RMG Networks Takes $18.5 Million Q3 Loss

November 7, 2014 by Dave Haynes

RMG Networks issued its Q3 financials this week, and the picture continues to something less than pretty. The recurring word in the financials is decreased, which is rarely good in the context of revenues.

Total adjusted revenues in the third quarter of 2014 were $14.1 million, a sequential decline of 13.9% from $16.4 million in the second quarter of 2014.

• Adjusted Enterprise revenue of $10.6 million decreased 8.5% from $11.5 million in the second quarter of 2014, driven by a decline in product sales and professional services which was partially offset by an increase in maintenance and content services. Gross margin declined to 52.7% from 58.9% in the second quarter of 2014, due to a large, high-margin software sale occurring in the second quarter of 2014.
• Media revenue of $3.6 million decreased 26.7% from $4.9 million in the second quarter of 2014, due to poor sales execution. Gross margin improved to 21.9% from 13.8% in the second quarter of 2014, due to an improved sales mix.

On a year over year basis, total adjusted revenues in the third quarter of 2014 represented a decrease of 14.1% from $16.4 million of adjusted revenues in the third quarter of 2013.

• Enterprise revenue decreased 13.1% from $12.1 million in the third quarter of 2013, due to a decrease in product sales and professional services. Enterprise gross margin was 52.7% compared to 51.0% in the third quarter of 2013, increasing year over year due to an improved sales mix.
• Media revenue decreased 17.1% from $4.3 million in the third quarter of 2013, primarily due to poor sales execution. Media gross margin was 21.9% compared to 22.2% in the third quarter of 2013.

“While we are not satisfied with our Q3 results, a number of deals we expected to close in the quarter shifted into future periods reflecting the sometimes long sales cycle in our Enterprise business,” says CEO Bob Michelson. “We have not lost this business, but the slippage of these opportunities caused revenues in the third quarter to fall below expectations. We are encouraged by the improvements we have seen in our pipeline and our ability to streamline the business, and we have identified steps we can take to reignite our growth engine.”

Reignite our growth engine??? English version: start making money.

“In the three months I’ve served as CEO of RMG Networks, my confidence in the vision for our company has been reaffirmed as our team works to bolster our financial discipline, establish a sales strategy for accelerated growth, deliver a robust road-map driving product innovation and ultimately drive profitability. Our third quarter results convey the quick actions we have taken to stringently scrutinize our cash operating expenses to extract the excess and instill discipline and accountability throughout the organization. Simultaneously, we are methodically assessing our portfolio of products and the sales processes utilized to successfully propose, sell and install our solutions into customers’ environments. With a reset cost base, RMG Networks can now focus on these near and longer-term growth initiatives to expand the company’s position as an industry-leading innovator of visual communication solutions.”

“While cost cutting is the prudent action to take, we must focus on growth,” adds Michelson. “After looking closely at our sales processes, organizational structure and post-sale customer care, we identified enhancements that we expect will facilitate a high-achieving sales effort. We have already taken steps to better support our sales organizations, and we are deploying initiatives to improve processes, increase accountability, and improve global collaboration. Simultaneously, we are making strides in reinforcing RMG Networks’ standing as an innovator, with a disciplined, customer-driven product development effort. With this in mind, we have identified new verticals where we are confident our demonstrated ability to drive a deep return on investment for customers who deploy our solutions will enable us to harvest opportunities similar to those we have found in our existing areas of expertise. We plan to aggressively pursue these new verticals in the coming quarters.”

The company is still getting stung by a revenue guarantee arrangement on an ad network, taking “impairment charges of $7.1 million and $10.1 million related to goodwill and intangible assets, respectively, of the Media Unit.”

Total reported revenue for Q3 was $13.9 compared to total reported revenue of $15.6 million for the same quarter last year. Operating loss for the quarter ended September 30, 2014 was $18.5 million compared to an operating loss of $5.3 million for the same quarter last year.

Ouch.

“If we are able to fully execute on the strategies we have outlined above, we believe the results delivered in the third quarter of 2014 will be an anomaly in our ongoing financial performance,” says Michelson. “We have in front of us numerous and specific opportunities to deliver growth and we are committed to executing on them. However, with many of these initiatives just beginning, the visibility into the exact timing of their impact is still not clear, and in that environment, we believe it would be inappropriate to provide specific, near-term guidance. As we execute on our planned product development and sales enhancement programs, we remain strongly convinced in our prospects for revenue growth, for developing material operating leverage and for producing significant adjusted EBITDA over the intermediate- and long-term. Growing to generate EBITDA and become self-sustaining is our key focus.”

The share price swooned on the news but is nudging up this morning.