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

Dennis Van Zelfden - Brazos Research Ian Corydon - B Riley & Co. George Melas - MKH Management.

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

Thanks so much, Sam, and good morning everyone. Welcome, and thank you for joining us today to discuss ClearOne's 2014 Fourth Quarter and Full-Year Financial Results. On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Senior Vice President of Finance. First, some housekeeping measures 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 the next 3 months and may be accessed on the internet at ClearOne's Web site.

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 actual results could differ materially from those stated or implied. And with that said, I will now turn the call over to Zey.

Zey?.

Thank you, Roger, and good morning, everyone. Thanks for joining us today to discuss our fourth quarter and full year 2014 results. We are pleased to report the highest fourth-quarter and full-year revenue in ClearOne's history. This is our 10th consecutive quarter and fifth consecutive year of year-over-year revenue growth.

This impressive revenue record is importantly accompanied by high profitability. You should know this that growth profit in the fourth quarter was 65%, from 60% in the same quarter one year ago. Our non-GAAP diluted EPS went up by 79% when compared to 2013 Q4 non-GAAP diluted EPS.

Net revenue for the fourth quarter reached 15.4 million, representing an 8% year-over-year growth. Sales of internally developed products combined with revenues from acquisitions completed in 2014 contributed to our strong topline performance and increased gross margin.

From microphone products, both wireless and wired as well as our video solutions including media collaboration, network streaming and digital signage contributed to revenue growth. We have also experienced growth across all regions in the world.

Bookings of 1.01 million from Spontania, for our 2014, are at the high end of our expectations, as you may recall Spontania is our carrier grade cloud-based media collaboration solution. However, revenues from wireless microphones amounting to 4.2 million were less than anticipated.

We are nevertheless confident that the wireless microphones business is poised for higher growth with the recent launch of five new models for Europe that comply with European Union standards and the imminent launch of our wireless microphone systems with Dante Audio Over Ethernet technology.

Our gross profit margin increased from 60% in the fourth quarter 2013 to 65% in the fourth quarter of 2014. Gross profit margin increased due to favorable product mix. We expect gross margins to go up from 61% level in 2014 to 62% to 63% in 2015 due to the enhanced product mix.

Operating expenses for the fourth quarter was 6.7 million, up from 5.8 million when compared to 2013. We believe our operating expenses have reached the level where expenses can support additional revenue with minimal increases. This will mean we can be even more profitable in the future as we see increased to revenue growth.

Non-GAAP operating income for fourth quarter increased year-over-year by 33%. Non-GAAP net income and diluted EPS grew by an extraordinary 77% and 79% respectively year-over-year. Tax rates for fourth quarter were reduced due to R&D credits made available later in the year and reversal of tax reserves set up earlier for tax disputes.

This had a favorable impact on our net income bear by reducing the effective tax rate from over 40% for the nine months ended in 2014 to about 31% for the full year of 2014.

In 2014, we successfully executed on our principals and goals to grow not only the top line revenues to acquisitions and organic growth but also of profitability is evident from our 17% year-over-year growth in revenues in 2014 and 26% growth in non-GAAP net income in the same period.

We will continue to execute on our strategic plan to accelerate top line and the bottom line growth in 2015 and beyond.

During the fourth quarter ClearOne's carrier cloud-based video collaboration software Spontania was selected as the exclusive video collaboration technology provider for the 2014-2015 Barcelona World Race, the first and only two crew member per boat, non-stop, around the world regatta.

The competition began on the last day December in 2014, and is expected to finish near the end of this month, March, 2015. With regards participants are relying on the Spontania to provide dependable and robust video connections from numerous remote high seas locations under severe connectivity challenges.

Spontania is able to automatically adapt to any environment to deliver reliable communications from anywhere.

In December, the company launched the new UNITE PTZ Camera, a very affordable, professional-grade, high-resolution 1080p60 camera that can connect directly to any standard PC or laptop through USB 3.0, eliminating the need for adapters or converters for using video application.

It offers an outstanding, high-performance value compared to other, more expensive solutions on the market today and works well with all of ClearOne's media collaboration solutions and network streaming products. The new camera adds another link in the ClearOne solution's value chain for partners and customers.

In December, the company's board of directors announced its first ever annual cash dividend, up $0.10 a share. The board has approved and increased quarterly cash dividend up $0.035 per share which will be distributed in April of this year 2015.

