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spk01: Hello, and welcome to the oblong fourth quarter and year-end 2020 earnings results conference call. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Brett Moss with Hayden IR. Please go ahead, Brett.
spk04: Thank you, Operator. I'd like to welcome everybody to the call. Hosting the call today are Oblong's Chairman and CEO, Pete Holst, CFO David Clark. Please be aware some of the comments made during our call may contain forward-looking statements within the meaning of federal securities laws. Statements about our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate, and similar expressions constitute forward-looking statements. These statements involve risks and uncertainties regarding our operations and our future results that could cause higher risk could cause actual results to differ materially from the management's current expectations. In addition, today's call includes non-GAAP financial measures, and a reconciliation of such measures to GAAP measures is contained in the press release issued today. We can encourage you to review the safe harbor statements and risk factors contained in the company's earnings release and its infilings with the SEC, including, without limitation, the most recent annual report on Form 10-K and other periodic reports, which identify specific risk factors that may also cause actual results or events to differ materially from those described in the four linking statements. Copies of the company's most recent reports on Form 10-K and 10-Q may be obtained by the company's website, www.oblong.com, or at the SEC website, sec.gov. The company does not undertake to publicly update or revise any forward-looking statements after the call or date of this call. I would also like to remind everyone that this call will be available for replay through April 13th. A link to the website replay of the call was also provided in the earnings release and is available on the company's website at oblong.com. And now I'd like to turn the call over to the CEO of Oblong, Pete Hulse. Pete, the floor is yours.
spk05: Thanks, Brett. Good afternoon, and thank you, everyone, for joining us today. 2020 was a significant year for Oblong, ending with momentum and marked by another quarter of sequential revenue growth, along with a measurable increase in our pipeline of new business opportunities. Though we achieved this progress amidst a pandemic that totally shut down our primary end market, the in-conference room, is both impressive and an incredible attestation to the team's ability to gel and focus on building great user experiences. Let's briefly look at fourth quarter achievements. In the fourth quarter, with COVID peaking across most of the United States and people continuing to work from home, we delivered $1.6 million in core product revenue from our mezzanine collaboration suite, We completed two financings, raising $7 million in net proceeds to fortify our balance sheet and give us capital to grow. We eliminated $5.6 million in debt for $2.5 million to strengthen our balance sheet and overall capital structure. We continued to improve gross margins three quarters in a row, and we narrowed our losses by half again from the prior quarter. And we enter 21 now with the best pipeline in our history, particularly in larger deals with qualified opportunities in excess of 100 rooms. Our focus has been on training and developing key partners in geographies, where we believe a return to the office is likely sooner than later. As the market begins to reopen, we believe our sales model is both highly efficient and sized proportionally to leading indicators in our channel. Our most prominent source of lead generation continues to be with our primary partner, Cisco, who we believe with their unmatched combination of network, security, and collaboration solutions are at the forefront of primary beneficiaries as enterprises look to reopen their offices. Recent Cisco research suggests there are two significant drivers in the reopening process. The first is a strong desire for more advanced tools. with over 96 percent of respondents to their recent research efforts wanting intelligent technology to improve their work environments. The second is a prioritization of the employee experience, with over 86 percent of respondents stating that empowering a distributed workforce with seamless access to applications and a high-quality collaborative experience is either important or extremely important. Interestingly enough, this jumps to over 95 percent for companies with more than 1,000 employees. With our singular focus on employee engagement and user experience, we were recently awarded a new Cisco certification in the content experiences category. This new certification offers WebEx video device users a more seamless user experience, dramatically increasing their ability to share and engage with live content streams. Mezzanine's integration with WebEx allows distributed teams to share up to 10 live streams of content, simultaneously delivering both a unique and unsurpassed level of user engagement. In addition to in-room experiences, Oblong's certified integration enables remote participants to also be full participants in the meeting. By using newly added features in WebEx, touch-enabled devices can now remotely connect participants to a mezzanine experience. As we look back over the last 12 months, in many ways, our performance during the pandemic is all the more impressive. First and foremost, we sell a product today that goes into enterprise conference rooms. One year ago, everyone who was using those rooms went home. Lights went dark, and IT buyers went to the sidelines. Every IT buyer we spoke to back in March and April of last year said, call me when this pandemic ends. It was unnerving to say the least. In spite of that, we raised $2.4 million very quickly from the SBA within three weeks of broad stay-at-home orders being issued. We restructured our operating expenses significantly and worked quickly to simplify our product offerings with our core partners. We're also building a sales pipeline that was both tangible and aligned with the reopening sales cycle. Near the end of the second quarter, we implemented a new pricing model for our flagship mezzanine suite of products, making pricing more attractive for customers by offering CapEx and OpEx models that allowed them to include us in potential deals not otherwise available historically. As