EXHIBIT 99.1
TRANSCRIPT OF CONFERENCE CALL
INCENTRA SOLUTIONS, INCORPORATED
FIRST QUARTER 2005 RESULTS
MAY 17, 2005
OPERATOR: Good morning, ladies and gentlemen and welcome to the Incentra
Solutions First Quarter 2005 Results Conference. At this time, all parties have
been placed on a listen only mode and we will open the floor for questions
following the presentation.
At this time, it is my pleasure to turn the floor over to your host,
Rene Caron of Allen & Caron. Please, go ahead, sir.
RENE CARON: Thank you, Autumn. Good morning and thank you for joining us for
Incentra Solutions' First Quarter Results Conference Call to discuss the
company's results for its first quarter ended March 31, 2005.
Before we start today's call there are a few items I would like to
cover with you. First, in addition to disseminating through PR Newswire this
morning, today's news release announcing the company's results (inaudible) of
the news release was also sent to a large number of conference call
participants. If any of you did not receive a copy of the news release please
call our California office at 949-474-4300 after the call and we will email you
a copy of the release. Additionally, a replay of the conference call, will be
available on the internet via a link provided on the investor's section of
Incentra Solutions website at www.incentrasolutions.com.
Finally, I've also been asked to make the following statement. Certain
information discussed on this morning's conference call may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and the federal securities laws. Although the company
believes that the expectations reflected in such forward looking statements are
based upon reasonable assumptions at the time made it can give no assurance that
its expectations will be achieved. Listeners are cautioned not to place undue
reliance on these forward looking statements. Forward looking statements are
inherently subject to unpredictable and unanticipated risks, trends and
uncertainties such as the company's inability to accurately forecast its
operating results, the company's potential inability to achieve profitability or
generate positive cash flow, the availability of financing and other risks
associated with the company's business. For further information on factors which
could impact the company and the statements contained here in reference should
be made to the company's filings within the Securities & Exchange Commission
including annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, and
current reports on Form 8-K. The company assumes no obligation to update or
supplement forward looking statements that become untrue because of subsequent
events.
On the call the today from Incentra Solutions we have Tom Sweeney,
Chairman and CEO; Paul McKnight, CFO; and Mike Knaisch, President of the
company's Front Porch Digital Broadcast and Media Services Division. During the
call management will provide a review of the results and the company strategy
for going forward, after which there will be a question and answer period. For
those of you who are participating on the call via the web cast over the
internet and who wish to submit a question to be considered for the question and
answer period, you can do so by clicking on the ask a question button provided
on the left side of your screen. Please submit your questions as early as
possible. Questions from the internet will be taken as time permits.
I'd now like to turn the call over to Tom. Good morning Tom and
congratulations on a great quarter.
TOM SWEENEY: Thanks Rene. Appreciate it. Welcome everybody and thank you for
joining us on the call. As you know the company is committed to becoming the
premier complete solutions provider of IT products and services. And I'm happy
to report that we've made great progress this past quarter in accomplishing our
major goals, and we have seen the early signs that our strategy is beginning to
pay dividends. First, we completed the acquisitions of Star and PWI. These
acquisitions are at the core of our efforts to further penetrate the enterprise
market. Both companies have an outstanding base of enterprise customers and are
staffed with an exceptional group of professionals. Our integration program is
underway and we're making steady progress against all of our major objectives.
We'll discuss this in more detail in a few minutes.
Second, our broadcast division continues to see increased ordering and
has had early success in selling our DIVAcomplete solution with 2 new orders in
the first quarter. In addition, we've introduced a complete set of services to
the broadcast market with 2 new products aimed at the mid-tier and smaller
station market segments. Mike Knaisch will provide a more detailed review of
these accomplishments in a few minutes as well.
Now I'd like to turn the call over to Paul McKnight to review the
financial performance of the company. Paul?
PAUL MCKNIGHT: Thank you, Tom. Good morning. I will now walk through the
company's financial performance for the first quarter. We will do that up and
provide results according to GAAP as well as on a pro forma basis. Now our GAAP
results will exclude the results of the businesses prior to the respective
acquisition dates. Accordingly, the GAAP results will show significant increase
over the last year results.
Now for the GAAP numbers, revenues for the quarter were $6 million
which is a 150% increase over the prior year. Our gross margin was 2.9 million -
this is a 255% increase over the prior year. Our operating expenses were 4.9
million - this is a 104% increase over the prior year. The net loss for the
period was $2.3 million which was a 25% increase over the loss last year. The
EBITDA, on an adjusted basis was a loss of $8,000.
