the Safe Harbor Provisions of the Litigation Reform Act.

The company's discussion today will include forward-looking information reflecting management's current forecasts of certain aspects of the company's future and the actual results could differ materially from those stated or implied. With that said, I will now turn the call over to Zee. Zee? [Audio Gap].

I'm sorry. Let us begin. We're -- thanks for joining us to this -- to discuss our first quarter 2014 result. We are pleased to report record revenue for the first quarter of 2014, and our seventh consecutive quarter of revenue growth. Revenue for the first quarter reached $12.7 million, representing an exceptional 13% year-over-year growth.

We continue to maintain our strong focus on gross profits and achieve a healthy 61% [ph] margin. During the first quarter, operating costs were higher, reflecting our continued plan to prudently leverage our profits from current growth to fuel future growth.

We made complementary and balanced investments in sales and marketing and research and development. We expect the acquisitions and our associated investments in sales and marketing resources and activities, as well as important R&D, to contribute to higher revenues and increased earnings growth in the remaining quarters of 2014.

We are confident that these timely and essential steps will create increasing value for ClearOne, its partners and its shareholders. During the quarter, we completed the acquisition of the supplier of our OEM professional wireless microphone solutions, Sabine.

The acquisition secured continued access to wireless microphones that are central to ClearOne's Microphone portfolio. In 2014, ClearOne's suite of wireless microphone products is expected to achieve revenue between $5.4 million to $6.9 million, including the Sabine acquisition.

This compared to $1.3 million revenue from wireless microphone products sold in 2013 before Sabine's acquisition. ClearOne also expects to improve profitability of its wireless microphone products by reducing operating expenses as the integration of the Sabine business continues to move forward.

Sabine has partnered successfully with ClearOne since late 2012 supplying these wireless phone systems sold under the ClearOne brand. These microphones complement ClearOne's CONVERGE Pro and INTERACT Pro products and drive sales growth of the company's broader professional product line.

The wireless microphone systems lead the industry in features, in performance and in pricing. This strategic acquisition is critical to solidifying our leadership position in this growth market, and positions us for accelerated development of installed audio and visual collaboration solutions.

Our professional microphone lineup now consists of wired and wireless solutions, as well as the Pro-Audio industry's only professional Beamforming Microphone Array. ClearOne is now a one-stop shopping resource for professional microphone solutions to fit any conferencing application.

As already announced on April 1, 2014, we acquired Spontania, the cloud-based video collaboration solutions business from Spain-based Dialcom Networks. In order to effectively grow video collaboration revenue during the first quarter of 2014, ClearOne made important investment additions to its video collaboration sales team.

We cast videoconferencing veteran David Moss as Vice President of Sales for Video Collaboration, Products and Services to drive strategic positioning and sale of the company’s on-premise and cloud-based video collaboration solutions.

David brings a proven track record of videoconferencing sales and business development to ClearOne and is well-known throughout the industry. He has a solid network of relationships with key associations, corporate end-users and OEMs in the video collaboration market.

During the quarter, we made important additions to David's video collaboration sales and marketing team, consisting of professionals with rich backgrounds, including experience working for marquee industry players like Cisco, Polycom, Siemens and Vidyo.

ClearOne intends to further build and broaden the sales channel of the complete portfolio led by Spontania as part of ClearOne's full range of video collaboration solution. Now coming to specifics on the product side. We made good progress with our new video products.

We have received first production units of the newest version of the COLLABORATE Room Pro, our on-premise video collaboration product, and the new VIEW Pro, our digital multimedia-streaming solutions. These are ready to be shipped in the second quarter.

The first shipment of these new video products in the second quarter will consist mostly of demonstration units into our sales channel, as well as a few for modest early project wins.

We launched the new COLLABORATE Room Pro with the Beamforming Microphone Array system, the world's only professional video collaboration system to integrate beamforming microwave -- microphone technology without the need for a DSP mixer.

This powerful video collaboration system fulfills our commitment to supply innovative solutions to professional AV and IT practitioners and their enterprise customers.

Finally, ClearOne received top marks from Frost & Sullivan for its continued innovation and leadership in the installed audio conferencing market, as the recipient of the 2014 Frost & Sullivan Global Install Audio Conferencing System's market leadership award. I'd like to quote from this Frost & Sullivan audio award.