We initiated the dividend program with full confidence in the strength of our current and future financials to sustain this program. We also importantly believe this will benefit the company by extracting investors looking for growth, looking for value, and looking for income.

With this wrapup of our recent highlights I'd like to turn the call over to Narsi for a detailed discussion of our fourth quarter and full year 2014 financial performance. Following Narsi's discussion we will take questions for the remainder of the available time.

Narsi?.

Thank Zey, and good morning everyone. Before I begin, I would like to point out 2 things. First, I will be discussing certain non-GAAP financial measures. 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 by the fourth quarter of 2014.

Please note the following comparison refer to fourth quarter of 2014 which is the same quarter of 2013. Net revenue increased to $15.4 million making this quarter, the stronger ever fourth quarter in terms of revenue. The revenue for the fourth quarter increased by 8% compared to $14.2 million in 2013 fourth quarter.

Gross profit was $9.9 million are 6.5% of revenue, compared with $8.5 million or 16% of the revenue. Turning to operating expenses, sales and marketing expense increased by 17% to 2.7 million from 2.3 million, the increase was mainly due to increased commissions to sales persons and independents reps. R&D expense was flat at 2.1 million.

Non-GAAP G&A expense was also flat at $1.3 million, total non-GAAP operating expenses increased by 7% from $5.7 million in 2013 fourth quarter to $6.1 million in 2014 fourth quarter.

Non-GAAP operating income increased to $3.8 million from $2.9 million and increase of 33%, non-GAAP net income increased by 77% to $3.2 million or $0.34per diluted share, from $1.8 million or $0.19 per diluted share of the prior year period. Net income for 2014 fourth quarter was positively impacted by lower taxes.

I have already noted about these, the lower taxes that are due to R&D credits for the entire year 2014 that was made available later the end of the year and release of [indiscernible] earlier set for tax disputes. Non-GAAP adjusted EBITDA increased impressively by 31% from $3.1 million to $4.1 million.

Let me turn to our financial results for the 12-months ended December 21, 2014. Please note the following comparisons refer to 12 month ended December 2014, versus the 12 month ended December 2013. Net revenue increased to $57.9 million from $49.6 million, which is an increase of about 17%.

Gross profit was $35.3 million at 61% of revenue compared net $29.9 million or 60% of revenue. Now turning to operating expenses, sales and marketing expense increased by 26% to $11.2 million from $8.9 million. R&D expense increased by about 19% to $9 million from $7.6 million. Non-GAAP G&A expense reduced by 3% from $5.1 million to $5 million.

Total non-GAAP operating expenses increased by 17% from $21.5 million in 2013 to $25 million in 2014. Non-GAAP operating income increased to $10.3 million from $8.4 million, which is an increase of about 23%. Non-GAAP net income increased to $7.2 million compared to $5.7 million in 2013 an astounding increase of 26%.

Diluted non-GAAP net income per share increased to $0.75 in 2014 from $0.60 in 2013. Non-GAAP adjusted EBITDA increased by 21% from $9.3 million to $11.3 million. Let me turn my attention to the balance sheet. Our balance sheet remains strong. At December 31, 2014, our cash and investments balance was $33.6 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 2014. I would now like to turn the call back to Zee..

Thank you, Narsi. Our investors can look forward to another year of strong revenue and strong profitability growth in 2015 as we remain focused on our vision to market success and execute on our strategy through operational discipline.

The synergy generated from our diverse and comprehensive portfolio of products and technologies continue to be a compelling ClearOne value proposition for our channel and our customers. Operator, I think we could take questions now..

Thank you ladies and gentlemen [Operator Instructions] We do have a question from Dennis Van Zelfden of Brazos Research. Your line is now opened..

Thank you, good morning Zey and Narsi. We will start off, which we just finished up with, in that you were saying investors can look forward to another strong year of growth.

How do you define the word strong?.

It's a good question. I think strong is first related to the market, our peers, that's one; and strong I think is, represents the kind of what we did. We claim that we had a strong year, this year 2014, and I think a strong year next year should be equally good, if not better, but at least it's good..

In terms of the percentage growth and things like that?.

Again, we're been focusing on revenue growth, profitability, EPS..

Okay, when you talk about revenue growth, what kind of visibility do you have with respect to the absolute levels of the revenue? I mean, can you look out with great confidence, one quarter or two quarters out or is it more like a month or two?.

