Opiant Pharmaceuticals, Inc.
Q3 2009 Earnings Call Transcript

Published: 5 Feb 2009

[Operator:]

Good day ladies and gentlemen and welcome to the OPNET Technologies fiscal year 2009 third quarter investor call. (Operator Instructions) Now it is my pleasure to introduce your host, Mr. Marc Cohen, Chairman and Chief Executive Officer for OPNET Technologies. Please go ahead, sir.

[Marc A. Cohen:]

Thank you. Welcome and good afternoon. I’m Marc Cohen, Chairman and CEO of OPNET Technologies. Before proceeding, let me note that various remarks that we may make about future expectations, plans and prospects for the company constitute forward-looking statements for purposes of the safe harbor provisions under the Private Securities Litigation Reform Act of 1995. These include statements regarding the company’s or management’s intentions, hopes, beliefs, expectations, or predictions. Because such statements deal with future events, they are subject to various risks and uncertainties and actual results could differ materially from the company’s current expectations. Factors that could cause or contribute to such differences include but are not limited to weakness in the economy, fluctuations in customer demand, the company’s ability to manage its growth, risk associated with competition, and risks identified in the company’s Securities and Exchange Commission filings including those appearing under the caption Certain Factors that May Affect Future Results in the company’s Form 10-K for the year ended March 31, 2008 and our quarterly reports on Form 10-Q that we will file during fiscal 2009. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so even if our views change. Therefore, you should not rely on these forward-looking statements as representing our views at any date subsequent to today. During this call, we may also refer to non-GAAP financial measures. Reconciliation of any non-GAAP financial measures to the most directly comparable GAAP measures would be available in the Investor Relations section of our website, www.opnet.com. I am very pleased to report a solid quarter for fiscal Q3 ended 31 December, 2008. Despite a challenging economic environment, we generated $31.5 million in revenue, generated operating margin of 9% and ended the quarter with deferred revenue of $31 million. This resulted in diluted earnings per share of $0.10. Our cash and cash equivalents and marketable securities balance remains strong, an increase by $1.1 million from last quarter to $88.8 million. Our presentation today will have three parts. First, Mel Wesley, CFO will review the financial results for the quarter. I will then discuss our business performance for fiscal Q3. We will conclude with a question and answer session. Alain Cohen, our President and CTO will join us in answering your questions. Now, I’d like to hand it over to Mel Wesley.

[Mel F. Wesley:]

