Kathy Madison - LHA Zee Hakimoglu - President and CEO Narsi Narayanan - SVP of Finance.

Kara Anderson - B. Riley and Company Lisa Springer - Singular Research Michael Kay - Kay Associates..

Good morning everyone, and welcome to the ClearOne’s 2017 First Quarter 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 Company’s Investor Relations representative, Ms. Kathy Madison of LHA. Ms. Madison, please go ahead..

Thank you Christy. Welcome everyone and thank you for joining us today for the ClearOne first quarter 2017 results conference call. On the call today are Zee Hakimoglu, President and CEO, and Narsi Narayanan Senior Vice President of Finance. Please note this call is being broadcast live on the Internet at www.clearone.com.

And a playback will be available for at least three months. Before we begin, I would like to make the cautionary statement and remind everyone the information discussed on the call today 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 forecast of certain aspects of the Company’s future, and our actual results could differ materially from those stated or implied. Today, Zee will open with a review of performance highlights and provide a business update.

Then Narsi will provide a detailed discussion of the financial results. We will then open the call for questions. Now it is my pleasure to turn the call over to Zee..

Thank you Kathy and good morning everyone. [2007] [sic] is trending positively. Our newest products are gaining market traction, our innovation is being validated and our financial results are improving. Also, as recently announced, our board of directors extended our stock repurchase program backup to $10 million.

Under this program in Q1, 2017 we spent approximately $900,000 to acquire approximately 79,000 shares. Also we increased our dividend payment from $0.05 to $0.07 per share in Q2, 2017. Our total Q1 revenue was $11.7 million and while still not at the first quarter, 2016 level revenue increased 9% sequentially from Q4.

Our video investments continue to pay off, generating steady and strong gains. Video posted revenue growth at 60% year-over-year.

Further, the CONVERGE PRO 2 platform gained market traction with revenue more than doubling sequentially Non-GAAP gross profit margin grew sequentially from 55% in Q4, 2016 to 57% in Q1, 2017 even though Q1 gross profit margins were not at the same level as Q1, 2016.

When compared to Q1, 2016, gross profit margin declined mostly due to price reductions affected to the CONVERGE PRO 1 products which still remains a significant part of our sales mix. The increase in share of video products in our revenue mix was also a factor impacting reduced growth profit margin.

When compared to Q4, 2016 sequential gross profit margin improved mostly due to increased CONVERGE PRO 2 revenue. GAAP net income in Q1, 2017 was affected by reduced gross profit if I just described as well as due to legal expenses incurred to defend our Beamforming related patent.

Before I provide greater detail on the quarter, I will address our recent patent award in our intellectual property strategy. ClearOne was awarded a new patent on April 25, 2017, the 186 patent in short on a system and method involving the combination of echo cancellation and beamforming microphone arrays.

This patented technology is one of many innovations that helped ClearOne conferencing systems provide the best, clearest and most intelligible audio possible.

Our extensive patent portfolio is an important core asset that protects our ground breaking technology, powers ClearOne’s industry lean edge and conferencing technology and represents significant value for the company.

Our history in investing in new ideas and technology that enable market transformation in our industry is a key differentiator and has enabled ClearOne as an innovation leader. We are particularly excited about the 186 patent as it underpins the acoustic intelligence of our award winning beamforming microphone array.

This patent delivered the pro-AV industry's first pro-grade microphone array with beamforming, adaptive steering smart beam selection, and acoustic echo cancellation, which we believe to be a significant value in our market.

We have initiated a strategy to ensure our intellectual property is respected by the industry and which is consistent with our commitment to building long-term shareholder value.

As many of our long term investors know, we have a successful track record of managing and winning litigation in intellectual property and other complex matters to defend ClearOne’s right. While we cannot comment on ongoing litigation, we believe the 186 patent is enforceable. Now I’ll provide further color on ClearOne’s progress in the quarter.