a result, We are now involved in almost three times the amount of larger-scale opportunities compared to the prior nine months, representing more than 10,000 conference rooms across hundreds of thousands of potential individual users. The new pricing structure and greater focus on cost of goods sold are also driving higher gross margins, which, combined with the actions we took in the late second quarter of 2020 to right-size the organization, have significantly reduced our overhead, putting us on a trajectory to grow the business thoughtfully and symmetrically to demand. Fast forward three quarters from the inception of the pandemic, and with a great majority of commercial real estate still remaining either at a minimal or shuttered state, we still sold almost 1.6 million of our core products in the fourth quarter. We improved gross margins for the third quarter in a row, and we improved our adjusted EBITDA loss by approximately 600,000 on a sequential quarterly basis. Again, an improvement from both Q2 and Q3. But now the pandemic is beginning to show signs of abating. We are incredibly encouraged with the rollout of vaccines across the U.S. and other countries who have been diligent in their approach to managing reopenings. Businesses are starting to think about what return to work will look like. In fact, IT leaders have been thinking about that for some time, scheduling demonstrations of next-generation technologies like Oblong and working to synergize the work-from-home and return-to-work mindsets, recognizing that we'll have something of a hybrid model in most cases for some time to come. Prompted by accelerated vaccination in the United States and recent reopening announcements from major corporations, we've been invited to bid on a number of larger scale opportunities. In fact, this is really just accelerated in the last 30 days. Our internal metric to define larger scale is both a combination of conference rooms and more importantly, looking down range, potential cloud users of our prospective new offerings. Recent opportunities have exceeded both of those metrics, indicating growing demand for hybrid offerings at scale. There are a number of indicators that suggest our growing confidence in 2021 and 22 is warranted. Oblong is, in fact, a major reopening play. As businesses unlock their doors, conference rooms will need to be updated. The old ways of sitting across a conference table and staring at linear content will no longer be sufficient to either engage or entice workers to return to the office. COVID demonstrated that things must change. Going forward, half the participants in a given meeting or work group will be remote and very likely working from upgraded home offices. Social distancing will still be prevalent and enterprises must harness technology to enable collaboration and engagement in new ways to create greater productivity. Those that don't will simply be left behind. And simply put, Oblong makes all of that possible. And we're working with one of the global leaders in IT in Cisco, who we believe is poised to break out in the next 24 months. Our progress on developing the cloud offering is coming along very nicely. We expect to release a beta version to a select group of existing customers in April and believe the addressable market for this complementary service is now easily accessible. in the millions of users now that COVID has dramatically increased the awareness and usage of virtual meeting services. As evidenced by the demand for more advanced and engaging technologies, we recently pre-sold our first annual recurring revenue cloud deal based solely on an early version of our cloud service, generating $75,000 in ARR in 2021. Based on this prototype, The same customer has now come back and asked us to generate a proposal for a hybrid cloud offering of mezzanine when we release a full version in the second half of 21. The scope of that proposal is 1,000 conference rooms and over 100,000 cloud users. Now, let me just turn the call over to David to quickly discuss the financial results.
spk03: Thank you, Pete, and good afternoon, everyone. I'll start with a review of our quarterly results. revenue for the fourth quarter of 2020 was $3.9 million, a 20% sequential increase compared to $3.3 million for the third quarter of 2020. This sequential increase was driven by higher product sales from our flagship mezzanine collaboration suite, which increased more than 50% to $1.6 million in the fourth quarter of 2020 as compared to $1.1 million in the third quarter of 2020. Our gross profit margin for the fourth quarter of 2020 was 59 percent, a sequential improvement of 800 basis points as compared to 51 percent for the third quarter of 2020. This improvement was primarily due to an increase in margins specific to our mezzanine offerings from 63 percent for the third quarter to 68 percent for the fourth quarter. We generated net income of $1.2 million for the fourth quarter of 2020, compared sequentially to a net loss of $2.1 million for the third quarter of 2020. Fourth quarter net income was favorably impacted by a non-cash gain on debt extinguishment of $3.1 million. We reduced our adjusted EBITDA loss by 57% in the fourth quarter of 2020 to $447,000 is compared sequentially to an adjusted EBITDA loss of $1 million for the third quarter of 2020. This sequential improvement was primarily due to growth in our revenue and gross profit for the fourth quarter of 2020. Turning to our balance sheet and cap table, we made significant improvements in these areas during the fourth quarter of 2020 and subsequent to year end. We ended calendar year 2020 with a total cash balance of $5.3 million compared to $4.6 million at the end of 2019. We strengthened our liquidity position with a private placement of common stock that closed in December 2020, and we eliminated $5.6 million of debt during the fourth quarter in exchange for a one-time cash payment of $2.5 million, resulting in the $3.1 million non-operating gain I mentioned earlier. As of year end, we had no debt outstanding other than a $2.4 million note under the Paycheck Protection Program, of which $2.2 million is expected to be forgiven in 2021. Importantly, on February 12th of this year, our common stock began trading on the NASDAQ capital market, and all Series D and Series E preferred stock converted to common stock. As of that date, we had no remaining preferred stock outstanding. With that, we'll open the call for questions.
