ClearOne, Inc. 2017 Q2 Form 10-Q Summary
Business Context and Reporting Period
ClearOne designs and sells conferencing, collaboration, streaming and digital-signage solutions, with revenue concentrated in professional audio conferencing products. The filing covers the unaudited quarter and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2017 | Three Months Ended June 30, 2016 | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|---|---|
| Revenue | $10.3 million | $12.0 million | $22.0 million | $25.0 million |
| Gross profit | $6.1 million | $7.7 million | $12.7 million | $16.1 million |
| Gross margin | 59% | 64% | 59% | 65% |
| Operating income (loss) | $(1.1) million | $1.3 million | $(1.6) million | $3.3 million |
| Net income (loss) | $(0.8) million | $1.0 million | $(1.3) million | $2.3 million |
| Diluted EPS | $(0.09) | $0.10 | $(0.15) | $0.24 |
- Revenue declined 14% year over year in the quarter and 12% for the six-month period.
- Video-product revenue increased 25% in the quarter and 40% year to date, but this was more than offset by declines in professional audio conferencing and unified communications endpoints.
- Operating expenses increased 13% in the quarter to $7.2 million and 12% year to date to $14.4 million. Six-month general and administrative expense increased 36%, primarily from higher legal and consulting costs.
- Cash and cash equivalents were $3.4 million at June 30, 2017, compared with $12.1 million at December 31, 2016. Marketable securities totaled $25.9 million, including $6.1 million classified as current.
- Working capital was $27.7 million, down from $30.8 million at year-end 2016. The filing does not report outstanding debt; liabilities consisted primarily of accounts payable, accrued liabilities and deferred product revenue.
- Net cash used in operating activities was $4.7 million for the first six months, versus $3.0 million of cash provided in the prior-year period.
- Investing activities provided $49,000, while financing activities used $4.2 million, including $3.2 million for share repurchases and $1.1 million for dividends.
- Inventory increased to $18.8 million from $13.0 million at December 31, 2016, and open purchase orders with electronics manufacturing providers totaled approximately $7.5 million.
Material Changes Versus the Prior Comparable Period
- The transition from the legacy Converge Pro 1 platform to Converge Pro 2 delayed revenue and required price reductions on legacy products, reducing both revenue and gross margin.
- Professional audio conferencing revenue declined 17% in the quarter and 16% year to date; unified communications endpoint revenue declined 30% and 26%, respectively.
- Video revenue grew and represented 16% of quarterly revenue versus 11% in the prior-year quarter. Professional audio products declined to 73% of revenue from 76%, while UC endpoints declined to 11% from 14%.
- The company moved from profitability to operating and net losses, reflecting lower revenue, lower-margin product mix and higher operating expenses.
- Shares outstanding declined to 8.55 million at June 30, 2017 from 8.81 million at December 31, 2016, primarily reflecting repurchases. The company repurchased 214,866 shares during the quarter at an average price of $9.91.
Guidance, Outlook, Commentary, Risks and Unusual Items
- No formal quantitative revenue or earnings guidance is provided. Management expects a return to growth as CP2 products and other new audio-platform products ship, but stated that growth depends on customer transition speed and economic recovery in key markets.
- Management identified weak capital-expenditure spending, intense competition, pricing pressure, rapidly changing technology and dependence on professional audio revenue as significant operating challenges.
- Approximately 37% of revenue comes from international operations. Management cited weakness in Europe, Canada and Australia and regional revenue declines during the quarter.
- Long-term inventory was $1.7 million. Management expects to sell it at or above cost, but acknowledges uncertainty regarding timing and sales price. A $55,000 inventory valuation charge was recorded in the quarter.
- A $238,000 discrete tax expense, primarily related to changes in reserves for research and development tax credits, affected the quarter. The reported quarterly effective tax benefit rate was 11.1%; forecasted tax rates may fluctuate substantially.
- ClearOne is pursuing patent litigation involving Shure, Biamp and QSC concerning its beamforming microphone technology. The Utah action was dismissed without prejudice after venue developments, and the matter proceeded in Illinois. Shure also filed an inter partes review petition concerning another ClearOne patent.
- The company declared a $0.07-per-share dividend for the third quarter of 2017, payable September 7, 2017. It also renewed authorization to repurchase up to $10 million of common stock over the following twelve months.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material changes were reported to the risk factors in the 2016 Form 10-K.
Most Important Facts for Investors to Verify
- Whether CP2 adoption and new product shipments reverse the decline in professional audio revenue.
- Whether gross margin recovers from 59% as legacy CP1 pricing pressure and unfavorable product mix diminish.
- Whether operating cash flow improves, given the $4.7 million year-to-date use of cash and the substantial increase in inventory.
- The company’s ability to fund dividends, repurchases, purchase commitments and growth investments using cash and marketable securities.
- Potential inventory write-downs or price reductions affecting the $18.8 million inventory balance.
- The financial and operational impact of the pending patent litigation and inter partes review proceedings.
- The final accounting impact of forthcoming revenue-recognition, lease and other accounting standards that management was still evaluating.