Filed
by International Microcomputer Software, Inc.
pursuant
to
Rule 14a-12 under the Securities and Exchange Act of 1934
Subject
Company: International Microcomputer Software, Inc.
Commission
File No: 0-15949
INTERNATIONAL
MICROCOMPUTER SOFTWARE, INC.
December
21, 2005
3:00
p.m. CT
Operator:
Good day, and welcome to the IMSI Update conference call. This call is being
recorded. At
this
time, I would like to turn the call over to the Chief Financial Officer,
Robert
O'Callahan. Please go ahead, sir.
Robert
O'Callahan: Thank you and good afternoon. I am Robert O'Callahan. I'm the
CFO of
IMSI and I'm here to introduce Martin Wade, our CEO, who is looking forward
to
this opportunity to talk to you about the exciting actions ahead of us.
Before
we
begin, let me remind you that various remarks IMSI may make during this
presentation are forward-looking statements, as defined under the securities
laws, and these remarks involve risks and uncertainties.
Statements
IMSI makes in this presentation concerning trends or outlook for financial
results, markets for IMSI products and statements that include the words
“anticipate”, “believe”, “plan”, “may”, “will”, “estimate”, “project”, “expect”,
“goal”, “potential”, “profitability” and other similar future expressions
constitute forward-looking statements.
Actual
results could differ materially from these forward-looking statements due
to
many factors, including those risk factors set forth in IMSI's 10K report,
and
10Q reports. We do not assume an obligation to update any forward-looking
statements we may make today.
Now,
I'd
like to introduce Mr. Martin Wade.
Martin
Wade: Thank you, Bob. I would like to start with a brief discussion of the
September quarter, and then an update on our S-4 filing following the progress
of the merger.
We're
pleased to announce that our business indicators saw significant improvement
during the September quarter as compared to the June quarter, as we witnessed
improvements in net revenues, gross profits, gross margins, as well as
improvement in the operating results level.
Our
focus
for the quarter continued to be revenue growth and cost containment. We continue
our focus on achieving the following goals:
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·
|
increase
the mix of online revenues as the percent of total sales,
|
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·
|
increase
our focus on the highest growth parts of our business and
to
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·
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continue
identifying synergies and implement cost reductions in order to
achieve
profitability.
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As
of
last week, we had a total of approximately $9 million in cash, including
$2.8
million resulting from the sale of our Smith Micro shares. We also expect
to
receive approximately $1.2 million of escrowed cash from Smith Micro over
the
coming fiscal year.
We
continue to closely monitor our cash position, manage our collections and
disbursements and negotiate better terms.
I
would
now like to turn to an update on the progress of our business initiatives
currently underway, and those planned for fiscal 2006.
First,
we
will increase our direct marketing distribution, as a way of increasing gross
margin and profit. With the growth of Houseplans revenues and our future
plans,
we remain focused on increasing this key source of revenue. Our goal for
fiscal
2006 is to generate over 70 percent of our revenue via direct methods. Our
total
direct marketing revenues amounted to 70 percent of total sales during the
September quarter, up from 52 percent a year ago. We hope to increase this
rate.
Second,
we intend to focus on lowering expenses in our businesses.
Third,
we
will continue to invest in content, services and products as a path to increase
operating margins, with AccessMedia, by the way, as a prime example.
We
are
particularly pleased with the Houseplans business. Gross margins in this
business grew to 61 percent, up from 53 percent a year ago. We were able
to
significantly improve the gross margin in this segment as we increased our
collection of proprietary royalty free content, negotiated more competitive
royalty rates with our vendors and began to successfully integrate our July
acquisition. We believe that gross margins in this business will continue
to
improve in the near term as we continue our integration of Weinmaster, and
as we
leverage our leading position in the market place. We expect to improve gross
margins in this business, to a target of 65 percent in 2006. Before I get
into
the S-4 and merger, I will turn over the presentation now to Bob O'Callahan,
for
a short discussion of our September financial performance.
Robert
O'Callahan: Thank you, Martin. We recorded $2.5 million gross margin for
the
September quarter, on revenues of $4 million during the quarter. Revenues
grew
26 percent on a year-over-year basis and 15 percent sequentially. This 26
percent year-over-year growth was driven by a 183 percent growth in the
Houseplans business. Absent the acquisition of Weinmaster, as of July 1st,
the
year-over-year organic growth in the Houseplan segment, would amount to 84
percent.