spk01: Thank you. We'll now be conducting your question and answer session. If you'd like to be placed into question queue, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, that's star one to be placed into question Q. Our first question today is coming from Jim McElroy from Bradley Wood. Your line is now live.
spk05: Yeah, thank you, and good afternoon. Can you talk a little bit about the cloud offering? And I'm specifically interested in any increase expenses that you might incur in order to complete the development and also any increased expenses to market the product. So that's one part of it. And then the second part of it is I was hoping you could elaborate on the sales cycle for the cloud offering. If you've got the beta in April and then a rollout in the second half, What would be a reasonable time frame to think about meaningful revenue contributions from the cloud offering? Sure. Hi, Jim. How are you? So in terms of the first question, as you think about rolling out the cloud service for Oblong, particularly as around development and sales and marketing costs, when you think about rolling out a SaaS product or at least a hybrid product, our sense right now is – We will continue to increase expenses from the current levels throughout 21 to invest in both product development and time to market. And as I mentioned a little bit earlier, we're pretty careful about how we manage the sales and marketing ratio as it relates to going to market, primarily because we're going through channels, as opposed to going direct where generally the marketing cost and usually the sales expense is quite a bit higher. on a direct basis. We're going to focus the vast majority of our go-to-market in 21 to our primary partners. They've been very, very good about setting up opportunities for us with existing customers of theirs. So we don't see sales and marketing expense going up dramatically higher from the current ratio at which we're operating today. So I'd say that ratio we're going to continue throughout the course of 21. unless we see greater demand signals, especially in the second half of the year. I think with respect to the rollout itself in the second part of your question, our sense right now is not terribly dissimilar from where we were last time, which is we see demand growing very, very quickly We are, you know, one of the big catalysts is demonstrations, right? How fast, how many demonstrations are you doing? How many customers are coming to you more proactively than reactively? And just as I mentioned in the last 30 days, we've seen a significant uptick in demonstration demand, both for the in-room product and the cloud product. I think it's important to note that because our roots are in the conference room to begin with, And a great many of the customers that we deal today, if not all, are in the enterprise sector. The vast majority of IT leaders are looking to balance that, sort of, you know, do that barbell approach, right? On one hand, it's in the conference room. On the other hand, we have a number of users in the cloud. And we want to address both constituents in an egalitarian manner. And they want to have security and, you know, real-time kind of communications capability. across the product. So I think we don't see a dramatic change in the ratio in sales and marketing, and we see incredible demand for, in particular, both the conference room product and the product relative to even where we were three months ago right now. And just to try to pin you down a little bit on that, on the demand that you're talking about, that you're experiencing. So if I'm a customer and I'm looking at an in-room solution and I get a demo today, and I know it's all over the place, but what would be a typical decision for that in-room purchase as well as the cloud purchase? Yeah, so right, it is all over the place. And, and, you know, I think it buyers are starting to lean in a little more than ever, I would say three months ago, there was still some hesitancy in the market in terms of trying to time it from their perspective on a real basis. But I'd say the last, you know, obviously, what's happening, especially in the US, and certain other countries who have been, who have been very diligent in their approach to sort of managing the pandemic. I would say that, here's a great example. So we were given a lead for a very large-scale opportunity about 45 days ago. That opportunity literally is in the middle of proposal and coming to fruition from a buying cycle in Q2. So you could make an argument that that was a four- to six-month kind of end-to-end start-to-finish buying cycle. I would say, generally speaking, enterprise sales, particularly whether it's cloud or on-premise, Historically, it had six to 12-month sales cycles, and it's generally somewhere in there from the moment you get a qualified lead all the way to close. And then obviously there's rollout, right? So if you have a solution that's in conference room, there's some logistics involved, you're shipping some hardware and software to get the configuration done. From a cloud perspective, naturally that's easier to sort of spin up, right? It's almost instantaneous. So I'd say the sales cycle, rather, remains probably generally speaking in that six to nine month range from the moment you get a qualified lead. I'm not sure that gives you a better pin, but hopefully it's closer to your question. No, that's helpful. If I can ask one more. Sure. When you look at the quarter to quarter progression in revenues this year, Is there any reason to expect – is there any seasonality that would make any one quarter lower than the prior, or is it reasonable to expect that throughout the year, you know, assuming that pandemic continues to fade, that you'll have sequential revenue growth for every quarter? No, that's a good question, Jim. Traditionally, certainly across the IT sector, the first quarter of the year, the first calendar quarter of the year, tends to be the lightest. Usually there's a huge push towards the end of the year across all sectors. And so generally speaking, the January to March, if there is a quarter that has seasonality to it, there tends to be sort of a sigh at the end of the year and then people start to pick back up into the new year gradually and buying starts again. So I think that's generic to the IT market. holistically. And as you know, with Cisco being our largest partner, they have a calendar year end that is July 31st. And so they're operating on a slight tweak their fiscal calendar to where we operate on a traditional model. So some of that can go off sequence a little bit. But on the margin, I'd say the first quarter, if there was to be something, the first quarter of every year from a classic IT event tends to be the softest Okay, great. I'll speed the floor and get back in line. Thank you. Great, thanks, Jim.
