Roger S. Pondel - Chief Executive Officer and President Zeynep Hakimoglu - Chairman, Chief Executive Officer and President Narsi Narayanan - Vice President of Finance and Corporate Secretary

Chris Armbruster - B. Riley Caris, Research Division Michael Kay George Melas - MKH Management Company, LLC

Good day, everyone, and welcome to the ClearOne First Quarter 2013 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to PondelWilkinson's Mr. Roger Pondel. Mr. Pondel, please go ahead, sir. Roger S. Pondel: Thanks operator. Welcome, everyone, and thank you for joining us today to discuss ClearOne's 2013 first quarter financial results. On the call today are Zee Hakimoglu, President and CEO; and Narsi Narayanan, Vice President of Finance. First, some housekeeping before we start. Please be advised that this conference call is being broadcast live on the Internet at www.clearone.com. A playback will be available for at least 3 months and may be accessed on the Internet at ClearOne's website. Before we begin, I would like to make the cautionary statement and remind everyone that all of the information discussed on the call today is covered under the Safe Harbor provisions of the Litigation Reform Act. The company's discussion today will include forward-looking information reflecting management's current forecast of certain aspects of the company's future, and actual results could differ materially from those stated or implied. With that said, let me now turn the call back over to Zee.

Thank you, Roger, and good afternoon, everyone. We thank you that you could join us today to discuss our 2013 first quarter results. We started the year with a solid quarter following the momentum set in Q4 of last year. We reported our strongest ever first quarter revenues and exceeded $11 million in first quarter revenues for the first time. This is especially noteworthy for the seasonally slower first quarter. ClearOne performed better than many of its industry peers. We achieved 11% year-over-year revenue growth, followed -- following 9% year-over-year revenue growth achieved last quarter. We also reported significantly higher gross income, higher operating income and higher net income. Narsi will provide further information on these details when he goes over the financial results. Our strong first quarter revenues demonstrate the positive traction from our newly-acquired businesses. These financial results have brought meaningful contributions from our strategic acquisitions of video technology. Share of video products in our revenue mix has grown significantly, reflecting its increasing importance to our future growth. In addition to the growth of our video revenue, our investments in newly-introduced professional audio products also significantly contributed to this record revenue. Our cash balance of about $42.6 million at the end of the first quarter includes the final net amount retained from the December 2012 $45 million favorable settlement relating to auction-rate securities. This after paying $13.8 million of associated income taxes and $6.75 million in attorney's fee. We continue to pursue the $10 million share buyback program that has been in place. We are also evaluating other measures to increase shareholder value, including internal investments in technology, operations, sales and marketing, modest strategic acquisitions and other alternatives to benefit the company and all shareholders. On the sales front in February, we introduced our new line of software-based videoconferencing solutions to our established Pro AV channel distributors. This is expected to generate additional revenue in the remainder of 2013. David Traeger, who has been with ClearOne since 2009, was promoted to Vice President, Professional Audio Videos sales throughout North America and Latin America. Dave will be responsible for developing and growing sales of ClearOne's full line of products, including the COLLABORATE suite of software-based videoconferencing solutions in the Pro AV channel. David's background includes experience in AV sales management for, BARCO, Christie Digital, Extron, Liberty Wire & Cable and Polycom. He will focus on relationships with Professional AV partners and resellers and will complement ClearOne's sales initiatives in the IT and unified communication channels handled by Chris Wildfoerster. Dave's technical expertise and deep knowledge of the Pro AV market makes him the ideal choice for this leadership role to serve this specialized channel. David has hit the ground running and will continue to help Pro AV practitioners drive ClearOne's complete differentiated solutions deeper into the enterprise. On the product front, in March, we started shipping our new Beamforming Microwave (sic) Microphone Array to complement our professionally-installed audio conferencing product lines. The Beamforming Microphone Array is the industry's first professional-grade microwave microphone array with patent-pending audio beamforming with adaptive steering and next-gen AEC technology. This very unique and powerful product differentiates ClearOne in the Pro AV market and is expected to drive higher adoption of ClearOne's broad CONVERGE line of professional audio products. In March, 2013, we also began shipment of our new Digital Wireless Microphone System to complement our professionally-installed audio conferencing product lines. The microphone system uses RF Digital wireless signal transmission technology with highly secure encryption and is optimized to work with ClearOne's CONVERGE Pro and INTERACT Pro product line. The introduction of this wireless microphone system provides partners with a more complete ClearOne-branded solution set and further extends ClearOne's reach in the large Pro AV microphone market. During the week of June 11, we look forward to seeing many of our partners at the biggest audiovisual exhibition of the year in North America called InfoComm. It will be held this year in Orlando, Florida. During this event, we will be showing several of our newest solutions for audio and video collaboration products. We heartily welcome investors and other stakeholders to stop by to see, hear and experience for yourself the extraordinary evolution that ClearOne continues to make in this extraordinary and rapidly evolving market of audio visual communications. With this update, I'd like to turn the call over to Narsi for a detailed discussion of our Q4 financial performance. Following Narsi's discussion, we will take questions for the remainder of the available time. Narsi?