Now, I'd like to provide the pro forma results. These pro forma results
will include all the results of the acquired companies as if they were acquired
at the beginning of the period being presented. Our revenues for the period were
$16.5 million. This represents a 15% increase over the prior year. Now this
increase was due to the growth in third party product sales the continue growth
in our DIVArchive sales, and growth in the number of terabytes that we have
under management.
Our gross margin for the period was 4.5 million. As the percentage of
revenue this represented 27%. This is an 8% increase over last year. Now the
margin percentage was slightly lower than expected due to the increase in our
third party product sales.
Now for our operating expenses: It was 6.4 million in the quarter. This
was a 10% increase over the prior year. Now these expenses were higher in the
quarter due to the fees that we incurred that were related to our various
filings, our registration statements and other merger related activities.
Otherwise, these costs were definitely in line with our expectations.
The net loss for the period was $2.4 million which was a slight
improvement over the previous year of 2.5 million. Now this loss did include a
$340,000 gain that resulted from the revaluation of our derivative warrant
liability.
Now, our EBITDA on an adjusted basis was $400,000 for the period. Now
this EBITDA was ahead of our expectations. Let me define what an adjusted EBITDA
is. First of all, it excludes the non-cash stock compensation expense, it
excludes the amortization and referral fees, and it also excludes the previous
owner's costs that were incurred in the acquired businesses prior to the closing
of the transaction.
Our cash balance at the end of the period was $2.2 million. This
concludes the financial portion. And I'd to turn it back over to Tom.
TOM SWEENEY: Thanks, Paul. Now I'd like to give you a brief update on our
integration efforts to date. The company is at the beginning of its integration
plan and is already accomplished many of the key goals it has established for
itself. The introduction of first call support services has already been rolled
out to the sales force and as you may recall, first call support is where
Incentra takes the first call from customers for maintenance for the various
products that it sells. We've rolled it out for the sales force, we are signing
new contracts now at the higher gross margins; we have approximately 60% of the
products we sell now covered with first call contracts with our OEM's and are
working to complete the rest of the product line during the second and third
quarter. This change will significantly boost our gross margins on maintenance
contracts, and it will add to our recurring revenue streams as we go through the
year.
Two, we have introduced our broader set of services including one time
professional services and recurring services for monitoring and management to
our enterprise division and we're already seeing opportunities appear in the
sales funnel.
Third, we've already eliminated any of the redundant expenses in our
newly acquired companies and have moved aggressively to consolidate our
purchasing contracts to maximize our discounts.
Lastly, we're preparing to roll out our enhanced first call services
where we monitor the customer's environment real time and eliminate their need
to call us. This service leads to faster problem isolation and improved response
times and asset availability for our customers. This will be an industry first
and we plan to leverage this service to set ourselves apart from our
competitors. We're pleased with the integration efforts to date but as you know
there are many aspects of an integration plan to manage and some are not
necessarily directly under our control, so we'll continue to keep our eyes
focused on it and try and accomplish everything that we have set out.
Now, I'd like to make sure that we cover a few highlights on the
enterprise and broadcast divisions. Mike Knaisch is going to do a quick update
on the broadcast business first.
MIKE KNAISCH: Thanks, Tom. As I indicated during our conference call on March
30th, Front Porch closed a very strong first quarter of 2005. The company signed
nearly $4 million in new contracts for future delivery and this total exceeds
our previous quarterly high by more than $1 million. Transactions were closed
with major global broadcast brands such as Disney, MTV, Nickelodeon, Discovery,
(inaudible) and Sony Pictures, as well as many leading regional broadcasters
throughout Europe and Asia. Two of these deals, Discovery UK and (inaudible)
were for DIVAcomplete solutions. And as a reminder, with DIVAcomplete we supply
all of the archive management software, hardware infrastructure, and provide
first-call support. Both of these deals were worth approximately $1 million a
piece will achieve at least 50% margin and should complete delivery in the
second quarter of this year.
We're now aggressively selling DIVAcomplete around the world and these
deals provide evidence that those are partners and prospects find the strategy
compelling. The second quarter launch begins in earnest at the National
Association of Broadcaster's Conference in Las Vegas last month. This is the
first NAB show where Front Porch had a booth. We released DIVArchive 5.8 which
included important new functionality such as tighter integration with Avid
technology and other product enhancements intended to protect our competitive
advantages. We launched 3 new products DIVAworks, DIVAdirector, and
DIVAmonitor. There was a lot of activity at the booth and there were many
indications that the show was a success. 274 visitors registered at our booth,
more than double what we achieved at the International Broadcaster's Conference
in Amsterdam last September. 171 of those registered visitors were from
broadcasters throughout the Americas and this traffic is an important indicator
of future demand in the Americas which has been lacking behind the activity in
the international markets.
