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Final Transcript

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CONFERENCE CALL TRANSCRIPT

APRS - Q2 2005 APROPOS TECHNOLOGY, INC. EARNINGS CONFERENCE CALL

EVENT DATE/TIME: JUL. 26. 2005 / 4:00PM CT
EVENT DURATION: N/A

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Final Transcript
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JUL. 26. 2005/4:00PM, APRS-Q2 2005 APROPOS TECHNOLOGY, INC.
EARNINGS CONFERENCE CALL
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CORPORATE PARTICIPANTS
LESLIE LOYET
Apropos Technology Inc. - Financial Relations Board

KEN BARWICK
Apropos Technology Inc. - Member of the Board, CEO

FRANK LEONARD
Apropos Technology Inc. - Chief Financial Officer

CONFERENCE CALL PARTICIPANTS
TED KETTERER
TK Associates - Analyst

DAN ZEFF
Zeff Capital - Analyst

PRESENTATION

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OPERATOR

Good afternoon ladies and gentleman. Welcome to the Apropos Technology Inc.
second quarter 2005 earnings conference call. Today's call is being recorded.
[OPERATOR INSTRUCTIONS] I would now like to turn the conference over to the Ms.
Leslie Loyet of Financial Relations Board. Please go ahead ma'am

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LESLIE LOYET - APROPOS TECHNOLOGY INC. - FINANCIAL RELATIONS BOARD

Thank you, afternoon everyone and thank you again for joining us for the Apropos
second quarter conference call. By now everyone should have received a copy of
the press release that was been out this afternoon. If anyone needs a copy, it
is available on Apropos' Website at www.appropos.com or you can contact Samir
Patel at 312-640-6771 and he will send you a copy immediately.

Before I turn the call over to Ken Barwick Board Member and Acting CEO, I do
need to remind you that certain statements made during this conference call that
are not historical may be forward-looking statements within the meaning of the
Private Securities Litigation and Reform Act of 1995. Although Apropos believes
the expectations reflected in any forward-looking statements are based on
reasonable assumptions, they can give no assurance that the expectations will be
attained.

Factors and risks that can cause things to differ materially from expectations
are detailed in today's release and from time to time in the company's filings
with the SEC. Additionally we want to let people know that the information in
statements made today are made as of the date of the call, July 26, 2005.
Listeners to any replay should understand that pass of the time by itself will
diminish the quality of the statement. Also the contents of the call are the
property of the company. Any replay or transmission of the call may be done only
with the consent of Apropos Technology. With that said, I would now like to turn
the call over to Ken Barwick for his opening remarks. Go ahead, Ken.

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KEN BARWICK - APROPOS TECHNOLOGY INC. - MEMBER OF THE BOARD, CEO

Thank you, Leslie and good afternoon everyone. Thank you for taking time to join
us today. As Leslie said, my name is Ken Barwick and I am the acting CEO of
Apropos Technology. I have been in that role of acting CEO since June 28 and
have been a Board Member since May 2002. As a brief background, I have been in
the high-tech industry for more than 25 years, having served in leadership roles
in both private and public companies, ranging from start- ups to billion dollar
corporations. I began my career in sales and for a number of years served as
CEO, COO and General Manager roles. Over the past few years, I have been in a
consulting arena focusing on helping companies in the area of rapid revenue
growth and turnarounds.

With me today is Frank Leonard, our Chief Financial Officer. Our agenda for
today will again that Frank covering Apropos' financial results for the second
quarter. After his comments I will highlight some of the non-financial
activities of Q2 and will open the call for questions. I would now like to turn
the call over to Frank.

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

Thank you, Ken. Revenues for second quarter 2005 were $4.5 million were down 10%
from the $5 million in the year ago period. In the current quarter, the software
license revenue component totaled $1.4 million compared to $1.6 million in the
second quarter 2004. However, we did experience an increase our the mix from new
customers. Software license revenue from new customers, which includes the SEC
order received late last quarter, accounted for 46% of software revenues
compared to 41% in the year-ago quarter.