Thank you, Zee, and good afternoon, everyone. Before I begin, I would like to point out 2 things. First, I will be discussing certain non-GAAP financial measures. A reconciliation of these non-GAAP measures to reported GAAP measures is included in the earnings release. In addition, our financial results for comparable first quarter in 2012 include favorable settlement process of $250,000. The settlement amount can be found in the operating expense section of our statements of operations and have the positive effect of decreasing total operating expenses and increasing both operating income and net income. Now turning to our financial results for the 2013 first quarter. Please note, the following comparisons refer to the first quarter of 2013 versus the same quarter of 2012. Net revenue increased to $11.3 million, up 11% from $10.2 million. Gross profit was $7 million or 62% of revenue compared with $6.1 million or 60% of revenue. The increase in gross margin as a percent of revenue was due to favorable product mix and absent of any inventory obsolescence cost. Turning to operating expenses. Sales and marketing expense rose by 6% to $2.3 million from $2.1 million. The increase was mainly due to increased commissions to salespersons and independent reps arising out of increased revenue. Research and product development expense decreased by about 7% to $1.9 million from $2 million. The decrease was mainly due to reduced depreciation charge associated with R&D efforts, direction in project expenses and reduced overhead allocation to R&D. G&A expense increased to $1.8 million from $1.5 million, an increase of about 21%. The increase was mainly due to increases in employee costs, amortization of intangibles, audit and accounting fees and legal fees. Also, in the first quarter of 2012, we had account for a decrease in allowance for doubtful debts which reduced our first quarter 2012 G&A. Operating income was $1.1 million and net income was $731,000, or $0.08 per diluted share. This compares with operating income of $736,000 and net income of $478,000 or $0.05 per diluted share for the prior-year period. Operating income, net income and diluted earnings per share for 2012 first quarter includes a favorable $250,000 litigation and settlement profits. Non-GAAP net income, which excludes the 2012 first quarter favorable litigation proceeds among other things, increased by 54% to $966,000, or $0.10 per diluted share compared to $626,000, or $0.07 per diluted share in 2012. Non-GAAP adjusted EBITDA increased by 34% to $1.6 million, or $0.17 per common share, compared with $1.2 million or $0.13 per common share. The first quarter results do not consider the expected receipt of approximately $500,000 in attorney's fees previously paid to indemnify the company's former CFO. Attorneys for Strohm, the former CFO, have submitted a motion requesting Utah Supreme Court to reconsider Supreme Court's ruling. We are awaiting Utah Supreme Court decision on this. Turning briefly to the balance sheet. Our balance sheet remains strong. At December -- I'm sorry, at March 31, our cash balance was $42.6 million and we remain debt-free. I would now like to turn the call back to Zee. Thank you

Thank you, Narsi. With that and for the time available, we would now like to address any questions you may have. Operator?

[Operator Instructions] The first question comes from Chris Armbruster from B. Riley and Company. Chris Armbruster - B. Riley Caris, Research Division: Would you mind detailing the contribution from your Pro unified communications and visual segments to the total and the growth in each of those divisions for the quarter?

Sure. Pro contributed 62%, UC was 26%, and video was 12%, actually. Chris Armbruster - B. Riley Caris, Research Division: And what was the year-over-year growth rates in those segments?