Thank you, Marc and good afternoon, everyone. As Marc mentioned, we are pleased to report solid quarterly results during a challenging economic environment. Our performance this quarter was driven by strong sales to corporate-type customers which enable us to generate total revenue of $31.5 million. We experienced a sequential decline in software license revenue of 3.1% due to delays in a few large forecasted deals. However, our software license revenue grew 32.8% year-over-year. Record maintenance bookings during the quarter enabled us to grow deferred revenues sequentially to $31 million. Despite the challenging economy, we believe strong demand for our application performance management solutions and the result of the competitive advantages they offer will enable us to grow market share and drive revenue. Before proceeding with Q3 financial performance, I would like to cover two topics related to Q3. First, I would like to provide an update on the available, for-sale auction rate securities held in our balance sheet as of September 30. In October, we accepted an offer from Morgan Stanley & Co., one of our investment advisors to repurchase our auction rate security positions for cash at par value plus accrued interest. In accordance with that offer during fiscal Q3, Morgan Stanley repurchased our auction rate security positions at par value with $6.6 million plus accrued interest. Consequently, as of December 31, 2008, we have no auction rate security positions or related impairment charges recorded on our balance sheet. Second, I would like to provide an update on the IRS’ examination of our federal income tax returns for fiscal 2002 and 2003. As a result of their examination, the IRS asserted tax deficiencies related to the timing of revenue reported on our fiscal 2002-2003 income tax return. We appealed the IRS’ assertions and the IRS issued a letter in January agreeing with our position that no tax deficiencies exist. Now I will summarize our financial performance for the quarter. First, overall execution by our sales team in a challenging economy was solid. Sales continued to be led by corporate enterprise and government customers which are consistent with our strategy. Our domestic sales team generated revenue of $24.6 million, a sequential decrease of $1.4 million. Our international sales team generated revenue of $6.9 million, a sequential increase of $530,000. International revenue accounted for 22.1% of Q3 revenue compared to 19.8% of Q2 revenue. Second, our gross margin decreased sequentially from 75.8% to 75% which resulted in a gross profit of $23.6 million. The decline was primarily the result of a $661,000 increase in the cost of new software license revenue driven by the cost of hardware platforms used to deliver certain software products released during Q3. Third, our operating margin decreased sequentially from 9.6% to 9% in Q3. The decrease in operating margin during Q3 as compared to Q2 was largely the result of an $843,000 decline in total revenue partially offset by a $608,000 decline in operating expense. Fourth, we generated $0.10 per share. Reported earnings met our guidance range of $0.08-$0.18. Finally, cash and marketable securities increased sequentially by $1.1 million to $88.8 million. At the end of Q3, cash and marketable securities represented 54.6% of total assets. I will now provide additional detail regarding financial performance. New software license revenue was $13.6 million, down 3.1% sequentially and up 32.8% year-over-year. The sequential decline was due to lower revenue from the United States government customers mostly offset by growth in revenue from corporate enterprises. The year-over-year increase was primarily the result of growth in revenue from service providers and to a lesser extent, corporate enterprise customers. Software license updates, chemical support and services revenue was $11.1 million, down 1.2% sequentially and up 26.6% year-over-year. The sequential decline in revenue was primarily due to the British pound weakening against the U.S. dollar in Q3 fiscal 2009 as compared to Q2 fiscal 2009 which resulted in a decline in revenue from British pound-denominated maintenance contracts. The year-over-year increase was primarily due to the growth in the solid customer base. Professional services revenue which includes both consulting and training revenue was $6.9 million, down 3.8% sequentially and down 0.7% year-over-year. Consulting services accounts for the majority of our professional services revenue. Consulting revenue was $6.6 million in Q3, $7 million in Q2, and $6.7 million in Q3 of last fiscal year. The sequential decrease in consulting revenue was primarily the result of the decline in revenue from service providers. The year-over-year decrease in consulting revenue was largely the result of a decline in revenue from network equipment manufacturers. International revenue was $6.9 million, up 8.3% sequentially and up 16% year-over-year. The sequential increase was largely due to the result of revenue growth from corporate enterprise customers partially offset by a decline in revenue from service providers. The year-over-year increase was largely the result of growth in revenues from service providers and network equipment manufacturers partially offset by a decline in revenue from corporate enterprise customers. Our gross margin was 75% this quarter, down sequentially from 75.8% and up from 73.4% for the same quarter of last fiscal year. The sequential decrease in gross margin was largely the result of a $661,000 increase in the cost of new software license revenue driven by higher hardware platform costs used to deliver our newly released ACE Live 4100 solution. The year-over-year increase was primarily the result of a $3.4 million increase in new software license revenue. Q3 operating expense was $20.8 million, down 2.8% sequentially and down 3% year-over-year. The sequential and year-over-year decline in operating expense was largely the result of our efforts to control costs. Now for the details on operating expense. Research and development expense was $7.3 million or 23.3% of revenue compared to $8.2 million or 25.3% of revenue last quarter. The decrease was largely due to a decline in discretionary compensation expense, payroll tax expense and patent costs. Sales and marketing expense was $10.7 million or 33.9% of revenue compared to $10 million or 30.9% of revenue last quarter. The increase was largely due to higher commission expense and conference costs. General and administrative expense was $2.8 million or 8.8% of revenue compared to $3.2 million or 10% of revenue last quarter. The decrease was largely due to lower bad debt and discretionary compensation expense partially offset by higher facility costs. As a result of these factors, the Q3 operating income was $2.8 million or 9% of revenue compared to $3.1 million or 9.6% of revenue for last quarter. Operating income for Q3 of last fiscal year was $-2.3 million or -9% of revenue. Our affected tax rate was 36.6% compared to 41.7% last quarter. The decline in our affected tax rate was the result of reflecting the estimated tax benefit of the research and development tax credit due to legislation passed in October 2008 that retroactively reinstated the tax credit back to January 2008. This decline was partially offset by an increase in our tax probation to reflect adjustments necessary to reconcile our estimated provision to an actual tax expense calculated in connection with filing our fiscal 2008 tax return in December. As a result, Q3 net income was $2 million or $0.10 per share. Earnings per share were unchanged from $0.10 last quarter and were up from $-0.06 in Q3 of last fiscal year. Moving to our balance sheet, total DSO at the end of this quarter was 88 days, up 5 days from the end of last quarter. The increase was primarily the result of two large aged invoices we expect to collect during Q4. Approximately 45% of Q3 revenue was recorded in December compared to 46% of Q2 revenue recorded in September. In order to set forward guidance, we considered the following factors and expectations. On the negative side first, we considered the impact of the current economic environment on our addressable markets and sales cycles. Second, we expect operating expenses to increase modestly as we make strategic investments to support our growth strategies. However, we are closely controlling these expenses in order to align them with anticipated revenue during a challenging economy. Finally, we continue to experience volatility in service provider license sales and international sales. On a positive side, first, we continue to experience solid demand for our application performance management products and believe the enterprise market offers to grow potential. Second, our expanded application performance management portfolio is opening up new opportunities increasing the frequency of multiple solution purchases and enhancing our ability to grow market share. Third, we continue to focus on expanding our international direct sales presence and believe the international market offers significant growth potential. Finally, we ended Q3 with strong deferred revenue. Consequently, we are establishing fiscal 2009 fourth quarter guidance for revenue between $29 million and $33.5 million and diluted earnings per share between $-0.01 and $+0.11. Please note that this guidance reflects the seasonal increase and payroll tax expense we incurred in the first calendar quarter. Given the prior operating margin guidance we provided for Q4 of fiscal 2009, I want to note that the revenue guidance just provided is expected to yield an operating margin between -2% and +11% for the quarter. As a result of the economic environment and the associated budgetary restraints facing our customers, we have updated our quarterly operating margin guidance for Q4 of fiscal 2010 to be between 10% and 14%. This concludes the financial performance review. I will now turn the call back to our Chairman and CEO, Marc Cohen.

