ClearOne, Inc.

Thanks, Emily. Welcome, everyone, and thank you for joining us today to discuss ClearOne's 2012 second quarter financial results.

On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Vice President, Finance.

First, some housekeeping before we start. Please be advised that this conference call is being broadcast live on the Internet at www.clearone.com.

A playback of this call will be available for at least 3 months and may be accessed on the Internet at ClearOne's website.

Before we begin, I'd like to make the cautionary statement and remind everyone that all of 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.

With that said, let me turn the call over to Zee.

Thank you, Robert. And good morning, everyone.

We appreciate that all of you could join us today to discuss our 2012 second quarter financial results. I am joining this conference call from our offices in Tel Aviv, Israel, today.

The revenue for the 2012 second quarter met our expectations but did not match the record-setting revenues we recorded in last year's second quarter. The slight revenue decline was due to overall softness in all the markets in which we operate.

It should be noted that we achieved record-breaking financial results in last's year second quarter, making for a challenging year-over-year comparison. More specifically, the year-over-year revenue drop was 2%, while revenue for last year's second quarter had improved 20% over the 2010 second quarter.

In mid-February, we completed the acquisition of VCON, a leader in high-performance end-to-end software-based videoconferencing in infrastructure and management. Since then, we have continued to build and align our sales channel and internal sales organization for the new video solutions we are bringing to the market.

The new products from our acquisition of VCON are in production and will be shipping under the ClearOne brand at the end of this month. The introduction of these new software-based videoconferencing products complements our industry-leading enterprise audio, expands our total available market, and we believe this will make immediate contributions to ClearOne's top line.

With this brief introduction, I'd like to turn the call over to Narsi for a more detailed discussion of our Q2 financial performance. Narsi?

Thank you, Zee, and good morning, everyone. Before I begin, I would like to point out a few things.

First, I will be discussing certain non-GAAP financial measures. The reconciliation of these non-GAAP measures to reported GAAP measures are included in the earnings release.

Finally, financial results for the 2012 second quarter included the full quarter impact of operations of VCON, the videoconferencing solutions company we acquired in February 2012.

Now turning to our financial results. For the 2012 second quarter, revenue was $11.7 million compared with $11.9 million for the 2011 second quarter.

Gross profit was $7.1 million or 61% after revenue compared with $7.2 million or 60% of revenue for the prior year second quarter.

Total operating expenses were $6 million compared with $5.3 million for the prior year second quarter. Operating income was $1.1 million compared with $1.9 million for the 2011 second quarter.

Net income was $575,000 or $0.06 per diluted share compared with $1.3 million or $0.15 (sic) [$0.14] per diluted share for prior year second quarter. The increase in effective tax rate from about 30% in 2011 second quarter to about 49% in 2012 second quarter contributed to the reduced net income.

The increase in the effective tax rate was mostly due to expiry of federal R&D credits and a charge of about $123,000 for the recognition of certain tax benefits recognized in a prior period. Non-GAAP net income was $905,000 or $0.10 per diluted share compared with $1.7 million or $0.19 (sic) [$0.18] per diluted share for the 2011 second quarter.

Non-GAAP EBITDA for 2012 second quarter was $1.9 million or $0.20 per diluted share compared with $3.1 million or $0.34 (sic) [$0.33] per diluted share for the 2011 second quarter.

I will now share with you the results of the 6 months ended June 30, 2012. For the first 6 months of 2012, revenues decreased 3%, or $21.8 million from $22.6 million in the first 6 months of 2011.

Gross profit declined by 2% to $13.2 million or 61% of revenue from $13.5 million or 60% of revenue in 2011. Total operating expenses were $11.4 million, which included proceeds from litigation of $250,000.

Excluding the litigation proceeds, total operating expenses were $11.6 million. This compares with $10.4 million for the 6-month period last year.

After excluding the litigation proceeds of $250,000, operating income during the first half of 2012 was $1.6 million. This compares to $3.1 million in the same period in 2011.

Net income was $1 million or $0.11 per diluted share compared with $2.1 million or $0.23 per diluted share for prior year first half. The increase in the effective tax rate from about 31% in 2011 first half to about 44% in 2012 first half was mostly due to expiry of federal R&D credits and a charge of about $153,000 for the recognition of certain tax benefits recognized in a prior period.

Non-GAAP net income was $1.5 million or $0.17 per diluted share compared with the $2.8 million or $0.31 (sic) [$0.30] per diluted share for the 2011 first half. Non-GAAP EBITDA was $3.1 million or $0.34 (sic) [$0.33] per diluted share compared with $4.5 million or $0.50 (sic) [$0.48] per diluted share for the 2011 first half.