Notable new customers in the current quarter were Jacobs Engineering a
professional technical services firm headquartered in California, UK-based
British Plasterboard, a supplier of building materials, and UK-based Wolseley, a
distributing of heating and plumbing supplies.

Revenue from services and other in the second quarter 2005 of $3.1 million is
down 0.2 million or 7% from the year-ago period. Support revenues up $2.3
million are down just over 2% from last year's quarter. This decrease was
primarily due to changes in customers' internal agent requirement. Service
revenues up $733,000 were down from the $883,000 in the year ago quarter.
Service revenues were impacted by lower utilization rates and the type of
services provided. The current quarter service mix had new system implementation
and more upgrades and special projects than the year-ago quarter.

On a channel basis, the indirect and OEM business in the second quarter 2005 was
21% compared to 20% for the same period a year ago. In the current quarter, the
company added several new alliance partners. Two of these new partners was
Solonis, a leading provider of customer sensored solutions for banks and credit
unions, and Unicras (ph) leading mid-market provider of web-based service desk
automation software. We believe these new relationships can expand our channel
opportunities.

On a geographic basis North American business in the second quarter of 2005
accounted for 79% of revenues compared to 83% in the same period a year ago. Our
May operations have delivered four consecutive increases in quarter over
prior-year quarter revenues. Gross margins for the second quarter of 2005 was
76.3% were down slightly from 77.1% from the same quarter a year ago, a shift in
product mix principally due to a decrease in higher margin software revenues had
a negative impact on margins of 0.2%.

Also, services and other margins were low in the current quarter versus the
year-ago period due to a lower professional services staff utilization rate and
the mix of services performed. Operating costs for the second quarter totaled
$3.9 million compared to $3.8 million in the year-ago quarter. Both quarters
include restructuring transactions. The current quarter had a credit of $187,000
for the successful sublet of the vacant corporate headquarters space, and last
year's quarter charge of 88,000 also related to the same big corporate space.

Excluding charges on both period current quarter operating costs would increase
by approximately $350,000 or a 9% from the year-ago period. This increase was
primarily due to higher marketing program costs, outside service fees, and
recruiting costs. Even with this increase in spending, the second quarter 2005
represented the seventh consecutive quarter when recurring operating costs have
been less than $4.1 million.

Total staffing including the professional service organization was under a 100
at June 2005 compared to 99 a year ago June. That has been a slight increase in
staffing mix towards sales, marketing, and professional services from the
year-ago period. The US GAAP net loss of the second quarter was $229,000, a
basic net loss of $0.01 a share. This compares to the US GAAP net income for the
second quarter of 2004 of $109,000 of basic net income up $0.01 a share. The
above-mentioned GAAP results include restructuring credit of $187,000 in the
current quarter and restructuring charge of $88,000 in a year ago quarter.

Look at our balance sheet and we can conclude our financial condition remains
strong. Our cash and investment balances totaled $41.1 million at June 30. Trade
receivables at June 2005 totaled $2.6 million. Day sales out standing at June
30th up 53 days over represents an increase of three days from the 50 days at
March 31st. Over the last year the company has seen DSO levels stay in the
nearer range of 50 up to 53 days.

Going to cash flows were negative for the first time in seven quarters. For the
current lower the company had negative cash of $167,000. Positive changes in
working capital were not enough to offset net losses before restructuring
credit. Even so, the company's cash and investments balances are still higher
than a year ago. At June 30, 2005 there were just over 17,907,000 shares
outstanding. Our book value per share was $2.15. Separately, the combined cash
and short-term invest balances represents $2.29 per share.

Let me take a moment to discuss our expectations going forward. I would again
refer you to our opening remarks regarding forward-looking statements. In last
quarter's conference call we indicated that the company lacked solid revenue
visibility for the second quarter and for the near term perceivable future. That
continues to be the case. It is clearly our goal to grow the business. With that
being said, it is difficult to predict the timing of closing of new business and
thus forecasting revenues is subject to wide variation. Because of this, our
current policy is not to issue forward- looking financial guidance.