It states, "ClearOne offers the most comprehensive, sophisticated and feature-rich product lines on the market today.

Frost & Sullivan firmly believes that ClearOne's complete product line of audio conferencing systems, strategic focus on innovation and product line expansion, as well as large channel partner network, will help the company maintain its leadership position in the installed audio conferencing market." With this wrap-up of our recent highlight, I'd like to turn the call over to Narsi for a detailed discussion of our first quarter 2014 financial performance.

Following Narsi's discussion, we will take questions for the remainder of the available time.

Narsi?.

First, I will be discussing certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to reported GAAP measures is included in the earnings release that went out this morning. Now, turning to our financial results for the first quarter of 2014.

Please note the following comparisons refer the first quarter of 2014 versus the same quarter of 2013. Net revenue increased to $12.7 million, making this quarter the strongest ever first quarter in terms of revenue. The revenue for first quarter increased by 13% compared to $11.3 million in 2013 first quarter.

Gross profit was $7.7 million, or 61% of revenue, compared with $7 million, up 62% of revenue. The decrease in gross margin was primarily due to increase in obsolescence-related [ph] charges. Turning to operating expenses, sales and marketing expense increased by 21% to $2.7 million from $2.3 million in 2013.

The increase was mainly due to increased commissions to salespersons and independent reps, increased headcount and increase in marketing expenses. Research and product development product expense increased by about 20% to $2.2 million, from $1.9 million. The increase was mainly due to increase in R&D project cost.

Non-GAAP G&A expense increased to $1.4 million -- actually decreased to $1.5 million from $1.5 million in 2013. The decrease was about 7%. The decrease was mainly due to decreased legal fees on non-acquisition-related matters.

Total non-GAAP operating expenses increased by 13% from $5.6 million in 2013 first quarter, to $6.3 million in 2014 first quarter. Non-GAAP operating income did not change much as they remained at about $1.4 million in both quarters.

Non-GAAP net income reduced by 14% to $831,000, at $0.09 per diluted share from $966,000, at $0.10 per diluted share from the prior year. Net income for 2014 first quarter was negatively impacted by higher taxes.

One of the reasons for increase in taxes was the non-availability of several R&D credit, since Congress has not extended this benefit for this year yet. Non-GAAP adjusted EBITDA decreased slightly by 3% from $1.57 million to $1.62 million. Turning briefly to the balance sheet. Our balance sheet remains strong.

At March 31 one of this year, our cash and investments balance was $34 million, and we remain debt-free. The cash balance reduced from $42.7 million at the end of December 31, mainly due to cash payments for both acquisitions, Sabine and Spontania, happening in the first quarter of 2014. I would now like to turn the call back to Zee..

Thank you, Narsi. We're fortunate, ClearOne, to be part of this exciting and rapidly evolving market space. Having started 2014 on a strong note, we look forward to another very solid year of growth and profit. With that, and for any time available, we would like now to be able to address any questions you may have.

Operator?.

[Operator Instructions] And our first question comes from Les Sulewski of Sidoti & Company..

Looking at, first, Sabine and then Spontania, Sabine looks like you'll probably contribute about close to maybe $5 million in 2014, and I understand the first quarter only had about 3 weeks of sales.

Is this a lumpy business? And then Spontania, what kind of expectations, and in terms of sales can we look to in 2014? And again, is this a lumpy business, as well..

On the Sabine -- Narsi may be able to add, but on the Sabine business, for ClearOne, it has not been a lumpy business. I think it's had a pretty smooth run rate with good growth. But of course, we have a very wide channel and a mature team, sales team to promote that smooth performance.

For Sabine, it was slightly lumpy, I would say the last 3 weeks or the -- Sabine has been relative -- the folks at Sabine may -- mostly the principal and the small sales staff, were focused on the transaction causing a little, I would say, less sales in those 3 weeks than they would normally produce.

As far as Spontania goes, Spontania is comprised of a few parts of revenue. One part is a subscription service. There, we could have looked at bookings, it's an ongoing monthly revenue component that we recognize as the subscription winds forward. At the same time, there's also license sales, onetime license sales. So that's a mixture.

I think they've had, at least prior to our acquisition, somewhat smooth revenue, I would say, smooth revenue history. And we anticipate it should be relatively smooth for the ClearOne, going forward..