In our continuing drive to optimize production cost across new products, we strengthened our global manufacturing operations team. On the sales and marketing front, we continue to strengthen our team through new additions for improved coverage and to increase market awareness of our new solutions.

We moved our Middle East sales and service headquarters to a more prestigious, high tech location in Dubai to serve our customers and channel partners better. Let me review some of our wins in Q1 that we secured thanks to our complete and complimentary value chain of solutions. Our new CONVERGE PRO 2 platform had several wins.

These included the fastest growing sports organization in the world, a Global Fortune 100 entertainment company, a big four accounting firm, a global biopharmaceutical company, an international financial exchange, a large U.S. government agency, a couple of South American Banks and a couple of U.S. hospitals.

Our legacy CONVERGE PRO products continue to win projects in Q1. These projects included a large military installation, a [Fortune 10 auto] maker, a Global Fortune 100 entertainment company, a large retail chain of hardware outlet, a Canadian government agency and a large Canadian City Administration.

In Q1, our video collaboration solutions secured several wins including a popular subscription video-on-demand service corporation, [a bid] for accounting firm, a leading U.S.

medical devices corporation, the Air force in a large South American country, an international financial exchange, a Canadian government agency, a large Asian Provincial education department, an international waste management company, an African hospital chain and a state county court system.

For our network media streaming products namely VIEW wins included a big four accounting firm, a global casino entertainment and hospitality company and a showcased international exchange and service center. Regarding product development, we continue to add features and functionality to our new CONVERGE PRO 2 platform.

We released a mobile app to easily access dial and control the CONVERGE PRO 2 line of mixers on both Android and IoS platforms. These new user friendly applications extend choices of devices and interphases for users and come on the heels of an already released applications for Windows and Mac Operating systems.

Finally, during the week of June 11, we look forward to seeing many of our partners at the biggest Audio Visual Exhibition of the year in North America “InfoComm” this year in Orlando, Florida. During the event, we will be showing several of our newest solutions for audio, video collaboration and network streaming.

We wholeheartedly welcome investors and other stakeholders to stop by to see here and experience for yourself the evolution ClearOne has made and continues to make in this rapidly evolving audio, visual communications market. Now, I’ll turn the call over to Narsi..

Thank you Zee and good morning everyone. Before I begin, I would like to note that I will be discussing certain non-GAAP financial measures. A reconciliation is included in our earnings release. Now I will turn to our financial results for the first quarter of 2017 compared to the first quarter of 2016.

Net revenue was $11.7 million compared to $13 in Q1, 2016 and $10.7 million in Q4, 2016. Reviewing the year-over-year change in percentage of revenue by region. Asia Pacific including the Middle East grew 36%, although Americas decreased by 17%, and Europe and Africa decreased 29%. That said, all regions grew sequentially.

Reviewing now the year-over-year revenue change in percentage by product category. Video increased 60%, although pro audio and UC endpoints were down 15% and 23% respectively, but again I am pleased to say all categories increased sequentially.

Non-GAAP gross profit margin grew sequentially from 55% in Q4, 2016 to 57% inQ1, 2017 even though Q1 gross profit margins were not at the same level as Q1, 2016. When compared to Q1, 2016 gross profit margin declined mostly due to price reductions affected to the CONVERGE PRO 1 products which still remain a significant part of our sales mix.

The increasing share of video products in our revenue mix was also a factor in reduced gross profit margin. When compared to Q4, 2016 sequential gross profit margin improved mostly due to increased CONVERGE PRO 2 revenue. Non- GAAP operating expenses were $6.3 million in 2017 Q1 and $5.9 million in 2016 Q1.

The majority of the increase was in G&A reflecting litigation expenses, partially related to the 186 patent law suit. Non-GAAP operating income was $366,000 compared to $2.5 million. Our tax rate for Q1, 2017 did not get the benefit of losses in non-U.S. jurisdictions and contributed the increased net loss in 2017 Q1.