At this time we also do not believe it would have any constructive value to our
investors. As a result of no solid revenue visibility we have and will continue
to closely monitor our cost structure. And the current revenue environments we
believe targeting staff levels near 100 persons make sense. We are also
reviewing all of other expenses with the view of how we can contribute to
increasing revenues. For the first half of 2005 it has been difficult, our
efforts are focused on top line growth and returning to profitability. We
believe the operational improvements already in place and current product
offerings provide strong fundamental to make this happen. At this time I would
like to turn the discussion back over to Ken.

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KEN BARWICK - APROPOS TECHNOLOGY INC. - MEMBER OF THE BOARD, CEO

Thank you Frank. Let's begin by talking about progress of business in Q2. First
of all, we did achieve 5.6% sequential revenue growth over Q1. While the growth
was modest, it was led by growth in license revenue particularly in North
America. Second, the pipeline continues to grow. The sales cycle for product
offerings traditionally have been long, sometimes 12 months or more, and it
takes time for growth and a pipeline to be reflected in increased revenue. The
good news is that we're seeing more deals and larger deals come into the
pipeline. That is promising.

Moving forward our primary focus for the near term will be driving sustaining
license revenue growth. Since the end of Q2 I have worked closely with the VP
Sales to do a comprehensive review our key accounts and prospects. To determine
which opportunities have the highest potential for closure in Q3 and beyond.
We're working to ensure a process to increase sales through execution and to
compress the sales cycle were possible, resulting a higher fully license
revenues that are repeatable and sustainable. We're also looking closely at the
alignment of our marketing initiatives with our sales efforts to ensure the
right messages being delivered to enhance license sales and to get the greatest
return for marketing efforts.

Secondly, I am actively involved in a search for permanent CEO. The board is in
discussions with several strong candidates and we hope to have replacement
completed as soon as possible. Our focus is in securing the best Candidate
possible, regardless of the time frame, but obviously sooner it's better. The
right candidate will be Chicago based and had demonstrated strong leadership
skills that was propelled Apropos forward. The selected individual also has
extra vision and perspective to re-ignite Apropos sales and operational growth.

Additionally, we will continue to play close attention to maintaining a strong
balance sheet enhancing our product to new functionality and growth and support
of our strong customer base. In that vein, we will be holding our conference
entitled Apropos World 2005 in Chicago from September 11 through13th. We are
looking forward to meeting face-to-face with many of our best customers and
showing them our products and technology directions

In summary, we are focused on the things that are essential for success and
growth for all software companies, namely predictable, repeatable, and
sustainable license revenue growth coupled with a strong balance sheet, a great
product, and a strong and growing customer base. We will make adjustments in our
business operations as necessary to achieve these goals. We believe we have the
right focus and the key growth factors of the business moving forward.

Thank you, and at this time, I will open up the call for questions.

QUESTION AND ANSWER

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OPERATOR

[Operator Instructions] we will take our first question from Ted Ketterer with
TK Associates.

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TED KETTERER - TK ASSOCIATES - ANALYST

I have two questions. It is an improvement over Q1. One SBC, which sort of those
remember in the last conference call those guys came to you? Has there been any
more or is there any more activity with SBC as a reseller? And secondly, can you
explain or go into a little background or detail. It seems to me if Honey well
will go up in this press release will agree to have their name in your press
release, that you save them 3 million bucks, but there is a product here that
has some appeal, but at the same time quarter-after-quarter licenses and
activity just limped along at frankly, disappointing levels. Can you explain or
give light on the contrast in the discrepancy? Thanks.

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

Obviously the relationship first and obviously it is one that is ongoing and
we're trying to expand our relationship with SBC, with additional and end
customers. At this point in time there are some discussions going on but there
is not anything that is depending at this moment. But we do see it as an
opportunity that we can expand upon going forward.