[Marc A. Cohen:]

Thank you, Mel. OPNET Technologies is a leading provider of solutions for managing networks and applications. OPNET’s best-in-class solutions address application performance management, network engineering operations and planning, and network R&D. OPNET differentiates itself from traditional management providers by focusing on analytic. Traditional application and management solutions focus on data collection and monitoring. These systems typically report on historical trends and the status of networking systems. They’re limited by their lack of understanding of the underlying technologies of support applications and their relationships among these technologies. While they provide useful information, they do not automate the next important step which is analyzing collected data enough to transform it into actionable information. OPNET’s unique end-to-end monitoring and analysis capabilities drive the rapid resolution of performance problems and also proactively prevent problems from occurring. These problems include for example network configuration errors, network congestion, poor interaction between the network and applications, inefficient use of network with the network by applications, application bugs and database inefficiencies. Consequently, analytics can sufficiently improve the performance and availability of mission critical applications. Taking into consideration the weakening economy, we intend to grow revenue and maintain profitability by executing the following strategy. First, making strategic investments in marketing and sales in order to increase market share in existing markets and further penetrate new markets. We are slowing the rate of expansion in the sales force in order to focus on sales force efficiency and productivity. The number of quota-carrying representatives from September 30 to December 31 was unchanged at 71. The number of inside sales representatives from September 30 to December 31 increased by seven from 16 to 23. The total revenue for quota-carrying reps in Q3 was therefore approximately $444,000 compared to approximately $456,000 in Q2. We also plan to make strategic investments in marketing initiatives to increase brand awareness of our software solutions with a focus on application performance and management or APM. We view this market as less accessible to weakness in the economy as our APM solutions are often viewed as mission-critical as they increase the availability and reliability of revenue-generating applications. In Q3, APM represented over 60% of our bookings. Bookings of our ACE Live APM solution which we released just over one year ago grew by over 100% relative to the prior quarter. The second element of our strategy is selling into our diverse install base while continuing to add new customers. Approximately 19% of total Q3 license revenue was from new customers compared to 30% in Q2. Third, concentrating resources specifically on developing new accounts within the corporate enterprise market because we believe that this is our largest opportunity. Our current install base constitutes an excellent list of referenceable and active users of OPNET solutions that demonstrated potential for recurring high margin license and maintenance revenue. Approximately 32% of Q3 Enterprise license revenue was from new customers compared to approximately 22% in Q2. From a product perspective, we are putting significant emphasis on further marketing and developing our APM solutions. We believe that our suite of solutions offers unique advantages by providing end-to-end visibility and analysis. We also believe that OPNET solutions offer incisive troubleshooting capabilities that allow customers to understand the root causes of performance problems much faster than other solutions on the market. The fourth element of our strategy is to grow sales by developing sales channels and partnerships. In North America, we have launched our own channel program called the OPNET Synergy Program or OSP for short. We believe that this will provide an opportunity to accelerate penetration of the mid-market while our direct sales force focuses on the Fortune 1000. As of today, we’ve signed up 54 Synergy partners. In addition, we have financial partnerships with Riverbed which brings new capabilities to the APM market and we now offer application performance management solutions that can be installed and run onboard with embedded compliances. OPNET solutions also provide visibility and analysis for applications running in ran-optimized environments from other vendors including Cisco and Juniper. Finally, we’re focused on controlling our costs to increase profitability. We are concerned about the effects a challenging economy will have on our growth strategies. The economy has increased the sales cycle in certain deals and has proven to impact the reliability of certain deals in our pipeline. However, we’re cautiously optimistic that strategic investments along with our enhanced solution portfolio will allow us to penetrate new markets and increase market share. To strengthen our position in the APM market and increase our market share in the compliance-based and user-experienced monitoring space, we released the ACE Live 4100 solution in December. The ACE Live 4100 includes integration with ACE analysts for in-depth troubleshooting and provides continuous data capture, long-term storage, faster through-put and high-speed interfaces. It is a very exciting solution. The technology innovations allow it to compete with high-end appliances and programs provided by companies including NetScout and MixUp. Our software’s used by our diverse customer base for the following mission-critical activities