Our team conducted extensive product demonstrations for broadcast
networks in the US as well as many independent stations. Independent stations
were drawn by our new products DIVAworks and DIVAdirector--a bundled offering
that should greatly help us penetrate the
large market for low-end broadcast archives. International prospects were also
very active, with over a 100 customers and prospects stopped by the booth.
As we look to the second quarter and beyond we believe we are well
positioned to achieve our annual plan. Overall our 6-month funnel remains strong
with $12.5 million in opportunities and more than half of them are in the
Americas. We're currently competing for at least 8 opportunities to sell
DIVAcomplete solutions. We are already responding to a number of requests for
proposal on both DIVAworks and DIVAdirector, and we're still adding new
opportunities as we follow up on leads from NAB.
The next big event on our marketing calendar is the International
Broadcasters' Conference in Amsterdam this September. We'll have an expanded
booth presence there, again demonstrating DIVAcomplete, as well our other new
products. And given our dominance in the European market we expect a very good
show.
That's the update, Tom.
TOM SWEENEY: Thanks, Mike. Now a couple of comments about the Enterprise
Division and its results: the Enterprise group relies on strong repeat customers
from existing customers such as Washington Mutual, Standard Insurance, Xilinx,
Jack in the Box, Elan Pharmaceuticals and Holland America to name a few. We
signed new, multi-year managed service contracts with Recruit Max, Good
Technology, TeleCity, Aon, and others, and we saw a significant increase in the
volume of terabytes under management, increasing by a hundred terabytes since
the end of the year for customers such as DataReturn, Food Technology, Cable and
Wireless, Network Supply and SpyOS and others.
Finally, we've conducted a number of customer awareness events to
introduce our broader set of capabilities to our Enterprise clients and each of
these has been well-attended with strong interest from our customers in regards
to complete solutions and managed services.
We expect to see strictly increasing sales of first-call services and
corresponding increases in our gross margins. Product demand remains strong in
the marketplace although we do not expect the second quarter sales to be as high
as the first. We are gaining interest in our expanded services and pursue those
opportunities vigorously. Overall the sales funnel on the Enterprise side is at
more than $24 million; however, we believe the funnel needs to go higher and
should with our demand generation programs and our hiring of additional sales
professionals. Now, on the reversed stock split that was announced previously.
Our 14C has been mailed to existing shareholders; that went out yesterday, so we
expect the actual effective date of the reverse split to be around June 10.
Finally, in closing we had a solid first quarter across all measures
and pleased at the progress the company is making. Our number one priority is
completing our integration efforts, and continuing to recruit and train
additional sales professionals across the entire business.
That's all for our comments today. Thank you for joining the call and
we will now open it up for questions.
OPERATOR: Thank you. At this time, if you do have a question, you may press
star, one, on your keypad. If at any point, your question has been answered, you
may remove yourself from the queue by pressing pound. Once again, that's star,
one, to ask a question at this time. Please hold while I poll for all questions.
Thank you, our first question is from Ron Mischner from M Capital
Management.
RON MISCHNER: Good morning.
TOM SWEENEY: Good morning, Ron.
RON MISCHNER: Three questions: number one, the line-up looking forward between 3
or 4 parts that you've got here sounds pretty positive and so first question is
why-excuse-me-why will sales in the second quarter be less than the first?
TOM SWEENEY: Oh, yeah, so let me explain a little bit about the first quarter of
volume, Ron and an explanation on the second. And the first quarter had a couple
of large transactions that were about a million dollars. Both of those are in
our funnel - we expected to close them. One of them in particular we closed on
the last day of the month and actually shipped it the same day, and so that was
a little faster than we had originally expected, and of course large
transactions tend to skew the numbers up a little bit. We certainly have a large
number of transactions in the second quarter. In fact the company overall did
about four hundred transactions in the quarter but we would be remiss if we
didn't suggest that the product volume is probably going to be slightly less
than in the second quarter than it was in the first.
RON MISCHNER: OK. Between the parts, first DIVA call, third party services
etcetera. How would you categorize the growth going forward? Which ones are
going to be the strongest, etcetera?