Non-GAAP net income was $149,000 compared to $1.8 million. Non-GAAP adjusted EBITDA was $634,000 compared to $2.8 million. Now turning to the balance sheet, we continue to be very strong. Cash, cash equivalents, and investment were $35.6 million compared to $38.5 million at December 31, 2016 still without any debt.

The decrease in cash balance was primarily due to higher spend on inventory related to new CONVERGE PRO 2 platform and wireless microphones. During the quarter, we continued our shareholder friendly initiatives.

We repurchased approximately 79,000 shares for about $900,000 bringing the total to about 621,000 shares for $7 million since the program interception in March 2016. As announced in March 2017, the board of directors have extended the program for up to $10 million over additional one year.

We intend to continue to repurchase our shares in the open market subject to price, volume and other Safe Harbor restrictions, also the Boards of Directors increase the dividend from $0.05 per share to $0.07, which will paid on May 31st to shareholders of record on May 17. Let me turn the call back to Zee..

Thank you, Narsi. We are dedicated to redefining AV through innovation and providing advanced conferencing collaboration and network streaming solutions that deliver unprecedented levels of functionality, reliability and scalability.

We are pleased with our Q1 improvements, however as discussed previously it generally takes about three quarters for a new Pro audio platform to replace the previous generation due to the time required for the sale cycle.

So it is still early in the log since we began shipping and we fully expect our new audio solutions along with video will drive 2017 growth and long-term shareholder value. Operator, you may open the line for questions now..

Thank you. [Operator Instructions]. Our first question is from the line of Kara Anderson of B. Riley and Company. Your line is open..

Hi, Good morning..

Good morning, Lisa. Oh, Kara, yes, Kara today. Thanks..

So, I’m a little bit newer to the story.

And so, can you help me understand what’s happening with the gross margin? What’s behind the price reductions? And are the expectations for that margin to return to 60 plus percent?.

I cannot be able to add, but when we introduce the newest platforms; the CONVERGE Pro 2, when you announce the new platform often times it create a situation where customers, integrators want to wait for the new platform rather than investing in the old platform. Of course, we like to keep our channel informed of what will be coming.

So in order to spur interest and continue to generate sales in the legacy platforms CONVERGE Pro 1, we reduce the pricing of that platform. For us we had anticipated that that platform the CP 2, CONVERGE Pro 2 would begin shipping sooner. That did not happen.

We had certain engineering delays et cetera, and as the shipping did not happen until really the every literally last day of 2016. On top of that, we had some very important software upgrades that we wanted to incorporate as well which came at the very end of Q1.

So all-in-all the CONVERGE Pro 1 existing platform is still selling at its reduced cost which tends to drag down the gross margin. I should also add that the CONVERGE Pro 2 is more competitively price than the CONVERGE Pro 1, and so it’s not equal and will have some impact on the gross margins.

Finally, as the mix of video increases in the overall mix, the gross margin per video solutions is not quite as high as the gross margin on the audio and accordingly makes an impact on the gross margin..

That is very helpful. Thank you so much.

And then could you repeat the revenue growth by product category and maybe even take it a step further and provide total revenue contributions for the three product categories?.

Okay. Revenue change for Pro year-over-year was 15% down. UC Endpoints was 23% down, video was up 60%. Pro’s share was 75%. UC Endpoints share was about 11%, and video share was about 14%..

Thank you for that. And then last housekeeping question from me.

Did you say how much litigation expense was during the quarter?.

We did not breakout specifically, but we made a non-GAAP adjustment and it’s in our earnings release actually. It includes litigation expense, not that litigation expense, but you can see amount included in there..

Okay. Thank you very much..

Thank you, Kara..

Thank you. Our next question is from Lisa Springer of Singular Research. Your line is open..

Good morning, Zee and Narsi..

Good morning, Lisa..

Hi, Lisa..

My question concerns, when you announce big customer wins during a quarter, what would be your expectation for when those customer wins will start to generating revenues.