[Operator:]

(Operator Instructions) We’ll go first to Gary Spivak with Stanford Financial Group.

[Gary Spivak:]

Last call, you got into a pretty strong booking start in October. I was just curious; I believe you said 45% was done in December. What was the linearity throughout the entire quarter?

[Mel F. Wesley:]

One second, Gary. I’ll get that. This is Mel.

[Gary Spivak:]

If you need a second there, I did want to ask a separate question and that was given the state of the economy, was there any particular vertical that was less weak, obviously the financials I would expect you to say were pretty weak in the quarter, but was there any that stood out being a little bit sheltered?

[Marc A. Cohen:]

This is Marc. I think across the board, we’re definitely seeing a greater delay in the budget process as well as we’re seeing that deals across the board are becoming less reliable. So what I mean by that is that even deals that were signed off and approved so they have budgets, approval and even run all the way up to the CIO, at the very last minute, we saw deals get put on hold. With many cases, we weren’t told that they were canceled out right but we were simply just told that they had to be placed on hold. We did, if I had to pick one vertical that probably still did better than the others, I would say it would be healthcare.

[Mel F. Wesley:]

Alright, Gary. I got your number for you. The linearity in Q3 was 26, 29, 45 and in Q2, that was 24, 30, 46.

[Gary Spivak:]

Two more numbers if you don’t mind, Mel. Cash from operations in the quarter and the percent from government in the quarter?

[Mel F. Wesley:]

Cash from operations was just over $3.2 million and the government number, I believe was 42%. I’m sorry, that was last quarter. 31%, I apologize.

[Operator:]

Our next question comes from Kevin Liu of B. Riley & Company.

[Kevin Liu:]

On the large deals that you had mentioned that slipped out, I was wondering how much of that you baked into the guidance for the March quarter and also if you could talk about perhaps the size of it relative to the deals that were closed, if you could go into the verticals as well.

[Marc A. Cohen:]

We did close some large deals last quarter including in the APM space. We have a number of large deals in the high 6-figure, and some 7-figure deals that are in play for this quarter which partially explains some of the reins that you see in our guidance. Does that answer your question? I wasn’t sure if I fully understood the last part.

[Kevin Liu:]

Yeah, for the most part, you did. I’m curious as well if any of those have closed during the quarter or if you just felt that you should put them on hold and leave them out of the guidance for now.

[Marc A. Cohen:]

We’re not going to disclose if any of those closed this quarter. But the difficulty for us is that from what we see based on the prior quarter, even deals that we are being told are pretty solid, have risk and we believe that larger deals have even bigger risk because they’re bigger targets when it comes to last-minute decision-making. So we’re being pretty conservative with those.

[Kevin Liu:]

If I heard correctly, I think you said 19% of the licenses were from new customers. It looks like year-over-year that would be approximately flat or slightly down where as revenues from existing customers are holding up pretty well here. Is it getting tougher for you guys to get into newer Enterprise customers given the environment and given the fact that maybe some of them are not really open to hearing about the products right now?

[Marc A. Cohen:]

I said that 32% of Q3 Enterprise revenue was from new customers, right?

[Kevin Liu:]

Sorry, I had that backwards.

[Marc A. Cohen:]

That was compared to approximately 22% in Q2. So I think that a third of our new customers are actually pretty good. I think that holds up pretty well to what we said in the past. But what we are finding, in general, to your point, is that newer customers tend to have more delays in their decision process because you are a new vendor which is a different situation than doing an add-on deal. There are more hurdles to go through.