Turning briefly to the balance sheet. Our balance sheet continues to remain strong.

At June 30, our cash balance was $10.4 million, which is after paying for the VCON acquisition and absorbing fully the post-acquisition operating costs.

I would now like to turn the call back over to Zee. Thank you.

Thank you, Narsi. I'd like to share with you non- financial corporate highlights since our last call.

We launched several new products and technology enhancements at InfoComm, the largest trade exhibition for the AV communications industry. These products for pro audio streaming, videoconferencing and signage continue to move us forward from traditional analog-based solutions to software- and network-based solutions.

At InfoComm, we unveiled our newest professional audio product, the Beamforming Microphone Array with adaptive steering and our next-generation acoustic echo cancellation. This unmatched and singularly differentiated cornerstone product is the most advanced professional microphone array in the industry.

We introduced our first network audio bridges which are designed to work with our flagship audio products to provide partners and customers with the most flexible, scalable, cost-effective and future-proof platform for network audio. The new suite of products branded CONNECT will provide solutions for the established CobraNet standard and the emerging audio-video bridging standard called AVB for networked audio.

AVB is an important set of standards currently in development by the AVnu Alliance, of which ClearOne is an active member, and it provides time-synchronized delivery of audio and video media through ethernet networks. The release of this new platform demonstrates our commitment to further extend and broaden the reach of our professional audio footprint for greater revenue opportunities in the complementary- and large-sound reinforcement market.

We also demonstrated our complete suite of high-definition videoconferencing solutions, including our software-based desktop video applications, room systems, video infrastructure MCUs and management solutions. All of these new products were enthusiastically and positively received by our partners and customers, including some of the largest players in our industry.

With the introduction of our new single-codex software-based videoconferencing room and video infrastructure solutions, we have increased the total available market for ClearOne by more than $4 billion. This is a significant leap in revenue opportunity for ClearOne.

For reference, the total available market for our current audio endpoint products is estimated to be approximately $200 million. Even capturing a small fraction of this new videoconferencing market will bring us sizable growth.

We intend to aggressively capitalize on the architectural shift from hardware-based to software-based video applications.

ClearOne is well positioned to benefit from this paradigm shift, unlike our very large and established competitors who are struggling to keep up with the seismic change in the market. While others are trying to catch up, we are well ahead, already on the path to consolidate our video technology for new and greatly enhanced video streaming and digital signage solutions.

ClearOne now has distinct competitive advantages, namely a complete suite of market-leading audio solutions to complement our new video solutions. Unlike start-up companies and even many large competitors, we can seamlessly deliver full high-definition videoconferencing and video MCUs, along with complementary audio solutions, for a variety of enterprise applications for SMBs to the Fortune 500, from the enterprise cubicle to the enterprise boardroom.

Today, there is not a single company in the industry that can, under a single brand, deliver everything from a simple USB headset and desktop video application to a high-end installed professional audio in high-definition room video system.

Importantly, ClearOne also has an existing global, well-developed and loyal sales channel to fulfill audio-video needs for commercial vertical markets. This established channel, along with our highly regarded and well-established ClearOne brand, will be fully leveraged to introduce and deliver these fully integrated innovative audio and videoconferencing solutions.

We will continue to build and align the sales channel with our internal sales organization to bring new video solutions to the market.

"The enterprise communications market is in a time of change that is presenting unique challenges to the vendors of tabletop audio conferencing endpoints. ClearOne has developed and implemented a first-class product line strategy to address these challenges by leveraging the changes in technology and customer needs in the market."

Reinforcing our belief in our strategy and plans for ClearOne's growth, we initiated a stock buyback program in Q2. Also, in line with our increased global footprint in the associated increasing complexity of our global operations, we have changed audit firms.

Our new audit firm McGladrey brings size and relevant experience as one of the largest accounting firms in the U.S. and is a member of RSM International, the sixth largest global network of independent accounting, tax and consulting firms.

With that and for the time available, we would now like to address any questions you may have. Operator?

So there's a little bit of an uptick in operating expenses and it looks like a lot of it was in the G&A line. Is that related to the VCON acquisition, or is there something else that's going on there?

It's mostly VCON acquisition. There is nothing unusual in the line, actually.

We have our usual share of legal expenses and it has to do mostly with the VCON acquisition. And also you should remember that we had one more acquisition which was not in the previous period in 2011 Q2.

That's MagicBox acquisition.

Right, okay. And then you've talked a lot about globalizing the ClearOne brand and extending your reach.

And I was wondering if you could talk a little bit about what you're seeing in different geographies and where you're seeing strengths and weaknesses.

I -- Narsi may want to cover this more specifically. But overall, North America, Europe and even APAC have shown signs of softness in our industry, talking to our partners and distributors and whatnot.