Pro went up by 12%, video went up by 111%, and UC went down by 10%, actually. Chris Armbruster - B. Riley Caris, Research Division: And to what do you attribute the growth in Pro audio? Is it the new products that are really driving that acceleration demand? Or is there kind of a general rebound in the industry?

I should say that it's a combination of the new product as well as the new products that drive the legacy flagship products. Chris Armbruster - B. Riley Caris, Research Division: Okay. And as far as unified communications go, can you speak to the 10% decline there and what do you think is impacting that?

It's -- we have seen this kind of decline in the past, but it has never been a sustained decline. For example, in Q2 last year, it went down, again it came up. We hope this could be just a stocking issue with the -- at the reseller level, not at the -- we already don't -- we discount the stocking at the distributor level. Hopefully, it's just a mismatch in the inventory with the dealers versus the demand, actually. I'm not seeing any pattern to give you a reason or what we can do about it. UC remains an important focus to us, and we will continue to pay attention and see if there is anything going on, actually. Chris Armbruster - B. Riley Caris, Research Division: Okay. And the tremendous growth in your visual or video segment there, what -- do you have a number for -- in the past, you have disclosed the contribution from products that came over in the VCON acquisition, do you have that number for this quarter?

As I said in the last quarter, we are not going to break out the video revenue, but of course, there is a significant contribution from the VCON because we did not have VCON revenues in Q1. There's a small portion in Q1 of last year. It says we already knew what VCON was making in the last few quarters. They have been disclosing this. And it's -- VCON's contribution is there in a big way. It's a big jump in the video product revenue, actually. Chris Armbruster - B. Riley Caris, Research Division: Okay. And so as we're looking forward in modeling that segment, how much of the growth in this quarter can we -- is attributable to the steps that you guys have taken to build out their inventory, build out their distribution versus maybe the growth in new products in general that you've been able to develop in that segment?

You're talking about the video? Chris Armbruster - B. Riley Caris, Research Division: Yes.

Yes. Well, obviously, the VCON is an important contributor. And we have had different releases, software releases for the product. So it's always -- the challenge is always in the beginning to start pushing it out. And so we still consider it a new product. On the signage, we've introduced some elements on the signage that we see some interest in and that will pick up, of course. This digital signage business has not been the business we have been absolutely focusing on just yet. We talked about using the core VCON technology, what we call the unified media engine, for both streaming, signage and videoconferencing. Today, the videoconferencing is using that engine and is our significant contributor, but I can only say that at InfoComm coming this year, you will see that core technology, that video engine, placed in our StreamNet, and I think that's going to also contribute to good increases once that product shifts with that new engine. Chris Armbruster - B. Riley Caris, Research Division: Okay. And then on the margin side. Your gross margin's at 62%. I know you said there was a little bit of product mix in there. In the past, we've kind -- you kind of targeted that 60% range. Is there anything that you guys think might lead to a little bit higher target margin? Is that 62% sustainable or is that a quarterly kind of mix issue?

Narsi has given out that 60% plus or minus 2%. We've talked about it at every meeting. That's really where we're targeting. There comes a point where you could strip things away, but I think that, again, we're in a growth mode as we introduce new products. We try to get the best pricing out of our contract manufacturers. We reduced cost in the bump [ph] , et cetera. But I think that's a practical -- what we have found for our industry, that's a good gross margin to keep going for. So I don't see a change in that.

[Operator Instructions] The next question comes from Michael Kay from Kay Associates.

Did international sales contribute substantially to the increase in revenue?

Yes. The share of the international market remains strong, actually. In fact, it went up, actually, from total -- it's almost the same. [indiscernible] about 34% now, actually. That's substantial, actually.

Would you consider a stock dividend since I do believe it's best to -- it's better than a cash dividend since I'd rather have the company plow back any cash it has into such things as discussed by the President. Would a cash -- would a stock dividend be on the table for consideration?

