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ClearOne Q3-2017

The Wainhouse Research Blog

News & Views
on Unified Communications & Collaboration


ClearOne Q3-2017

By: -
20 Nov 2017

ClearOne reported total revenues of $10.6M in Q3, up 4% sequentially but down 18% year over year. As seen in the table below, the company’s video business is growing sharply, and represented 25% of total revenues in Q3, but couldn’t make up for the decline in the company’s pro audio business which typically represents 75-80% of the revenue pie. The company’s video business includes its VCaaS service dubbed Spontania, a set of appliance-based and PC-based video conferencing solutions, and cameras.

Total revenues in Q3 were aided by an “unusual large order” that shipped during the quarter.

The company continues to struggle to reach the $50M annual revenue run rate, a problem acerbated by the fact that the market which ClearOne dominates is the tiny “installed audio” market.

In the company’s financial analyst earnings call, management continued to emphasize that the company is going through a major transition from its Converge Pro 1 product to the new Converge Pro 2. The transition is taking longer than first hoped. Management believes Y2018 (just six weeks away) will be the year for overall revenue growth.

While the revenue figures in the chart and table included here are readily understandable, the GAAP income figures sent the author back to his accounting books.  Non-GAAP operating income for the quarter was +$0.526M compared to non-GAAP operating income of $2.5M in q3-2016.  But GAAP income was a net loss of $9.276M.  The GAAP figure includes a $12.724M non-cash write-off called "impairment of good will."  (ClearOne still has over $23M in cash and marketable securities.)  Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed.  Public companies generally perform impairment tests annually or whenever a triggering event occurs.  In the case of ClearOne, the company's share price fell to the point that the company's market cap was lower than its book value.  (The share price nosedived August 9.)  The result:  a Q3 write-off of over $12.7M in goodwill plus another $736K in intangible assets, thereby reducing shareholders' equity on the balance sheet and causing a huge GAAP income loss.

Patent litigation is another issue with potential positive and negative impact on the company.  ClearOne is suing un-named companies for violating ClearOne patents.  Success here would likely lead to additional revenues (licensing or penalty fees).  The company spent over $840K in legal fees during Q3; these are cash expenses that are capitalized and amortized over the life of the patent.  If ClearOne is unsuccessful in the courtroom, however, these expenses could lead to further GAAP P&L write-offs. 

ClearOne recently declared a quarterly dividend of $0.07 (an annual rate of $0.28).  I never offer stock advice; in fact, whenever I get the urge to invest in stocks or bonds, I lie down till the urge passes.  But, as I write this column, ClearOne shares are selling for approximately $7.25.  That makes the dividend yield ~3.8% - rather attractive in today's economy.  Of course, companies can always cut their dividend payout, as evidenced by a recent announcement from General Electric.  It does seem, however, that many of the high-tech stocks of old, like Microsoft and Cisco, have moved into the "dividend" category, long associated with AT&T, public utilities, and fixed income retirees. 

Bottom line, ClearOne is hoping that i) the product transition phase is about to end and that Converge Pro 2 will take them to the promised land; ii) their overall audio and video product and services portfolio is market-leading; iii) their legal team is successful in the patent courts; and iv) that its channel network will remain loyal as the collaboration industry continues to evolve.  We'll soon see what's behind those lights at the end of the tunnel.