ClearOne, Inc. 2017 Q3 Form 10-Q Summary
Business Context and Reporting Period
ClearOne designs, develops and sells conferencing, collaboration, streaming and digital-signage solutions for audio and visual communications. The filing covers the unaudited three and nine months ended September 30, 2017, compared with the corresponding 2016 periods.
Financial Results and Position
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $10.6 million, down 18% | $32.5 million, down 14% |
| Gross profit | $6.5 million | $19.3 million |
| Gross margin | 62%, versus 59% | 59%, versus 63% |
| Operating income (loss) | $(13.5) million | $(15.1) million |
| Net income (loss) | $(9.3) million, or $(1.09) per diluted share | $(10.6) million, or $(1.22) per diluted share |
| Operating cash flow | Not separately provided | $(7.6) million |
- Cash and cash equivalents were $3.0 million at September 30, 2017, compared with $12.1 million at December 31, 2016. Marketable securities totaled $20.4 million, including $4.0 million current and $16.5 million long-term.
- Working capital was $26.8 million, compared with $30.8 million at year-end 2016.
- Total assets were $74.4 million and shareholders’ equity was $61.6 million. The filing does not disclose outstanding borrowings or senior debt; reported liabilities totaled $12.8 million.
- Inventory increased to $22.1 million from $13.0 million at December 31, 2016, including $2.4 million classified as long-term inventory.
- Nine-month investing cash flow was $4.4 million, primarily reflecting net marketable-security sales. Financing cash flow was $(6.0) million, including $4.2 million of stock repurchases and $1.7 million of dividends.
Material Changes Versus the Prior Comparable Period
- Revenue declined because professional audio conferencing revenue decreased 21% for the nine-month period and unified communications endpoint revenue decreased 26%; video revenue increased 51%.
- Professional audio revenue was affected by the delayed transition from the legacy Converge Pro 1 platform to Converge Pro 2, price reductions on legacy products and increased competition.
- Nine-month gross margin fell to 59% from 63% because of lower-margin product mix and CP1 price reductions. Third-quarter gross margin improved to 62% from 59%, helped by a high-margin large order and the absence of prior-year inventory-scrapping costs.
- Sales and marketing expense increased 9% for the nine-month period, research and product development expense increased 7%, and general and administrative expense increased 14%.
- The company recorded a $12.7 million full impairment of goodwill and a $0.7 million impairment of customer-relationship intangible assets after a decline in market capitalization triggered impairment testing. These charges were the primary drivers of the operating and net losses.
- Operating cash flow shifted from $7.4 million provided in the first nine months of 2016 to $7.6 million used in 2017, principally due to the loss and an $9.0 million increase in inventory-related cash outflows.
Guidance, Outlook, Risks and Unusual Items
- Management expects growth to resume as customers transition from CP1 to CP2, but the timing depends on customer adoption and recovery in weak markets. No quantitative revenue or earnings guidance was provided.
- Management expects video products, including Unite, Collaborate and cloud-based Spontania offerings, to support future growth, but the company faces intense competition from established and emerging providers.
- Approximately 49% of revenue comes from international operations. Risks include currency movements, economic weakness, pricing pressure, rapidly changing technology, supplier disruptions, customer and product concentration, inventory obsolescence and dependence on professional audio revenue.
- The company had $6.7 million of open purchase orders with electronics manufacturing service providers at September 30, 2017.
- ClearOne capitalized $0.8 million of patent-defense costs during the nine-month period. The company cautions that these costs could be written off if the expected benefits or probability of success change.
- ClearOne is pursuing patent litigation involving Shure, Biamp and QSC concerning its beamforming microphone technology. Discovery was ongoing, and a preliminary-injunction hearing was scheduled for January 9, 2018. The outcome and associated costs remain uncertain.
- The company intends to adopt the new revenue-recognition standard using the modified retrospective method beginning January 1, 2018 and anticipates a material impact on its financial statements. The effects had not yet been finalized.
- The company declared a $0.07-per-share quarterly dividend payable December 6, 2017. It also had $6.6 million remaining under its stock-repurchase authorization at September 30, 2017.
Investor Verification Items
- Verify the sustainability and timing of the CP1-to-CP2 platform transition and its effect on revenue and gross margin.
- Assess inventory realizability, particularly the $2.4 million of long-term inventory and the $6.7 million of related open purchase orders.
- Reconcile liquidity using cash, marketable securities, operating cash burn, dividends and continued share repurchases.
- Review the assumptions supporting the $12.7 million goodwill and $0.7 million intangible-asset impairments.
- Monitor the patent litigation, capitalized defense costs and potential future write-offs or cash requirements.
- Evaluate the eventual impact of adopting the revenue-recognition standard on deferred revenue and reported revenue trends.