Okay. Well, I could say that we welcome ideas from -- thanks for the question, Michael. But we do welcome ideas and how best to increase shareholder value. We're continuing to evaluate various options that are available to us. We certainly haven't ruled something like that out. We paid the taxes, again, last -- well, past this quarter, Q1, and we will continue to hear the ideas from our shareholders and come up with a plan. And we are working on plans that will bring the most shareholder value. I should notice that we're a high-tech growth company, and we want to do things that fuel our growth. We're still pretty small, and there are several investments that we could be making to fuel our growth. That could be one of them.

And at this time I am showing -- actually, we did just that get one more question from George Melas from MKH Management. George Melas - MKH Management Company, LLC: I have 2 questions. And I'm -- the videoconferencing product, you have introduced it so far to the IT channel and now you're introducing it to the AV channel. Is this right? Is that the progression of how you're doing that?

Yes. Actually, we introduced it kind of at a similar time but we did start with the IT channel. That's correct. And we're introducing it to the Pro AV channel. And the way the introduction goes is they have to get comfortable with the equipment. You have to train them. They have to roll it out and educate their partners and whatnot. So that's correct. George Melas - MKH Management Company, LLC: Okay. And what would be the relative size of these channels and what -- do you expect your sales to be roughly 50-50 between those 2 channels or how do you think about that? Can you...

Actually, I have to give you the answer, it's not clear. We look at the whole video market as a whole and we know it's a very big market. And from our perspective, we simply want to cover both the professional AV market, where we're -- where we've operated for many, many, many years, and of course we need to consider the IT market, where our unified communications products had been for some time. And our UC VP of Sales, Chris Wildfoerster, is continuing to work with our IT channel partners to get them trained and familiar with that product. It's not a quick progress but it's a slow and steady process. George Melas - MKH Management Company, LLC: Okay, great. And then a question regarding the microphones. It seems like you've introduced a number of-- new microphones in the past 6 months. You have your ceiling microphones, and you have the 2 microphones that you sort of -- you point out now. How important is the microphones to the overall product or system? And have you always had microphones and now you're making a particular push into sort of developing or trying to upgrade them? Can you explain a little bit that?

Okay. That deserves an answer, George. We have not always provided microphones. We had something called Delta Mics, et cetera. It doesn't even deserve too much conversation. As a convenience, we provided very small set of accessories. I would call them accessories for the Pro AV market. But as we get more sophisticated in the market, what we have observed and what we know is that microphones do in fact play an important role for conferencing. We have selected -- it's also a significant market. It adds to our market share to introduce microphones. The microphones that we're adding are somewhat unique. We are not necessarily making me too microphones. We're selecting microphones that will bring value to ClearOne and its legacy flagship product, plus we're bringing microphones because our Pro AV market can now have, under a single brand, a full solution from the audio mixer and AEC all the way to the microphones on the table. They attach directly to our pro audio products. There is no reason why we can't develop, and we have developed and introduced, very solid, very strong, differentiated solutions. And we're getting a good reception of those. They belong in -- they absolutely are synergistic to what we do and we are introducing them, and we're dead serious about it. It helps us grow our market share both on our existing products and brings us more opportunities. They should not have to go to another vendor to go get top-notch microphones. George Melas - MKH Management Company, LLC: Great. That makes a great deal of sense. May I ask why you didn't have microphones before and you have them now? It seems like it makes a great deal of sense. Just trying to understand why you didn't have them, or you hadn't make a push there before?

Well, we have so many ideas. There's always more ideas on the table. We try to prioritize these ideas. On one hand, we came out with the latest CONVERGE Pro from the XAP. Once that's done, and we introduce what we can. It's a question of resources. We make acquisitions. We do internal research and development. It's always a juggle. We try to make the best decisions and we balance all our products. At the end of the day, we want to provide conferencing solutions that reach farther into the enterprise, which is streaming video, signage and audio and videoconferencing. So we're in the process of consolidating our solutions. Unlike some of our bigger competitors, we are not in the UC platform business. We make endpoints with good software solutions and as well as hardware. And that's where we're staying because the profitability and the competition and the opportunity is significant.

And at this time, I am showing no further questions. I would now like to turn the call back over to the presenters for closing remarks. .

Okay, thank you. And we appreciate your continued interest in ClearOne for joining us today. And if you have any further questions on ClearOne, please contact Investor Relations. And that concludes our call for the day. Thank you for your attention.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day