No, first of all we don't provide guidance because we sell through a channel, and we don't necessarily have visibility into our channel. What of our revenue is project based and project can be lumpy. They could come in one quarter early. They could come in one quarter late or more.

And so the lumpiness of our solutions as they are deployed, does not give us a good degree of confidence that we comfortably project our revenue. We certainly track our revenue on a daily basis, of revenue that comes in, and we look at trending and we have our budget and compare our trending to budget and make appropriate adjustments.

But that's about as far as I say. We watch it like a hawk on a daily basis, but these are project oriented infrastructure sales for the most part, they are not daily decision sales..

Just to add clarity, what Zey is saying is, we can't say with precision that we would end up each quarter, but we do have good vision on how our products will do, how it will ramp up and we have a good idea, not just a one quarter or two quarters, we have one year budgets, we have five-year long-term outlook.

We know that we are going up but we are not in the business of giving guidance actually..

Okay, one last question. Zey, you mentioned that the wireless microphone segment was 4.2 million, and that was a little bit less than anticipated.

Can you deal a little bit more into as to why it was less than anticipated and was currency a factor in that at all?.

First of all, I can't, Narsi may be able to speak of currency. But of course we deal in U.S. dollars, and of course there is always added pressure on the U.S. dollar, we are trading overseas. However we see that what has happened is, we had anticipated two things which I mentioned.

We had anticipated that we would have received compliance for our European brand of microphone, the wireless microphones, it require different frequency plans and different compliance certificates to sell in Europe. And those did not get completed in engineering to our targeted plan and we are not part of our Q4 shipment.

Number two is we have planned to launch another very strategic product in wireless microphones which is wireless microphones with Dante. Dante is the latest, hottest audio interface for audio solutions and we have planned again in engineering to complete that development and ship those units in Q4. That didn't happen.

And for those two primary reasons we lost a little of, I would say revenue or momentum in not getting those out in the market as we had hoped but the good news is that those are imminent and we think that we will get right back on track and have a very-very positive reception to these products and catch up where we need to..

Our next question comes from Ian Corydon of B Riley & Co., your line is now opened..

I missed some of the commendatory around the improvement in gross margin.

I think it was primarily due to mix, can you just expand on that a little bit more?.

The primary reason for gross margin increased due to of course the mix and also the inventory optimisms playing a lesser part, but we also had little benefit from the UC overhead allocation things that we do, that might have contributed about 1.5% to 2% in gross margin. And we had a hit in Q2 where our gross margins dipped to 57%.

So this happens periodically, but most of the gains came from product mix actually, and we expect this game from product mix to stay in the long-term actually..

What is that change in mix?.

Now you have seen that trend, that our UC products have been having lesser share of the revenue, and the higher value products like our microphones, especially ceiling microphones and beamformer microphones, and our professional products have a higher mix.

And the software, when you see, Spontania getting increasingly a contribution factor, the software-based video product, it's also high margin, almost hundred percent gross margin on those products. So, all these things are contributing to the trending of our combined gross margin rate actually..

And what's the biggest impact be mix within pro?.

The biggest impact would be from microphones. Those are the ones that are causing the biggest impact..

In the pro line..

In the pro line..

And can you provide the percent of revenue breakdown?.

Yes, just give me a second. Let me open up those spreadsheets. Let me go by the region's first. Americas for 2014 increased by 20%, and in Q4 close to 5%. APAC, which includes Oceania was flat year-to-year, the entire year; but Q4 it also grew by 27%.

EMEA, which rose Europe and Africa, in our case Middle East is included in APAC actually; the year-two-year increase 2013 to 2014 totaled 24%, just Q4 alone it was 6%. And the mix of Americas, in Q4 the mix was 69% and the entire year it was 70%. APAC, it was 17% for Q4, and 18% for the entire year.

And EMEA it's 14% for Q4 and and 13% for the entire year. Let me give you by products. To products which includes microphones went up in 2013 to 2014 for the entire year by 35%, of course it includes Sabine acquisition that includes wireless microphones. Q4, it went up by 10% actually.

UC, for the entire year, it went down by 10%, for Q4 it went down by 14%. Video for the entire year went down by 43%, but just for this quarter it went up by 60%, and the 60% is followed by 42% growth in Q3 actually, so video is picking up actually. In terms of mix, 2014 entire year to 77%, Q4 the same 77%.

UC was 15% in Q4, in 2014 the entire year it was 17%. Video was 7% in Q4, and for the entire year it was 6% actually..