[Kevin Liu:]

Lastly, in terms of the maintenance revenues. I was wondering how much was that impacted by ForEx? Do you guys have a number there? I also just wanted to make sure that the renewal rates are still in line with what you see historically.

[Mel F. Wesley:]

Hi, Kevin. It’s Mel. The EfEx impact was about $240,000 for the quarter and no drastic change, no material change in the renewal rates, either.

[Marc A. Cohen:]

We’re definitely continuing to see strong renewals and in fact, we have been seeing records in terms of our renewal bookings. So we’re pleased with that but we definitely had an impact here with the foreign exchange rates.

[Operator:]

Next is Jeffery Myers with Wachovia Capital.

[Jeffery Myers:]

First question is on you said ACE Live bookings were up 100%. Was that sequentially or year-over-year?

[Marc A. Cohen:]

That was sequentially.

[Jeffery Myers:]

Sequentially, okay. You’re not going to tell me the absolute dollar value of those.

[Marc A. Cohen:]

No.

[Jeffery Myers:]

How much of that is 4100 versus the ones you had out there already?

[Marc A. Cohen:]

That’s a good question. When we saw right out of the gate a lot of action for the 4100 so I would say that is a strong contributor to our Q3 business.

[Jeffery Myers:]

That came out just in December, right?

[Marc A. Cohen:]

That came out in December, correct.

[Jeffery Myers:]

So this quarter, you’ll have three months of that versus one month.

[Marc A. Cohen:]

True statement.

[Jeffery Myers:]

Question on the software gross margins. It came out to be 90%. Do you have any guidance for that going forward? Do you think this is kind of the right level for them or could there be, you know I guess, could they go down further given more ACE Live sales?

[Mel F. Wesley:]

Hi, Jeff. It’s Mel. That is a little bit tricky because we saw in the cost of new software licenses that it was really driven by the lease of the new 4100 and the demand there, because the cost for us, the hardware appliance associated with that solution is about 3-4 times what it is for our other ACE Live solutions. That solution is also more likely to be associated with larger deals like the high 6 and 7-figure deals. Given that they have more variability in their sales cycles, as a couple that are hitting the quarter, it could bump up our cost of sale and software licenses and that would bring down the gross margin percentage. It would obviously increase the gross profit because the sale price is also around 3-4 times higher than the sale price on our existing or our prior ACE Live solutions that were sold. So that is a little bit tricky, it’s really dependent upon the demand for those units.

[Jeffery Myers:]

In terms of the Synergy Program, have they really started contributing revenue yet or is it still early on for them and is that something you are going to start getting contributions later in the year?

[Marc A. Cohen:]

I still think it’s early on. I think we’ve seen that there are good indications with regard to registrations of activity, and by active registrations, I mean DO registrations from Synergy partners. As far as contributions, it is definitely early on.

[Jeffery Myers:]

Last one is so now that we have started looking at 10%-14% operating income target at the end of next year, what are the assumptions that are going into that?

[Mel F. Wesley:]

Sure, I can take that Jeff. Just give me a minute. I’m going to give you the growth assumptions from our current quarter performance. License revenue growth assumption from the current quarter to Q4 2010 for that range that I provided is 12%. Updating tech support revenue growth is 22.5%. Professional service growth is 5%.

[Jeffery Myers:]

So this could be it could be way off, right, I mean if the economy comes back?

[Mel F. Wesley:]

I hope its way off. I hope it’s much higher, yes. I think we view that as fairly conservative.

[Jeffery Myers:]

You guys are almost at the low end of that today.

[Mel F. Wesley:]

Right.

[Operator:]

We’ll go next to Warrick Jervis with Trailhead Asset Management.

[Warrick Jervis:]

I was wondering if you purchased any shares during the quarter and how you were viewing the share buyback program at this point in time. Mel F. Wesley Hi, this is Mel. The only shares we bought back over the quarter were related to vesting of restricted stock because the company buys shares back to cover employees’ tax liabilities associated with those restricted stock vesting dates and it was nominal.

[Warrick Jervis:]

Do you plan to go out into the open market?

[Mel F. Wesley:]

We do currently have our authorization in place to do that and our current plans are to continue that although I acknowledged that we didn’t do any activity other than what I just mentioned last quarter.

[Warrick Jervis:]

Also, you talk a lot about the various customers. Can you tell me how many total customers you have at this point in time?

[Marc A. Cohen:]

That’s not a number that we share on our calls, unfortunately.

[Operator:]

Mr. Cohen, there appears to be no further questions at this time.

[Marc A. Cohen:]

Very well. I would like to thank everyone for attending today. The conference call is now closed. Copyright policy