TOM SWEENEY: Yeah. So let me try and answer it this way. The broadcast business
is going through a fairly significant growth rate right now, in terms of both
the archive sales of the primary software product as well as gaining interest
for complete solutions, and as you know the complete solutions as that pushes
up, it drives the revenue much higher and still has really great gross margin,
so we would like to see a doubling of the number of archives that we sold from
last year to this year. Last year we did about 43, we said this year we'd like
to do somewhere around 80. I know that we have got plenty of activity inside our
funnel from a broadcast perspective so we feel pretty good about that. On the
Enterprise side we want to achieve the same growth as a percentage but the
broadcast business today in its pure form is only 20% of the revenues of the
company. So, when you put the two together we still see pretty heavy growth. I
think we had told people at the end of last year, I think when we did our call
in March, that we expected somewhere between a 20 to 30% growth rate
year-over-year, all combined.
RON MISCHNER: Right. You're sticking with that then.
TOM SWEENEY: Yeah, I think that's still pretty good guidance from our
perspective.
RON MISCHNER: OK. And at this juncture, what would be your guidance for gross
margin goals.
TOM SWEENEY: Well, we came in at 27% for the first quarter. That was lower then
we expected because of higher product values and some of those bigger business
deals carry lower margin percentages. We would like to see the gross margins up
above 30%, and my product volume mix is going to determine to some degree where
that percentage comes out. But, we would like to get it up over 30% as quickly
as possible but we may be able to do it in the second quarter. What I can tell
is that right now, if you compare the company to other systems integrators or
solutions providers we're at the top of the class for gross margin percentage
and we think we're low.
RON MISCHNER: OK. And you still think that based on EBITDA basis we'll break
even towards the second half?
TOM SWEENEY: Yeah. Our guidance has been we'd like to be EBITDA positive by the
third quarter. The first quarter exceeded our expectations. We got a much better
EBITDA performance than we expected, primarily because we shipped a lot of
product and software. The second quarter, we're expecting it to be neutral to
positive and I think we're in good shape overall for the year. We feel pretty
confident about where the trends are.
RON MISCHNER: OK. Thank you.
TOM SWEENEY: Yes.
OPERATOR: And thank you at this time I would like to remind all participants to
ask a question you may press star, one, on your keypad.
And now I would like to turn the floor over the Rene Caron for any
questions via email.
TOM SWEENEY: Rene, you may have your phone on mute.
RENE CARON: I'm sorry Autumn, I'd like to give it one more second to see if we
have any more questions from the telephone audience and if not we'll start the
email questions and answer period.
OK. At this time, we'll answer some questions we received via email. I
will remind everyone that many of the questions we've received may have been
already answered during the company's formal presentation or during the previous
question and answer period. So, if you submitted questions that have already
been answered we will not be repeating those questions.
The first question, Tom, comes from someone who is interested in the
Front Porch Digital Media and Broadcast Services division and the question is:
"How far along are most North American broadcasters in their migration to
digital archiving systems, and what does Incentra see as its key sales catalyst
in this market going forward?"
TOM SWEENEY: Mike, I'd like you to answer that.
MIKE KNAISCH: Well, as we've said before, we know that the Americas, and
specifically the US market, is lagging behind both Europe and Asia in terms of
adoption but we are beginning to see more deliberate activity of the major
broadcasters, major networks throughout the US as well the independent call
letter stations in the secondary and tertiary markets. We're currently involved
in several proposals to the major US networks and as I said we're also seeing a
lot of that activity from the independents.
As for catalysts in this market, there are several that I've mentioned.
The first is the obsolescence of the analog systems that they have been used and
they wear out and must replace them with digital systems as there are no analog
systems being produced anymore. The second catalyst would be the creation of new
television channels to broadcast more content to more audiences and these
complex systems are much more easily managed in a digital operation. Third, the
improvement of the US advertising business, the revenues generated from that,
will fuel additional capitol investments and ultimately competitive pressure. As
major networks move into the digital world the remaining laggards will be forced
into that same mode. So those are the primary catalysts that I point to.
RENE CARON: Thank you, Mike. The next question is: "Are there other major market
opportunities that the company is focusing on apart from its broadcast and
enterprise businesses?"
TOM SWEENEY: Today, the focus is truly on the enterprise and the broadcast
based. We may as we go forward through this year and next year create another
vertical focus either inside the enterprise segment or in looking at other
market segments, but today we have our hands full with both of those and we're
pretty happy with the opportunity we have in front of us so we're not planning a
major expansion or vertical expansion at this point.
RENE CARON: Thank you, Tom. Next question is: "Is the company adequately
capitalized to meet its current sales goals and its business plan?"