On
a
year-over-year basis, gross margins for the Houseplans business improved
4.1
percentage points, while gross margin for the software segment declined by
7.9
percentage points. But because of the fact that the Houseplans business carried
a lower gross margin in general than the software business, this “mix” factor
meant the overall margin declined from 67 percent to 63 percent during the
September quarter as compared to the same period in the prior fiscal
year.
Our
$2.5
million in gross profit was more than offset by a $3.4 million in operating
expenses for an operating loss of approximately $900,000. We have some special
factors in there, and we have also reexamined our expense level and are
eliminating items that are not directly supportive of our mission. This will
entail some short-term costs in the December quarter. The new operating expense
level should appear in the June quarter, and be significantly lower.
We
should
note that as a result of the Allume sale, we recorded in the quarter ended
September 30, 2005 a loss on the sale of discontinued operations of
approximately $843,000. This loss calculation does not include any consideration
of the $2 million in cash held in escrow, as part of the Allume sale. We
will
change this number, reported in September, to a loss of approximately $470,000
in December, as $500,000 in escrow funds were released to us since the end
of
September.
As
you
may have noted from a recent press release, the coming December quarter will
show a realized gain of approximately $900,000, as we sold the Smith Micro
stock
which we acquired in the Allume sale transaction.
The
loss
on the sale of Allume along with the loss from marketable securities position
of
approximately $158,000, took our operating loss in September quarter to a
bottom
line loss close to $2 million.
EBITDA
for the September quarter was a negative $1.5 million (this amount includes
the
loss on sale of the Allume of $843,000). This EBITDA compares to a positive
$3,000 in the September 2004 quarter and a negative $877,000 in the June
quarter.
We
reported on September 30th assets of $22.6 million, including $9.9 million
in
cash, in addition to $1.5 million in available for sale securities. Overall,
the
business showed $8.4 million in intangible assets, including goodwill in
the
amount of $3.7 million.
Our
liabilities as of September 30th, included $1.9 million in total debt, including
$750,000 on a note relating to the Weinmaster acquisition, and a $850,000
short-term revolving note that we repaid in its entirety on October 3,
2005.
Now,
I
would like to turn the call back to Martin, for his further
comments.
Martin
Wade: First, the recently filed preliminary S-4, provides the perfect time
for
an update of our investors on the progress of the merger with AccessMedia
which
would create an Internet media business for the company.
AccessMedia
is in a market testing stage, and is actively testing different offers in
different markets determine how best to roll out its subscription business,
for
accessing media through personalized media searches.
The
initial results have been positive. While we will not provide specific metrics
based on preliminary test results, we believe these results are at the upper
range of our expectations, and require no adjustments to the business
model.
AccessMedia
plans to launch a fully active version of its media subscription business
in the
first calendar quarter of 2006. AccessMedia has not required any cash under
our
joint operating agreement as of this date.
We
believe the combination will add amortization cost to the income statement,
but
we expect to cross over into positive cash flow based on our current
indications, within the first post combination quarter.
Let
me
step back here and talk about the larger picture and why IMSI is involved
with
Internet content, rather than strictly software, such as our excellent TurboCAD
software product.
As
the
CEO, I see my job as finding and developing opportunities for the company
which
will grow shareholder value. This involves work on existing business, such
as
new product launches. And sometimes, this involves expanding into other lines
of
business. We are fortunate in having the option to do both. And after literally
a year of searching the market, we brought the board of directors what I
believed to be an extraordinary opportunity for shareholder value
growth.
Through
the efforts of Baytree Capital and Michael Gardner, we were introduced to
the
principals of AccessMedia, which is located in Los Angeles. What motivated
us to
talk further was the opportunity to bring their expertise, as they have been
pioneers and experts in Internet marketing for many years, and their proposed
new product to add to our business.
We
believe this business will overshadow the existing IMSI products so much,
that
we are proposing to change our corporate name to Broadcaster, Inc. In the
process of this reorganization, our legal counsel, one of the largest law
firms
in United States, advised that it would be easier under Delaware law, and
there
would be significant operating benefits going forward under Delaware corporate
law.
So
that
you will see in our preliminary S-4 filed last Friday, it will contain a
proposal to do that change, and take advantage of the Delaware law. What
stockholders of IMSI will be getting is access to the “Virtual Set Top Box”
technology, online media content libraries and Internet marketing expertise
of
our new partners in Los Angeles.