Can you perhaps provide us with maybe like a number, maybe a quarterly run rate, or something that you would expect for the full year from Spontania?.

From Spontania, we have plans to give certain numbers, either as bookings or expected revenue, but we are not there to give this quarter. Since they closed in April, they are going through the modeling and going through the channel asking for everything. I think we will give those numbers probably by next call, actually.

Okay?.

Okay.

And then as far as some of the remaining acquisition-related expenses, should we see the bulk of them in the second quarter? Or kind of laid out through the year? And what would that number approximately be?.

We have gone through most of our acquisition expenses in the first quarter. What you would see is mostly from sale and expenses. It should not be as much as you saw in Q1. It would be a few thousand dollars here and there. It's not going to be material..

Okay, that's helpful.

And then, without the R&D tax credits, what could be the assumed tax rate for 2014?.

We are calculating anywhere from 36% to 39%..

Okay. And then -- so the increase in the headcount, marketing and some of the commission expenses.

So $2.7 million run rate in sales and marketing this quarter is kind of a run rate we should expect, moving forward?.

Yes. Actually what I would like to give you as a modeling idea is whenever our new sales go up, especially with Sabine, we track most of the sales through our independent non-reps. Independent non-reps carry a certain percentage of commission and revenue. When revenue goes up, you have to pay them the commission.

And more revenue we generate in the year and especially from the pro channel, that expense will grow actually. Since we had a good increase in our microphones business from the pro channel, especially from the U.S., you saw a good amount of the sales and marketing expense increasing due to this commissions to independent reps actually.

And it will continue to happen. It's not a bad thing. It's only because our sales are increasing on the top side. We have to pay those agents, actually..

Okay.

And then I understand you don't really give out guidance, but something including the 2 acquisitions in your organic sales, is something in the low double-digit growth for the full year achievable?.

Let me give the numbers for Sabine. And we have been very particular, since last year, in our mainstay Pro business. We think we can maintain the growth, but we can't give any specific number, really..

Okay, so. Perhaps maybe if you can maybe guide us through each business starting with Pro. You see in the video -- what kind of activity are you seeing in each segment? That was really [ph] very helpful..

Give me one second. Pro, for Q1 2014, it actually grew by about 30% plus, actually. And UC went down by 6%. And Video was nearly half of what it was from previous year..

[Operator Instructions] And our next question is coming from Ian Corydon of B. Riley & Co..

Just so I'm clear on the expenses, the $2.7 million in sales and marketing and $2.2 million in research and development, are those good run rate numbers to use for the rest of this year?.

Sales and marketing, probably that's a good number. R&D, no. It's -- Spontania will add, but the product expenses will not stay exactly like that -- through the year. That's mostly because of the new product introductions that we have been going through, but this is not a full run rate, actually.

This is not a representative run rate for every quarter in the future..

So R&D would be higher, going forward..

No..

No, R&D would be lower going forward. We had a convergence of both the VIEW Pro and the COLLABORATE Pro..

Projects getting completed..

Its projects getting completed and that will -- that is winding down..

[Operator Instructions] And our next question comes from George Melas from MKH Management..

Very solid results. Very strong continued revenue growth. Can you tell us just maybe a little bit, how much did Sabine contribute during the quarter? I think it was just 3 weeks, and probably not a whole lot, but it will be good to have that information..

We specifically didn't want to include that information. It was not -- as I mentioned, George, it was not exactly representative because the principal of Sabine and his one salesperson -- specifically this principal was very focused on the transaction. Fully focused..

And I'd also like to add one more thing. Since the acquisition, we made sure that we have enough inventory to satisfy our side of the business. We were the number one customer, actually. Therefore, anything, anything [ph] what they're doing, they're focused on producing [ph] the inventory and satisfying our demand, actually.

We put our demand at the primary goal to be achieved. And therefore, it will be mostly intercompany sales that will flow-through us and not the Sabine book, actually. It was not a very representative few weeks to track that revenue, actually..

Our revenues are was expect -- was to our expectations and we were pleased with our results for that quarter, those 3 weeks..

Okay, very good.

On the Sabine side, what percentage of revenue did you account? Were you, as part of Sabine sales in 2013, did they sell to other parties as well?.

