ClearOne, Inc.

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

On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Vice President of 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 now over to Zee Hakimoglu. Zee?

Thanks, Robert, and good morning, everyone. We're glad that all of you could join us today to discuss our 2012 third quarter financial results.

Overall, I'm pleased to report that ClearOne had a solid third quarter and has performed better than many of its industry peers. This despite the global economic headwinds our industry continues to face.

Net revenue for the 2012 third quarter was slightly higher than that of the same quarter last year. The increase was driven by impressive growth in the EMEA region offset by a decline in sales in our Asia-Pacific region.

The third quarter also saw our inventory decline by $2.7 million contributing to the increase in cash position by $3.9 million. During the quarter, we began reorganizing and restructuring our business to maximize our operating efficiency across all fronts.

It should be noted that our third quarter operating expenses, which included operating expenses associated with our acquisition of VCON in February 2012, remains flat with no increase compared to the same quarter a year ago prior to this acquisition.

This is a significant financial performance metric and demonstrates our ability to consistently, quickly and effectively integrate these modest but highly strategic technology acquisitions and maintain excellent operating results. We essentially transitioned all non-R&D VCON Israeli operations to the U.S.

while strengthening VCON's Israel footprint as a Class A product development center for ClearOne.

Future ClearOne video products on our roadmap, including streaming and digital signage, will have core technology component developed at this Israeli R&D center. At present, we are already integrating the industry's most powerful video engine into a second-generation stream net platform.

Doing so will significantly expand the application space and total market opportunity for ClearOne's streaming solutions from the LAN, or local area network, to the WAN or wide area network.

On the sales front during the third quarter, we restructured our internal sales organization by adding sales personnel and realigning our regional sales coverage in order to prepare for sales of new products, particularly videoconferencing.

In September, we held our annual Asia Pacific Partner Conference in Bangkok, Thailand. We introduced our latest products, including our new videoconferencing solution.

Feedback from these partners on the new product announcements has been extremely positive. We are awaiting compliance certifications to ship these products into these markets.

Recently, we strengthened our relationship with Ingram Micro, the world's largest broad-based distributor of technology products and services. Ingram Micro will now distribute ClearOne's new line of software-based videoconferencing solutions, as well as our USB analog and VoIP conference phones to authorized technology resellers in the U.S.

The Ingram Micro relationship is significant for us because it will allow us to better identify new business opportunities, drive greater growth within the U.S. reseller community and expand market awareness and sales of ClearOne video and audio solutions into new channels and vertical markets.

We also signed a distribution agreement with D&H. Under the terms of the agreement, D&H will also distribute ClearOne's new line of software-based videoconferencing solutions, as well as its USB, analog and VoIP conference phones.

D&H leadership in the IT reseller, small and medium business and consumer electronics markets offer us a substantial opportunity to provide these markets with our value-rich collaboration solutions.

On the product side, we launched the MagicBox on-premise Entry-Level Server, which extends our web-based digital signage offering. The Entry-Level Server runs MagicBox WebSuite applications for digital signage, including content creation and asset management inside a browser for a comprehensive content management experience from design to verification.

Finally during the quarter, we met our plans to ship our first production units of our Collaborate-branded videoconferencing products at the end of the third quarter.

With this update, I'd like to turn the call over to Narsi for a detailed discussion of our Q3 financial performance. Following Narsi's discussion of financial results, we will take questions for the remainder of the available time.

Narsi?

Thank you, Zee, 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. A reconciliation of these non-GAAP measures to reported GAAP measures is included in the earnings release.

Also, last year's financial results for both the third quarter and 9-month period included the favorable judgment award of $3.7 million, which can be found in the operating expenses section of our statement of operations. The award had the positive effect of decreasing total operating expenses and increasing both operating income and net income.

Now turning to our financial results for the 2012 third quarter. Net revenue was $11.6 million up slightly from $11.5 million for the 2011 third quarter.

Gross profit was $6.7 million or 58% of revenue compared with $7 million or 61% of revenue for the prior year third quarter. The decline was due to unfavorable product mix and higher overhead absorption due to a substantial decrease of $2.7 million in inventory.

Our gross profit margin for the 9 months ended September 30 remains at 60%.

Total operating expenses were $5.3 million. Operating expenses for the prior year third quarter, which included the $3.7 million favorable judgment award, were $1.9 million.

Excluding the judgment award, operating expenses were essentially unchanged. Operating income was $1.4 million and net income was $930,000 or $0.10 per diluted share.

This compared to operating income of $5.4 million and net income of $3.4 million or $0.36 per diluted share for the prior-year period.

Non-GAAP net income, which excludes the judgment award among other things, was $1.3 million or $0.14 per diluted share compared with $1.2 million or $0.13 per diluted share for the third quarter of 2011. Non-GAAP EBITDA for 2012 third quarter was $2.1 million or $0.23 per share, remains essentially unchanged from 2011 third quarter.

I will now share with you the results of the 9 months ended September 30, 2012. Revenue was $33.4 million compared with $34.1 million for the first 9 months of 2011.

Gross profit was $19.9 million or 60% of revenue from $20.4 million or 60% of revenue for the comparable period of 2011. Total operating expenses, after excluding judgment awards, were $16.9 million in 2012 and $15.7 million in 2011.

Operating income after excluding judgment awards were $3 million in the first 9 months of 2012 and $4.7 million in the same period last year. Net income was $2 million or $0.21 per diluted share.