Okay, and just to clarify, video in Q4 was up 60%, not 16% is that correct?.

Yes, 60. .

[Operator Instructions] Our next question comes from George Melas of MKH Management; your line is now opened..

First of all congratulation for a great year. I want to ask you about the new products that could drive significant growth for Q1 and I think you said that it typically takes three quarters from a product launch to getting to a meaningful revenue.

And you have a number of these products in your portfolio, not just while it's microphone backed, also this streaming products, your two videoconferencing products and also the matrix product.

Can you sort of elaborate on each one of those products and to see how they're doing?.

Talking first on the network streaming products, again we began shipping the ideal network streaming product last quarter and that is the one with the software engine which is also used in our media collaboration appliance.

And those our system jobs, that is really truly infrastructure and we keep our measure of our pipeline and the quotes that are out there verbally, and we see a very nice pipeline of quotes that are developing on the streaming products quite frankly. We had a couple of nice wins last quarter, Q4 with some multi accounts.

There are small but as you know the streaming infrastructure are view products, scale from small systems to larger systems.

So we also found a new partner, or engaged with the new partner that had been extremely bullish on our network streaming solution and in fact had displaced their former network streaming provider with ClearOne and is transitioning to ClearOne.

And that will be very significant, but again these are quotes, our job becomes open as you put in a quote, there is a decision-making period. A decision is made and then you have to fulfill. So it's a longer cycle which is where we want to be in doing infrastructure more a system oriented work.

The converge matrix is another product we haven't talked much about that ship this quarter, just beginning to ship this quarter. That again is another sort of infrastructure product. It is a converge product with everything except echo cancellation.

The market for one-way distribution of audio is a large market, for every one room of conferencing, there are multiple rooms that don't need conferencing but simply need audio. That again is infrastructure. That again takes time to quote, to make decision, then to finally fulfill.

But again, we received a nice interest from our partners, it's much newer. We received a nice reception from our partners. They liked the product, and we expect -- we are going to start seeing a nice pipeline of quote for that one as well. On the Media Collaboration, those are important products.

We are seeing good adoption or good uptake on the interest of those products, right now mostly overseas because those products were overseas. To some extent Spontania was marketed overseas and our collaborate product in APAC is an interest because of its price point et cetera.

So we anticipate that we are going to start seeing some of these products ramp up methodically, there was a little spottiness, jobs come in, jobs get delayed, sometimes they come in early if you're lucky. But we are optimistic; of course the wireless microphones are bread-and-butter product.

They go hand-in-hand with our legacy mixers, and we are optimistic again that these two enhancements, new systems are going to continue to drive revenue for us. And that's a little bit more straightforward. Hope I answered your question..

You sure did, I appreciate that. And then try to add a little bit more question on that, you expect nice growth in 2015, I guess strong growth.

The new products, this turn in product and metrics and the Media Collaboration, do they hit the right way or do you think it's more in the second half of the year that they are really begin to ramp?.

I will have Narsi answer that because we have a plan on that, or at least a target, you go ahead Narsi..

Based on our models and expectations, streaming products should start contributing in Q2, Q3 onwards it should be a big factor actually..

You said streaming would start to contribute in Q2 and Q3, is that we are talking in?.

It is only expected to, as I said -- we have said before it takes about three quarters for us to ramp up, and we think starting from Q3 we will see a significant increase actually, from where we are today.

We already are seeing a good increase where you can see from our total numbers, our video numbers are up 60% for Q4 it was up 49% or 50% last quarter. And it will go up and network streaming products will be a significant factor. And Spontania is already contributing a good amount every quarter.

So, yes, second half of the year is when we expect things to sharply increase actually..

Okay and then if you look at the product mix in ’15, do they UC products sort of keep declining somewhat as you put less emphasis on them and will you put more of your resources on, I guess you have put more of your resources on the newer product; will that be a good way to see at that?.

Yes. We don't want to run our business on commodity products. We did, especially making these technology acquisitions because what type of products that we put out, it needs to be differentiated in the marketplace, difficult for the competition to duplicate as you can see many of our products are not duplicated and highly profitable..

Thank you and I am showing no further questions, I’d like to turn the call back to management for any closing comments..

Okay. Thank you. We appreciate your continued interest in ClearOne for the listeners and for joining us today in our quarterly and full-year update. If there is any further questions please contact us at ClearOne Investor Relations, this concludes our call for today and we thank you for your time..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a wonderful day..