spk01: Thank you. As a reminder, that SAR 1 will be placed into question few. One moment, please, while we poll for further questions. Once again, that's star one to be placed in the question queue. We do have a follow-up from Jim McElroy. Your line is now live.
spk05: Yeah, thanks again. Is the K going to be filed tonight, or is that tomorrow?
spk03: Hi, Jim. David, the 10K was actually just filed, so you should see it on sec.gov in a minute.
spk05: Okay, great. And if you can just help me understand what you think about growth margins going forward. Is there any reason to believe that they're significantly different this year versus what you saw in Q4? Yeah, I'll take that, Dave. At this time, I think there are still some gains to be made, Jim, throughout the course of the year. I think our performance in Q4 specifically around mezzanine was pretty strong. And when you're selling a hardware-software kind of combination, I think we're trending pretty close to the higher levels of what that product can deliver. I think the margin expansion... And increased operating leverage obviously comes from, you know, diversifying your mix into cloud going forward. So I would say that, generally speaking, that we have a little bit of upside left in gross margin for the rest of this year, particularly around MES. But I think, you know, the current trajectory is pretty consistent at this stage. Yeah, I was trying to be tricky in it. really get a sense for your projections on messaging cloud this year by asking that. I know. I think I've shared this with you in the past. I would say that the cloud aspect of our business measured purely standalone shouldn't be fundamentally different than any other cloud SaaS service. And so give the cost to deliver that product. So you should, you know, at some point we should, proof's in the pudding, but ultimately those metrics tend to be in the 75 to 80% plus kind of range, a pure standalone basis from a gross margin perspective, so. All right. Okay. And then as far as the data in April and then the full rollout for the rest of the year, I'm assuming that the beta will drive to some extent the product development. So if you can just focus on the beta, what are you either worried about or what do you think needs a little bit more work or what are you particularly focused on in the beta that you think is important either from a customer experience or a technological perspective? from the technological capabilities aspect? Sure. Well, I think one of the fantastic advantages we have in our team today is we have very, very deep roots and expertise in design and user experience. And the team pays a tremendous amount of attention to interaction with software. And I think anytime you go through MVP all the way through beta, you're always tweaking things to eliminate friction. And as a product evolves over time, I think that'll be our core focus, Jim, which is how easy is it to buy, how easy is it to plug into other networks and other systems and other applications, and how seamless is the transition from you know, the current conventional sharing model to what we believe will be the sharing model of the future, right, which is multi-share. And how do you make those user experiences contiguous so that they don't break the brand promise, right, from the existing provider? So most of our work between current state and GA will almost assuredly be in getting ourselves to a point where users are giving us feedback on a regular cycle where we get to a stage where they say, this is frictionless, right? The whole goal is to create seamless experiences for people where they can get optimal user experience by sharing multiple pieces of content. So that's where all the work will be between now and then is let's get to a no-friction environment. And have you shared – how many users or how many installations are in the beta and if you haven't can you give us some general yeah so we haven't shared it um but i'll give you i'll give you some basics right i mean we're going to keep it very very uh tight to our to our top customers across multiple verticals and i suspect we'll probably roll this out to 10 or 15 customers probably across 100 different conference rooms and 1,000 different users at this stage. Like I said earlier, there's one extremely large global customer in particular who has taken a very strong interest in this, and obviously they'll be part of the data effort as they were part of the prototype. But that's the scale, Jim. For testing purposes, call it 100 conference rooms and 1,000 users during that MVP to GA period. Okay. All right. That's great. That's it for me. Thanks a lot, and good luck. Thanks, Jim. Appreciate it. Thank you.