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TED KETTERER - TK ASSOCIATES - ANALYST

Okay

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KEN BARWICK - APROPOS TECHNOLOGY INC. - MEMBER OF THE BOARD, CEO

And just this Ken. I will attempt to address the -- give you background in
detail over the quarter-to-quarter activity. You are right Ted there has been
some limping along, to use your term. What I have spent the time that I have
been here, predominately since June 28, is trying to understand in detail how
our pipeline is made up, what is it made up of, where are the key prospects are
in the sales cycle. And I think important Ted, is to make sure we are aligning
where we think they are, being sales to where the customer is in the sales
process. And sometimes that the line gets out of lag and causes opportunities to
lag and roll over and take longer than we want to close. So I have really
focused now and on making sure that we have the alignment, not only where the
customer expectation garble what are sale the expectations are.

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TED KETTERER - TK ASSOCIATES - ANALYST

That still does not shed much light on why if this product can achieve what
Honeywell says it has for them, why can't be sold in greater volumes to other
people?

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

Am I off base somewhere?

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KEN BARWICK - APROPOS TECHNOLOGY INC. - MEMBER OF THE BOARD, CEO

No, I think that is obviously one of the things that we can see what we can have
success with selected customers, and it is just a matter of trying to take that
success and build upon it. You know, through marketing, press releases, and
customer references, etc.

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

And ken, also to make sure we're focused on the right opportunities. Those being
where we have the highest revenue opportunity and the largest return it to the
company. And that is what I am trying to get my arms around now as I talk about
the process. And there is the process there for doing that. The pipeline process
and as well as the sales process.

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TED KETTERER - TK ASSOCIATES - ANALYST

And speaking about the pipeline, can you give color on it in terms of quality?
How it compares to this time last year?

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

Do you know I cannot give you a lot of detail, but I can tell you that the
pipeline is growing. And it has grown since last year it has grown since last
quarter.

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TED KETTERER - TK ASSOCIATES - ANALYST

Okay. And one last thing, the sublet for your excess real estate, does that go
through the entire term of-

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KEN BARWICK - APROPOS TECHNOLOGY INC. - MEMBER OF THE BOARD, CEO

Yes, it does. Since, May of 2006.

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TED KETTERER - TK ASSOCIATES - ANALYST

So you have, as long as that subleased stays in place you did not have any
liability for future expenses?

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

Unfortunately the sublet does not equal what we are paying.

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TED KETTERER - TK ASSOCIATES - ANALYST

I understand that

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

Okay, great.

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TED KETTERER - TK ASSOCIATES - ANALYST

And last, what is the status of that last remaining class action suit?

Frank Leonard There is activity on it. Again obviously, we are one of over 300
defendants in that. I know how they have a revised settlement that that they
have been in front of the judge, actually the judge's direction as to what needs
to be done. And I think the last discussion I have they are hoping to have
something kind of, finalized in Q3 here.

Great. Okay guys, Thank you.

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KEN BARWICK - APROPOS TECHNOLOGY INC. - MEMBER OF THE BOARD, CEO

Thank you Ted.

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OPERATOR

[Operator Instructions]. We do have a question from Dan Zeff with Zeff Capital
(ph).

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DAN ZEFF - ZEFF CAPITAL - ANALYST

I was wondering at the board level you were discussing possible sale of the
company, if you would concurrently we had looking for a new CEO. If you haven't,
how long do you give yourself to see the pipeline bear some fruit before that
becomes a more active process?

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FRANK LEONARD - APROPOS TECHNOLOGY INC. - CHIEF FINANCIAL OFFICER

I hope you can appreciate that I can't comment on what we discussed at the board
level. I can tell you that we still believe there is room on the top end for
revenue growth in this company.

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OPERATOR

Ladies and gentlemen, there appeared to be no further questions at this time. I
will turn the call back over to management for any closing comments.

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KEN BARWICK - APROPOS TECHNOLOGY INC. - MEMBER OF THE BOARD, CEO

Thank you. In summary, I want to say one thing. It all starts with revenue. So
the things we're looking at are increasing our revenue, but some things we are
really strong for us that software companies are dying to have and at the strong
customer base, a strong balance sheet, and a strong product. So, with that we
can build on the future. Thank you for your time. We appreciate it, and that
adjourns our discussion for today.

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OPERATOR

This does conclude today's conference call. We appreciate your participation you
can disconnect at this time.

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