The softness, we understand, is common to many vendors of our type and projects, on occasion, are pushed. We anticipate that -- many of these projects that are occasionally pushed, that we will eventually bear the fruit of these.

Narsi, do you have any specifics you want to add?

I think Chris's question was more specific to our push in the global sales site. I think he's talking about the new products.

With VCON, I can say that they are pretty strong in EMEA where [indiscernible] relatively speaking. When compared to their presence in the -- in North America and APAC, they are stronger in EMEA to begin with.

But with our channel, existing channel, we can change it, actually. I think we can bring more balance to the overall global sales channel.

And we are not singling out any particular market. We -- with videoconferencing being a globally demanded product, we are focusing on all the regions.

We have made hires in all the regions. And we are focusing on our existing channel as well as the channel that VCON used to have.

Okay. And then just bringing you back to inventory, I want to focus on that for just a second.

It looks like it ticked up again. I know, on the last conference call, you still said that you believed it would fall towards the end of the year.

Are you still expecting that? I know that you did sell off some of the long-term inventory, but it looks like you're current inventory ticked up again.

What's going on there? And can you give us any more color on where it stands?

Okay. In fact, the last time, I was pretty clear that, for this quarter, it would stabilize and then we will see clear improvements in the inventory in subsequent quarters.

And as I predicted, it did -- the overall increase in inventory you saw was only toward the K [ph], actually. And we are talking about the total inventory of $70 million and it went up by, to the case of [ph] -- it's a signal of the stabilization, actually.

And you will see significant decreases, more in a million-dollar range plus in the end of this quarter, actually, Q3, and even more sizable decreases by end of the year, actually.

Okay. And just one more.

You talked about before your opportunities, maybe monetize your IP portfolio. Have you guys done anything there?

Or how are you thinking about going about that?

On patent modernization, we actually have a firm engaged in the stage of evaluating certain of our patents. It's an area that we go methodically, but we've taken the first step.

And it's certainly an area that we're going to continue to look at. I -- it's -- I would not say it's an -- we focus on the products and our differentiation, but we have certain patents that we believe have value and will continue down that path and keep folks informed as we go.

Despite some acquisitions, your last 3-quarter sales year-over-year declined. The rate of decline seems to be getting better because you're annualizing some nice sales gains.

Can you talk about what you expect for the back half of the year? Do you expect to continue to see declines year-over-year in sales?

Narsi, why don't you take that?

Yes. The -- if you look at the overall trend in our decline, in our reduction, it is in line with other industry peers.

And this is not something that is specific to our products. I think this has something to do with the global macroeconomic conditions.

And in line with that, I'm seeing even the regional trends changing from quarter-to-quarter. And of course, I can't predict.

We definitely expect much more revenues to come from our acquired unit, especially the videoconferencing. The rest of the product groups and our flagship of professional audio conferencing depends on global macro conditions.

We can't -- we can try our best to budge the macro problems, but we can really go to only a certain extent, actually. My -- our take is, it's not going to -- even if things don't improve dramatically, it's still not going to be -- it's -- it will be the single digits, either positive or negative.

It's not going to be big swings on either side, actually.

Okay, I appreciate that. And also, you said you've bought back some stock this quarter.

Can you tell us how much you bought back, how many shares?

We -- it's -- it was not significant, given the volume restrictions imposed by Rule 10b-18. We bought totally 23,000 shares costing about $92,000.

We will continue to do it. We are -- we will buy as much as we can that's available in the market and subject to all the federal securities regulations.

So would you guys mind going over the growth numbers in each of your product segments for the quarter?

Okay, I can give you a quick year-to-date number for all the segments. Professional went down by about 6%, personal went down by 4%, tabletop by 9%.

Premium went up by 13%. And other things are not significant.

Okay. And just on the premium, what -- is there something sort of specific product that you're really seeing strength in there?

What's driving that as opposed to outperforming the other segments?

Okay. I think premium is our -- it's our low-cost alternative to our professional.

In this tough economy, we had a feeling that there may be a demand for our lower-cost premium conferencing. And there is also demand for our USB-compliant INTERACT 80 series, actually.

It's both -- twin factors. It's -- we see growth in both the -- both type of products.

Zee, do you want to add anything to this, or...

No, I was going to say, because it's such a versatile product, it plays both sides of the fence. It's a light pro product and a more sophisticated tabletop product and thus, with its USB features and some of the other features that it has, a complete system.

It suits a lot of small businesses and other small-room applications and will fit nicely as well with our new videoconferencing solutions.

Thank you. I want to thank you for the -- making the time available, and I would say today that concludes this call.

We appreciate you joining us.