TOM SWEENEY: Well, we think the company is adequately capitalized. We would tell
you that you know having enough money is a measure of where are you running and
where are you in relation to positive cash flow. So we think we're on the right
track right now; we like the trends we've been experiencing and we think we're
going to get sustainable positive cash flow, you know, EBITDA from operations as
we get to the third quarter. Our next objective is to get to free cash flow
where we're actually able to take care of any debt service that the company has.
Right now we think we are positioned well but, that's it.
RENE CARON: OK. The next question has to do with the reverse split, which I
believe you had mentioned is anticipated to become effective around the 10th of
June. And that question has to do is: "Are all shares including options, rewards
and such affected by the reverse split?"
TOM SWEENEY: Yes, and when we announce the 10 to 1 reverse. All of the shares of
the company: preferred shares, common, stock options, warrants, all of them will
be adjusted in a reverse and the strike prices will be increased accordingly. So
it was effective across all forms of capitol.
RENE CARON: OK, fine. The next question is somewhat related to the reverse split
but also generally related to the company's plans going forward in order to
attract additional interest in the company's shares to absorb any supply that
may come into the market in the future.
TOM SWEENEY: Well, the company has had a fairly vigorous public relations,
investor relations, program that it's been involved over the last few months. We
finished meetings with folks in April. We're planning to go back to meet with
institutions again in the month of June and to follow up with them in terms of
our performance versus the expectations. We have seen interest from a large
number of these institutions, many of them had provided commentary early on that
they wanted to see the company reverse the stock and adjust its capitol
structure. We have done that and at the same time we've been posting solid
results, and so let's hope that the work that we've been doing with them getting
capital structure corrected, and the results themselves will put those
institutions in a position where they will want to buy.
RENE CARON: OK. Tom, I think we also have at this point at least one or two more
telephone questions that have been queued up, so Autumn, I'd like to turn it
back to you and pick up any questions that may be coming in from the telephone
conference.
OPERATOR: Thank you and I'd just like to make another reminder, if you would
like to ask a question over the phone you may press star, one, on your keypad.
And thank you, our next question is from Chris Moore of Bristol.
CHRIS MOORE: Good morning. I know it's largely a function of the projected
revenue mix but you talked about the next goal being reaching pre-cash flow
positive. Roughly on a quarterly basis, what kind of levels are we talking about
- - is that in $17-17.5 million range - excuse me, on a quarterly basis.
TOM SWEENEY: Ah, let's see here so well, good morning, Chris, thanks for being
on the call. In terms of where we need to be, to be pre-cash flow positive, I
think that the number has got to be higher than 17. I'm looking at my Chief
Financial Officer right now. My guess is that the number has got to closer to
the 18-20 range, OK. OK, I think that's probably in line with what we expect
with the product mix.
CHRIS MOORE: Gotcha, and one other question. In terms of the maintenance
margins, on some of the revenue in particular, you talked about that likely
expanding pretty rapidly over the next 12
months or so just from a kind of basis point perspective. What kind of expansion
are we talking about?
TOM SWEENEY: Yeah, I'll actually give you some specifics around it. Generally
maintenance contracts will have margins associated with them in the 10 to 12%
range.
CHRIS MOORE: OK.
TOM SWEENEY: Our new contracts with our manufacturers now have maintenance
margins that are at 25% and go as high as 45% based on volume, so we're
expecting a very, very significant change.
CHRIS MOORE: Gotcha and that further expansion you'll feel later on this year?
TOM SWEENEY: Yeah, actually it started already. We've already started looking at
maintenance contracts right now at the higher discounts and generating recurring
revenues. As I mentioned we have about 60% of the product line covered. We
should have the majority of it finished up by the end of the second quarter and
going into the third quarter, so we're going to see those increased margins as
we go forward during the year and we would expect to sign somewhere around $10
million dollars of maintenance contracts this year. So, we look at it as key
synergy that comes out of the acquisition plan.
CHRIS MOORE: Sounds good, thanks.
TOM SWEENEY: Thanks, Chris.
OPERATOR: Thank you, Mr. Caron at this time, there appears to be no further
questions.
RENE CARON: OK. At this point, Tom, we'd like to turn the call back to you for
any closing remarks.
TOM SWEENEY: Well, I think we're all set. Thank you all again for joining in the
call if you came online. For those that are listening to the web cast either now
or later, we certainly appreciate your interest as well. And as always myself
and the management team are available to meet with people to answer questions or
to provide more insight into the company's operations. Thank you.
OPERATOR: Thank you; this does conclude today's teleconference. Please
disconnect your line and have a great day.