This compares to net income of $5.5 million or $0.59 per diluted share for the prior-year period. Prior-year period, as I've said before, included $3.7 million favorable judgment award.

Non-GAAP net income, which excludes the judgment awards among other things, was $2.8 million, I'm sorry, $2.8 million or $0.30 per diluted share, compared with $3.8 million or $0.41 per diluted share for the first 9 months of 2011. Non-GAAP EBITDA was $5.2 million or $0.56 per diluted share compared with $6.6 million or $0.71 per diluted share for the 2011 9 months period.

Now turning briefly to the balance sheet. Our balance sheet continues to remain strong.

At September 30, our cash balance was $14.3 million up $3.9 million from June 30, 2012. We also reduced our inventory level by $2.7 million in the third quarter to reach $14.4 million.

Thank you, Narsi. With that and with the time available, we would now like to address any questions you may have.

Operator?

So I guess, my question is related to that. Last quarter, you said you plan to monetize 15% of inventory by year end.

It seems like you're well ahead of that goal and kind of have already done that. Is there additional inventory monetization you expect towards the end of the year?

Or was this kind of everything that you planned doing in this quarter?

No, there will be some more, but it is not going to be tremendous, but it is still -- maybe our goal [ph] of our -- thinking about all the options actually to not -- we still have plenty of time in the quarter and we will take into account our gross margin position and we will also take into account the cash flow and the opportunities to reduce the inventory.

And will that be long-term inventory? Because I noticed that you still have a little bit of growth sequentially in long-term inventory.

Long-term inventory is a function of how our budgeted -- our expected revenue trends are. I don't expect our long-term inventory to change significantly, either upwards or downwards.

It's just -- we have some products that are stocked for the more than a quarter and if you see our expectations go up or down, it changes. If it's fairly a mathematical number, based on our expectations and it's not anything to do with the quality of the product or the ability of our -- ability of us to sell through the products.

Okay, that's good color. And then, I think it was in the quarter that you filed -- that you talked about the professional products being a little weak in the quarter.

Can you talk a little bit about what it was that was driving that, if it's macroeconomic-related or is there kind of any moving parts there?

You're talking about specifically for Q3 or for the entire 9 months actually?

Q3.

We already have reported last quarter, it's some uncertainty with respect to big projects. People are not saying they're not going to do it, but they are postponing.

These are anecdotal. We don't have any survey or any scientific way to show why these things are postponed.

But to an extent, we thought it may have to do with the -- this being election year or all those things. And we had some good successes with our ceiling mics, which has improved the situation.

And our -- that goes into our portfolio [ph] of product mix mostly, small products that goes into our premium, and that has been affected.

So pro-equipment, the capital expenditure, since it requires installation and it's a more complex product to procure, install and maintain. So if there's going to be a cutback in capital expenditures, it's going to be in the installed.

Okay, fair enough. And then last one on VCON, before you talked about the new VCON products that we're going to be shipping in August, have you rolled out your targeted line up of VCON-related products?

And how -- can you give us a little more color on how they're selling, how they're being received and where you're seeing the strength there?

Our goal was to ship at the end of last quarter. We ended up shipping from Flextronics the last 2 weeks of September.

So with the short frame, we had a little demand and we shipped. But currently, we're now in the second production run.

I would say that was our first, maybe a bit of a beta production run. We're in our current production run.

We have a software upgrade that we'll be including in this production run, which we hope to get out the end of this month or the first -- second week of December. It's basically the same hardware, but a slightly different software revision.

We had, as I mentioned, an APAC Partner conference. These guys were the first to hear about the release of the product in a meaningful way.

We had a training, an actual hands-on training with about 80 to 100 partners. It went very well.

We're waiting for compliance on the hardware, on the room solutions, that will go into the various APAC regions. And then, in North America, the most interesting aspect is that we have added these products to our IT channel.

Again, software-based videoconferencing is kind of an infrastructure IT solution, it can be. So bringing on board D&H and Ingram Micro to sell our video-based solutions was very important to us.

We see -- we have just recently gotten out demo units for our sales team, as well as our own outside sales force, and those are in the process of shipping. Some of them shipped actually last week.

So having those demo units is pretty important in evangelizing the software-based solutions. We allocated units for shipment from our first batch for, what I would say, as revenue, rather than sending other units for sales demos.

But this quarter what we are going to prioritize and send out our demo units. And again, these are going to go to our internal sales team, to our external sales team.

So we feel we've made good progress. There's progress to go, but haven't had any complaints to the products, and I think we're making good progress.

My question is -- my usual question is, can you comment on that VCON unit shipments or the revenue from VCON now that they're completely absorbed?

On revenue, we had a little over $300,000 of revenue from videoconferencing. As we said, these tend to not have their products maybe until the last 2 weeks after the quarter.

And we were selling through some of the remaining old stuff features [ph] barely nothing. We were able to field from the stock [ph] from products ticket [ph] and other things.

And that's all we got from video. But I think we are making good progress in getting the products ready for selling through this quarter and subsequently.

Okay. I want to make sure I understood your response and that is as you said the little over $300,000 for the quarter for all of their products or just the new ones that were shipped in the last couple of weeks before the end of the quarter?

No, that's for all the products, actually. It's all the products through the entire quarter, all 3 months.

Thank you, and we appreciate the time and interest in ClearOne. If any of you have any further questions on our quarterly update, don't hesitate to call Investor Relations at ClearOne.

This concludes our call today and we thank you for your attention.