How long the lag is there between the contract signing and revenue generation?.

Those are actual wins where we have shift product and recognize revenue. Anytime we talk about a win on these calls we have recognized revenue for those projects. They relates with Q1..

And historically when you’ve attended conferences like the InfoComm, do you see a bump in revenues following those conferences?.

Actually there is occasionally a bit of a low just before the conference, people try to do get work in and it certainly impacts the quarter to some extent but you could see its reflect in our many years of InfoComm..

Okay.

And I know you can't talk this specifically about the patent lawsuit, but could you guide, maybe you assume that or should I assume the litigation expense is going to be a meaningful part of expenses during 2017?.

It depends on couple of factors. We don't know how the other side is going react to our strategy. So it depends largely to the extent of how they will react. And litigation is only one to resolve an issue. That’s one thing. So we don’t know all the different basic will get resolved..

I would say, it’s very early in the process, extremely early, but certainly we have plan for it and we went into with our eyes wide open and we considered this strategic activity to bring further value to ClearOne ultimately..

Okay. Well, thank you both for the color. Appreciate it..

Thank you, Lisa..

Thank you. Our next question is from [Indiscernible]. Your line is open..

Hello, Zee, hello Narsi..

Hello..

Hello..

I have a question for you. I think the last call, Q4 call was around March 10th, 11th, I can’t remember offhand, but think it’s about that time. You mentioned Zee that the revenue was tracking up slightly from Q1 of 2016, that's revenue -- including the backlog. And then revenues I guess came in lighter than we had anticipated they might.

What happened in the last 20 days in Q1 for that not materialized?.

Actually we were tracking at that time, taking into account backlog and whatever we had shift at the time. March is not obviously pretty good month when compared to previous part of the quarter..

Okay.

So, can you expand on why March was not strong as January and February because I thought maybe the momentum might have been building?.

Actually you can – we might have noticed that even the GDP numbers that were put out recently for U.S. economy in particular for Q1, it was one of the lowest in the last three years actually.

And I think which was kind of a surprising thing especially when we saw the momentum in favor as business was picking, conference growing after the elections, U.S. elections, so it was surprising and disappointing. I think it might have room in disappointing March performance.

And we were surprised but it looks like numbers do prove that it’s not something that happened just for us actually, it’s more an industry wide concern actually..

Okay.

So you’re saying it’s a macro reason, there’s not something competitive believe that was hurting you in the market?.

Yes..

I would say that if you could see by numbers, we made progress both on the video and on the CP 2 and that’s coming along, but overall it impacts everything..

And you have to notice that Q1 is generally our leanest quarter and Q4, our Q4 results are bad actually. But to beat Q4 results by [19%] I think it’s pretty good indication but I think that turning around actually..

Yes. I was glad to see revenues up from Q4, so maybe the revenue bottom is in. You mentioned on the call that it takes about three quarters for a new product to really work its way through the channel.

Would you consider Q1 to be the first quarter of that or is Q2, the first quarter where your CONVERGE Pro 2 is really in the market?.

I’m going to consider it sort of in between, because while at the very end of the quarter, basically at the beginning of Q1 we began shipping all 10 SKUs of CONVERGE Pro 2, but at the end of Q1 we implemented a major software upgrade that for all the features functions and scalability to the 10 SKUs..

Got it.

So, it will be Q4 really before the channel is fully absorb three quarters out from the CONVERGE Pro 2 intro?.

Well, as I said, it’s a long sale cycle. We give it an average about three quarter for this kind of infrastructure equipment..

Got it. Okay. You mentioned on the last call that the sales and marketing expense you may increase that to support the new SKUs.

Is that some of the increase that we saw in the sales and marketing number? Is there any specific programs you can speak to?.

The sales and marketing number for this quarter 2017 Q1, it tracks similar to how we have done in earlier years. Those initiatives that we talked about have not yet converted into cost in Q1 actually.