spk01: Our next question today is coming in from Richard Malinsky from Max Communications. Your line is now live. Hey, Pete. How are you doing?
spk05: Rich, how are you?
spk02: Good, good. First of all, congratulations on the fourth quarter. Congratulations on, you know, getting the capital structure straightened out, the cash. The one question I have for you is that the start of the new year to where you are today, what concerns you at this point in time? Maybe what has gone slower than expected or maybe moved fast than expected? Possibly maybe with the Cisco relationship or, you know, the salespeople. What's the few things that really... that you want to focus in on that maybe hasn't, hasn't happened as quickly as you'd like it to.
spk00: Sure.
spk05: Well, yeah, thanks, Rich. You know, I think just to answer that generically, I think we'd all like, I think we'd all like the market to open faster, right? So, so sort of a more broad rollout across, you know, the, the G7, G8 countries, I think would, would be certainly a welcome outcome for us a little faster than where we're headed. That said, You know, we are seeing some, like I said, in the last 30 days, we are seeing some very strong leading indicators that people believe, particularly in the countries who have accelerated their vaccination policies, that they are going to reopen sooner than later. And I think you probably read in the last couple of weeks, Google, Microsoft, some of the larger tech titans, Most of the investment banks have all come out and publicly stated that they are getting ready for reopening in the next 30 to 90 days. So I think all of those things are great leading indicators for us. And it's also supported by the fact that we have been getting calls in the last, call it 30 days or so, from many of those IT folks who are very closely aligned, particularly with Cisco, where the Cisco sales reps are coming to us saying, okay, we're starting to see demand build. We're starting to see people engage. We really want to get demonstrations of your products, right? So that's a great leading indicator for us, right? Just our demonstration volume is probably up 5x in the last 30 days, right? But it's also a function of people saying, I think we're ready to start making some buying decisions here in the next 6 to 12 months, right, as we look to refurbish our offices. And, you know, we have billions of home users now. who have clearly adopted things like Zoom and WebEx and Microsoft Teams, et cetera, et cetera, and Google Hangouts, right? So they're all automated to that user experience. And now every IT buyer is saying, now what, right? What's the next step? What's the next step in the evolution of engagement? And we need to go look at new technologies that can really enhance the user experience. And so that's It's not so much a worry as it is, you know, I think it's been a worry for most every company in America for the last 12 months. But from our perspective, we look at this as, you know, it's inevitable that the market is going to reopen. It's just a function of managing the timeline and managing your business to that timeline. And as we see these buying signals start to open, we need to invest in the sales and marketing resources both here domestically in the United States and frankly abroad as we're starting to see Other countries who are probably a little bit ahead start to reopen their doors and looking for similar technologies to address the same problem.
spk02: All right. And how are you monitoring the cash to make sure that you could execute without having to really raise much money at this time? Or, you know, you'll pick the time and place to raise the money when the time is right, you know?
spk05: Sure. Yeah, I mean, I think, you know, I think full credit to David and the entire finance team. I think we're pretty judicious, right, with our capital structure. As I said, we manage the balance sheet very carefully to demand signals. And I think David has done an incredible job, as has the entire team, on giving ourselves an appropriate amount of runway into 2021 to to allow us to build business opportunities, build pipeline, and close deals that would offer our investors really strong signals of growth potential for the company in the future. So I think at this point we're in very good shape on the cash side, and I think we're in really good shape in terms of managing it going forward. Great.
spk02: Thank you, Pete. Appreciate it.
spk05: Anytime. Happy to talk to you, Rich.
spk01: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
spk05: Thank you. As I mentioned earlier, we are increasingly optimistic about 2021 and beyond, as we believe the return to office is accelerating and imminent. And businesses, quite frankly, reimagine what they need to look like in the future. No doubt it's been a challenging environment, but the exogenous headwinds we faced in 2020 are, in fact, abating. And we are building upon extremely good recent momentum. With a robust and innovative technology platform, a very strong channel partner in Cisco, and a stronger balance sheet, we are also well positioned to grow our business in a very meaningful and thoughtful way into the future. And I look forward to sharing a lot more information in the coming weeks and quarters ahead. Thank you very much.
spk01: Thank you. That does conclude today's teleconference. Let me just connect your line at this time and have a wonderful day. We thank you for your participation today.
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