People
often ask what exactly is the Virtual Set Top Box. Simply, the Virtual Set
Top
Box is a software application. We will be able to offer this application,
which
will allow viewers to search, access and organize growing volumes of high
quality content available on the Internet. This includes proprietary media
libraries, media under license, and media readily available on the Internet
in a
controlled and protected environment.
This
was
designed to be a simple format, as simple to use as television. The time
appears
to be right as broadband access has reached a significant household and daytime
market penetration.
Therefore,
large media firms are also interested in this business opportunity. And while
we
cannot be complacent about their possible offerings, we believe this serves
to
validate the timeliness of this offering.
We
look
forward to closing the transaction and engaging 100 percent in the development
of the business in the coming quarter. Steps are being taken between now
and
then are the completion of the S-4 review, and the filing of the final effective
version, and then the shareholders meeting to approve the reincorporation
in
Delaware.
I
have
several major shareholders currently committed to attend, and vote in favor
of
this transformation of the business. We would like to encourage all shareholders
to review the filings, investigate why I and the directors recommend the
current
course of action and vote in favor of our goal, more shareholder
value.
Now
I
would like to turn the call over to any questions.
Operator:
Thank you. The question-and-answer (special) will be conducted electronically.
If you would like to ask a question, please do so by pressing the star key
followed by the digit one on your touch-tone telephone. If you are using
a
speakerphone, please make sure that your mute function is turned off to allow
your signal to reach our equipment. Once again, that is star, one to ask
a
question today. We will pause for just a moment to assemble our roster.
Thank
you.
We
will
take our first question from Aram Fuchs with Fertileminds
Capital.
Aram
Fuchs: If you just give me a little more detail on Access. Specifically,
maybe
you can talk a little bit about the cost structure as my first question,
and the
second question, if you can give us more detail on these tests, and how they
differ amongst themselves and amongst the site that's open to the public.
Thank
you.
Martin
Wade: OK, Aram, I don't think we're prepared to disclose, at this point,
much
information, unfortunately, on either one of your questions.
The
cost
structure, I would say in general, if I'm getting the gist of your question,
is
budgeted, shall we say projected to be profitable in the first quarter. At
the
very worst breakeven, which I think would be extraordinary for a first quarter
out of the box.
The
metrics that we refer to in the testing that it gives us such encouragement
are
things like conversion rate, click-throughs, et cetera. But it would be very
premature to just start disclosing, if ever, the exact numbers of those
conversions.
But
I
think we've said, the results exactly with that kind of metric, is what has
given us such an extraordinary amount of excitement about rolling this out
in a
hard launch, which we expect to do in the first quarter.
Aram
Fuchs: OK. The different tests have really been marketed, or have they've
been
product development as well?
Martin
Wade: They've really been marketing, Arum, the product is been developed.
It's
really been test marketing, I guess I'd say, for the various components of
what
our marketing program is going to be. What we're going to be offering, at
what
price we offer it, and things like that. And we've tested them in markets
around
the world so that we aren't biased by geography or demographics.
Aram
Fuchs: OK, thank you for your time.
Martin
Wade: You're welcome.
Operator:
We will take our next question from Martin Cohen with Balanced Financial
Securities.
Martin
Cohen: Yes, my questions relate to this also in just a little different vein.
Can you outline the size of the market, just generically about what the
estimated size of the market. Who would be the competitors to this in the
market
place?
And
possibly, what would set this aside from larger players getting into online
content like Microsoft or Yahoo or AOL or any of these - the others that
are
sort of content providers. Is there some measure of differentiation that
would
limit the competition, versus all these other guys out there.
Martin
Wade: Taking your last question first, Marty, I think that we will have a
unique
offering, which is really a combination of things.
Martin
Cohen: Yes.
Martin
Wade: It's a combination of proprietary content. Not totally dependent upon
that, but its some proprietary content. Along with leased content, if you
will.
Content is available to others via lease. Combining all that in a package,
that's simple, fast and easy to use.
Martin
Cohen: Yes.
Martin
Wade: As well as cheap.
Martin
Cohen: OK.
Martin
Wade: So we have to present a value, otherwise we're not going to be able
to
compete against the other guys. All of the other guys, whether they're
Microsoft, Yahoo, et cetera. They already have, in one form or another, some
kind of online content.
Martin
Cohen: Yes.
Martin
Wade: Everybody has that. So I think you have - it's going be very difficult
to
- for anyone to compete just on your proprietary content.