We talked about strengthening our sales team, exiting the coverage, increasing the awareness, but we are still able to manage it within our usual financial budget. We haven’t started..

Yes. Within an eye on to sensitivity of the growth of that CONVERGE Pro, we are doing some ad spends. We’ve increased our ad spends. We’ve increased our social spend. We’ve added some PR on a particular line.

We’ve rearrange some -- added some supplemented our sales team in areas that we think [deserve] to be increased to grow those regions, but of course that ClearOne is always very sensitive to any expenditures, so while we are implementing some sales and marketing initiative, not to the extent fully of course we take these incremental and we don’t just throw it all at marketing at ones.

We try to save cost in other areas and that’s what we’re doing. We save cost in other areas and we spend money in areas that we want it to further develop..

Got it. I appreciate it.

I want to ask lastly I guess on the buyback, $900,000, 79,000 shares, that’s 11.39 a share, with the stock down some in April were you able to buy any shares than when it was lower or is that a quiet period, can you comment on that?.

We are doing it the normal way. It depends on the volume also, when that, when stock price goes down, there are not enough activity in there actually. Its – so we are doing safe harbor provision buying actually, right. So we are subject to all the volume restrictions and price restrictions.

So it’s nothing unusual in terms of our volumes for any purchase in April actually..

And the firm that we’re using, our bank -- our main bank it’s a market making for ClearOne as well. So he knows our stock pretty well and its very, very effective in making these trades..

Got it. Okay. Good luck in the lawsuit and I look forward to seeing you at InfoComm..

Well, look forward to seeing you Chip. Thank you..

Thank you. [Operator Instructions] Our next question is from Michael Kay of Kay Associates. Your line is open..

Yes. Good morning..

Good morning, Michael..

The question is, why did the rationale using the company’s money to buy back the shares, I really don’t see how that is valued to the company.

Wouldn’t be more if you look upon ClearOne as primarily a conservative growth company? Wouldn’t it be more judicious to use that money for strategic and strategic acquisitions that could add real value to the company resulting in increased revenues and earnings rather than buying back the shares?.

It’s a very good question and we’re often asked that, and I want to respond Michael. We try to balance. We’ve made several acquisitions over the years for technology.

And we do that within eye towards not spending too much money, its making sure that it’s a technology fit, making sure that it has a good runway for the future making, making sure there’s a cultural fit and it something we can manage and our eye is always out for an acquisition whether that be small or large.

We’re not afraid of spending our money in fact raising money if a strategic acquisition comes our way, and we proven that we can do it and we’re good at it, and we get rid of the waste and we bring value to the company.

So we’re always on the hunt for that, but often times many companies are overpriced, have poor technology, required too much investment that we feel will bring extraordinary risk to the company and we don’t want to do that, but we are on the lookout always and we talk to companies constantly and we have a bankers that brings deal to us that maybe of an interest et cetera.

So we are very active. At the same time, we traditionally except for this short period of hiccups generate cash and we have a code of cash and we have no debt and we feel that it’s only fair and beneficial for our shareholders that we share some of that cash.

It doesn’t affect our ability to go out and make some good valuable strategic acquisitions that will add revenue and value to our stock as well. So we keep an eye on both, it’s very important and I’m glad you ask, maybe Narsi has some comments on that..

I think it’s great. I agree with what Zee said..

Yes. I’m really pleased to hear that it’s a perfect response and I like the philosophy that one could both in moderations. Thank you very much..

Thank you, Michael..

Bye..

Bye..

Thank you. And that conclude our Q&A session for today. I’d like the turn the call back over to Zee Hakimoglu for any further remarks..

All right. Thank you for joining us today. We’ll be at the B. Riley Annual Investor Conference in Los Angeles later this month and hope to see some of you there. Have a wonderful day..

Ladies and gentlemen, thank you for participating in today’s conference. This does concludes today’s program and you may all disconnect. Everyone have a great day..