If I understand your question, Sabine had their customers. They have their partners. In a sense, quite frankly, Sabine was competitive with the ClearOne brand, quite frankly. They were trying to run their business. Obviously we had an OEM business, branded ClearOne with the same exact microphone. And they competed.

Obviously, they had been doing it longer and they actually, obviously, accomplished greater sales than we did. But now with the combination, we're not competing and we're going out together. We're going to unify the brand for the conferencing applications, and sell to all the customers..

Okay, great.

So are you going to discontinue the Sabine brand?.

Not necessarily -- for the conferencing application we plan to convert it to the ClearOne brand. But of course, like any company, there are applications in the, what we call, the MI industry, houses of worship, music, other things, where their technology and products can also be used.

And we haven't made the decision whether we want to continue that slightly different market under the Sabine brand..

Okay, great. Very good. A few quick question on Spontania. I think that -- I think you haven't told us what the sales were in '13, but I think you did say in your press release that the acquisition would be accretive, which suggests that Spontania was profitable.

Can you tell us a little bit about their sales? What countries they were in? Do they have any presence in the U.S.? And how you expect to introduce them to your distributors and then, of course, to your end customers?.

Okay, in Spontania, I can answer part of that, Narsi you could chime in. Spontania has focused mostly in India and Europe. They have some interesting wins. you could go to the spontania.com website and look at some of the wins they've had. But they actually had very little or no presence in the U.S.

The way we're going to move Spontania forward is by, of course, we introduced a brand new sales and marketing team for Spontania to collaborate. They -- some of them have already been selling the cloud solution, software-based solution, such as that video.

We plan to introduce it to our channel such that they can have downstream revenue by selling the services. That's slightly different than what some of the other players are doing. And we've already started making some good partner relationships to do that. We'll talk about those next quarter, if you want to talk about the revenue..

One thing I would like to -- we think Spontania can be accretive to us. But since we acquired a portion of a business that the parent company was running, it's hard for us to say whether they were profitable or not, actually. We think they will be profitable under us, actually. We don't know whether they were profitable under the old management.

They had -- Spontania was 1 business out of 2 that the old company had, actually. It's -- we just bought the business. We did not buy the entire company. And we don't have full access to that side, other side of the business..

It's called Dialcom..

Dialcom's the entire operations. And they are borrowing all those things. We are -- you cannot assume that they are profitable with them, actually. We think they are going to be profitable under us, actually..

Obviously, it's a software product and the gross margins are very good there..

Okay, great.

Narsi, can you sort of give us the revenue breakdown between Pro use in video but in a different way, not as a year-over-year but as a percentage of revenue?.

Yes, yes, I will tell you that. Okay, now this quarter, Pro was -- it's 75% of our business. UC [ph] was 22% of the business and Video, about 4%..

And so Pro was 74%?.

4..

And then, Zee, maybe I'll just ask just one more question.

On the video side of the business, how do you expect to run that business? Is it going to be -- is the -- are they on-premises solution and Spontania can be under 1 management with 1 P&L reporting to you? And when do you expect the on-premise side of the business to do? Because it was sort of soft in '13 as you were reworking the product and introducing new product..

Well, it's really all getting run under a sales organization run by David Moss. They're highly complementary, cloud and on-premise. Meaning -- including the new infrastructure solution that we came out with this quarter. So it will be under the responsibility of David Moss. There are customers who want to own it.

There are customers who want a subscription. There are customers who want us to run the service. Places like, for example Asia, I should point, are not so keen, I should say China, are not so keen on the cloud because of security reasons. And yet in places like India, they're extremely keen on the cloud services.

So it's really a single solutions that's under David Moss. We don't look at profit and loss for each of the various businesses. But certainly, that is a good business for us because of the large software component. On the VIEW Pro, we are actually going to do a bit of a breakout of our VIEW Pro product, which again is part of the video family.

It's a little bit more on the professional and commercial side. And over time -- not immediately, but over time, we will be focusing our Pro AV team, some on the conferencing side and some on the distribution side, including VIEW. But that is more or less a common channel..

Okay, very good. Okay, good. So if we look at the core business, it seems to be it has done very well for some time. You probably expect it to continue to do well. The Sabine acquisition is totally complementary to that and should be accretive or should contribute to increasing the profitability of that business.

And the videoconferencing has been a bit of a drag on the overall results, but it should contribute better. So it seems that we have a business that is -- a core business that is growing, very profitable and growing. We have an addition of Sabine that should help.