Martin
Cohen: Yes.
Martin
Wade: You have to offer a package, which is priced right, which is easy to
use,
which is got a search function, which is maybe has an IM function, an e-mail
function.
Martin
Cohen: Yes.
Martin
Wade: Those kinds of things as a combination. Now if you can do that and
have it
in a package that's valued correctly, that's billed appropriately, we feel
that
you can generate enough traffic against that offering, and that's what we've
been testing. We've been testing that kind of product mix against
traffic.
Martin
Cohen: Yes.
Martin
Wade: Your results come back in a positive i.e. trackable way then you have
a
business offering that just like we had with Art today, earlier, a few years
back at IMSI, you've got a profitable valuable proposition on your
hands.
Martin
Cohen: Yes. And what about the - I imagine the size of the markets, probably
into the hundreds of billions. I mean …
Martin
Wade: Yes,, that's a question that because of the nature of the Internet
is very
difficult for anyone to answer. I don't know what the size of the market
is at
the top end. What we're trying to budget for is be profitable at the bottom
end.
So that if we have - we happen to roll up into - in these big huge telephone
type, telephone number type numbers, then we'll be so much the better. But
we're
budgeting ourselves to be profitable at a very modest level. And we'll go
from
there.
Martin
Cohen: OK, great. Thanks a lot Martin.
Operator:
We will take our next question from Robert Nichols with Nicholson
Associates.
Robert
Nichols: Hey folks, how are you?
Martin
Wade: Very good, thank you.
Robert
Nichols: Good, just wondering, you had mentioned a while back doing something
with Sonic Garden, and I'm a big fan of the online music industry. Just
wondering what you can tell me about that. How that is progressing and when
you
expect that to occur.
Martin
Wade: Well we've had a number of other initiatives, which we really had to
put
in a holding pattern, subsequent to getting an approval of our S-4. So we
have
not finalized any deals with any other ventures, such as Sonic Garden, but
we
will seek to finalize them just as soon as we get this thing
approved.
Robert
Nichols: OK, do you feel as strongly as I do about the online music business
and
what that can bring to the table?
Martin
Wade: Absolutely. Music is an already proven, viable e-commerce product.
And we
would add to that, that we think we'll bring a particular strength to the
movies
as well as music.
Robert
Nichols: Do you believe that Sonic Garden is the right vehicle to do that
with?
Martin
Wade: We know Paul Abramson. We've had discussions with him. And I think,
you
know, since he's not on the call, I'd rather leave it that we, you know,
we know
him, like him, respect him, think he's got a nice operation in Sonic Garden.
And
we'll just see where that leads us.
Robert
Nichols: Well, thank you very much, sir.
Martin
Wade: You're welcome.
Operator:
As a reminder, that is star, one to ask a question. And as one final reminder,
that is star, one to ask a question. And we'll take a follow-up question
from
Aram Fuchs with Fertileminds Capital.
Aram
Fuchs: Yes, it's just to pry a little bit more about your business models
for
Access. Is there any sort of model that you can show us at least, in terms
of
cost of goods, and sales and marketing, and G&A? And also, is there any, in
terms of number of employees that are going to be in AccessMedia. You know,
I
was hoping that you could give some sort of detail like that. Thank
you.
Martin
Cohen: Yes, well Arum, I'm not sure. Let me try to keep myself out of trouble
by
saying that we would expect to have somewhere between 30 and 40 employees.
I
think that - certainly at the outset. We’re being careful, because I don't want
to have a situation where I'm disclosing some information to whoever's on
this
call, and not to the whole world.
And
we
don't plan, however, at this stage, and I'm not sure we'll ever. I mean at
some
point, if AccessMedia becomes the major portion of Broadcaster, I think we
would
be compelled to disclose margin type information.
But
at
this stage, we won't be breaking that out, and I wouldn't feel comfortable
until
I saw a full quarters worth of post-combination numbers, so that I could
be more
definitive with you and accurate.
Right
now, those numbers that I would give you today could change. It could change,
because we make a decision to alter things between now and closing. So, I'm
really not comfortable doing that, Arum.
Aram
Fuchs: OK, well I appreciate the head count, then. Thank you.
Operator:
And that does conclude our question-and-answer session today. I'll turn the
conference back over to the speakers for any additional closing
comments.
Martin
Wade: Well, once again, thank you all for attending. Thank you for the
questions, they were very good ones. And I hope to see you all at our next
quarterly conference call.
END
7