And with the changes in the acquisition of the videoconferencing, we should see an improved contribution from that business.

Is that one way to think about 2014?.

Yes, definitely. And while it's sometimes a bit discouraging that the Video business timing was slightly delayed, we remain very optimistic of that business, the management, here [ph] team and our partners, et cetera. It's slightly different than the audio. So they were obstacles that we had to get over, but I think we're really there..

And we have one last question from Austin Hopper of AWH Capital..

So you said about $10 million on Sabine, is that right?.

It's a little less than $10 million, yes..

About $9.95 million roughly, it was announced. So is there a $5 million -- it's unclear to me, there was some commentary earlier, the $5 million revenue business, is that about right or....

That's the expected run rate by the end of the year..

I think it's 5 to 6 points..

That's the expected run rate by the end of the year?.

Yes..

Okay. And then [indiscernible].

Sorry?.

2014, yes..

Okay.

And is it a profitable business?.

Sabine was breaking even. We think we will make more money than them actually..

It's a profitable product, I would say, yes..

Okay, so it's -- Okay.

I think you commented earlier but was ClearOne the largest customer to Sabine?.

Yes..

Okay. So can you help us understand need to buy [indiscernible] largest customer. You're paying them $10 million, or we did. The $5 million business that's breaking even, you're the largest customer. So what's kind of the need to kind of pay such a huge price to a business where you -- I'm just trying to understand....

I wouldn't say that it's a huge price. What I would say it was something that was extremely strategic to ClearOne. We started an OEM relationship about a year ago. We anticipated good revenue, otherwise we wouldn't have gone through the trouble. But it performed even better than our expectation, our customers love the product.

It fuels the growth of our Pro product. And there comes a point where you have to make a decision. You may or may not know that one of our major competitors in the wireless microphone business called Revolabs, about a week or 2 after our announced acquisition was itself acquired by Yamaha.

They were the only other this-sized company -- well, they're larger than Sabine, but they were VC-funded. They had much larger market share than ClearOne. But our products were significantly better.

At the end of the day, once we see the revenue growth, and we see the important -- strategic importance to our products and our channels, we have to make a decision. We buy it today. Maybe pay a little more than we might have liked, or the price goes up, because there was no way that we were going to eliminate this product.

If we could have developed it ourselves, we would have developed it ourselves. But as you know, in technology, you can't do it all yourself. You got to make strategic acquisitions.

We felt the timing of this was just right and paid the right price, and we're happy that we made this acquisition before someone else, such as Yamaha, making the acquisition for Revolabs -- we got to it. So we were very pleased with what we did there..

Yes, it eliminates one competition, and it also improves our gross margins in the long term, actually. If it's -- I think it's one of the safest acquisition models that you can come across, actually..

Okay. And then also, can you just kind of talk to us a little bit about Spontania and, if I'm saying that correctly, and then just kind of -- how that is positioned. You hear a lot about Blue Jeans in video, and of course the Skype being free, but just kind of where Spontania -- how it's positioned and some [indiscernible] will be helpful..

Spontania has a lot of -- well, Spontania, first of all, is a complete system that could live on a public cloud, such as Amazon. A private cloud on which you could buy your own virtual machine on Amazon or elsewhere, or it can live on-premise, where someone puts that collaboration software on their own virtual machine, on their own premises.

So not -- for example, video, I would say Blue Jeans, doesn't have that capability. They run on a public cloud and those are the options available to it. Many companies do not want to live on a public cloud.

There are many applications, telemedicine, that require a more secure environment or control over your videoconferencing, especially overseas, and getting some of the United States. So it also has the ability to interface to standards-based videoconferencing product line, such as Cisco, Polycom, ClearOne, COLLABORATE.

It's unique in that it can host standards-based systems along with its own. It could host thousands. It's the lowest-cost solution in the market today because of its unique design to live on a very low-cost Amazon core. It has a variety of attributes that are unique and it's been deployed.

And it's very, very complementary to our own infrastructure and our own collaborate endpoint..

I'm showing no further questions at this time. I would now like to turn the conference back to Zee Hakimoglu for closing remarks..

I think we've gone through that and we thank you for your time, and look forward to talking to you again next quarter. Thank you..

Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and have a wonderful day..