Q1 2005 VCampus Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good day, ladies and gentlemen, and welcome to the VCampus Corporation first quarter 2005 earnings conference call. My name is Anne Marie, and I'll be your coordinator for today. [Instructions]

This call contains forward-looking statements. Actual results might differ materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in the company's SEC filings, including its registration fitness on form S-1 and S-3 and periodic reports under the Securities Exchange Act of 1934, copies of which are available upon request from the company's Investor Relations Department.

I would now like to turn the presentation over to your host for today's conference, Mr. Nat Kannan, Chairman and Chief Executive Officer of VCampus Corporation. Please proceed, sir.

NAT KANNAN, CHAIRMAN, CEO, VCAMPUS: Thank you. Welcome to our quarterly conference call for the period ended March 31, 2004, for VCampus Corporation. My name is Nat Kannan, and I'm the Chairman and CEO of VCampus. With me today is Christopher Nelson, Chief Financial Officer of the company. Today, Chris is first going to review the financial results for the first quarter of 2005. I will then provide my perspective on the company's progress and results, and then we'll be happy to take your questions. Chris, please take us through the numbers.

CHRISTOPHER NELSON, CFO, VCAMPUS: Thank you, Nat. Before I begin discussing the numbers today, I'd like to highlight the fact that we finished the quarter with $2.7 million in cash and cash equivalents, as compared to $2.6 million at the end of the year. And this represents substantial capital with which to continue the execution of our select partner strategy.

What I'd like to do now is review the first quarter of 2005 as compared to the year-earlier period, the first quarter of 2004, as well as the fourth quarter of 2004.

VCampus had revenue of $1,128,582 in the first quarter of 2005, as compared to revenue of $987,228 in the fourth quarter of 2004 and $1,494,052 in the same period a year earlier, which was the first quarter of 2004. These total revenue amounts include online tuition of $1,023,095 in the first quarter of 2005 as compared to $852,389 in the fourth quarter of 2004 and $1,409,503 in the same period a year earlier.

During the first quarter, the company recorded a noncash charge of approximately $447,000, which represents amortization of debt discount in deferred debt offering costs related to our financing in March of 2005. The issuance of March 2005 was $3,649,000 worth of debt. The principal amount stands at $1,833,000 as of March 31, 2005. Including this noncash charge, VCampus reported a net loss for first quarter of $1,902,673, or 22 cents a share, compared to a net loss of $789,205, or 15 cents a share, in the first quarter of 2004, or $1,723,863, or 22 cents per share, in the fourth quarter of 2004.

I'd like to note that the first quarter enrollment in the previously released security courses offered in preparation for the ISC2, CISSP, and FCC [ph] exams increased more than 200% from the fourth quarter of 2004. In addition, during first quarter, the company rolled out several select partner courses, including the course, "End of Life Pain Management," which we did for the National Council of State Boards of Nursing, which is a continuing education course for nurses. We did the Series 86 and Series 87 exam preparation courses for FT Knowledge. Each of those courses is in preparation for a distinct certification for financial analysts.

Now I'll go ahead and turn the call back over to Nat.

NAT KANNAN: Thank you, Chris. I want you all to know that we have turned the corner since Q4 of 2004, which was the low point of our revenues as we moved away from our legacy business to the new model of co-publishing with brand name partners with certified professionals. In Q1, we grew, largely due to growing revenues from our new select partner model, which grew from 6% of our revenues in Q4 to 10% in Q1 of 2005. We expect this trend to continue in the current quarter. The momentum is built largely on two courses. As we publish more titles, this trend will accelerate in the coming months.

Our leading indicators are registrations, growing revenues, and improving gross margins, and all pointed in the right direction to giving a great deal of optimism in the coming months. The key benefits to the transition to select partner revenues is not only revenue growth but also growth in gross margins. The select partner courses have a 90% gross margin, compared to the legacy, which average at 60%, which has eroded from commoditization of our legacy market.

Thus far, revenues from the select partners have been growing nicely, but lumpy and clustered around dates of certification exams, which are generally offered through classroom methods. More and more of these certifying bodies are starting to use online testing, which should smooth out our revenues in the coming months.

What drives our select partner revenues are simply the number of courses we can publish and distribute over the Internet. We are publishing right now at the rate of one a month, which is our capacity, and, as a result, still catching up with some of the commitments we made to our partners from last year. We're rapidly increasing our capacity to remove the bottleneck, partly from increased availability of good instructional designers and expanding our offshore vendors.

We've addressed this capacity problem and will be able to publish more than one course a month. This should help grow our revenues even faster.

We also face an additional bottleneck in terms of ability to accept credit cards in the European market. Post 9/11, the process has become much more stringent. And after weeks of negotiation, I'm glad to report that we'll soon be able to accept credit cards in Euro payments. There's a big shortage of instructors overseas, and online offers an attractive alternative, and we expect to show significant growth in Europe in the next six months.

Some of our partners have not had much experience with marketing online programs, and now we've established a formal program of marketing assistance to some of them to get their programs going. And it is very promising at this point.

Thanks to our 12 months of successful publishing of online courses with our initial partners, such as ISC2, we are now able to show a solid track record of our service that has attracted other world-class certifying bodies, and we are in discussions with a number of them.

We have kept our team of information security, financial services, and healthcare as a principal focus. Collectively, our select partners to date, with whom we have exclusive relationships, reach an audience of 300,000-plus professionals in the US, out of which one-third are members who believe to these select partners. As we find more partners as reach grows by tens of thousands with each additional partner, we are finding new sources of revenues from our existing select partners as they're offering continuing professional educational credit for some of our existing library of courses from third parties. This offers us a cross-marketing opportunity as well as off-selling.

In our legacy market, we find the government sector to be the most profitable, and have focused our energies to use our experience with Department of Veterans Affairs to sign other agencies.

All in all, I feel we have made tremendous progress in the past 8 months, starting off an entirely new and promising business model, and the results thus far are encouraging, and we expect this momentum to continue. We are now partners, we have courses, we have revenues, we have the technology we need, the financial resources, and a solid team to execute in 2005 and beyond.

Thank you for your continued support and interest in VCampus.

CHRISTOPHER NELSON: Thanks, Nat. Before we go to the question and answer session, I want to put our recent growth in perspective. The low point of our revenues was the third quarter of 2004, when we had approximately $917,000 of total revenue. The fourth quarter of 2004 is $987,000 of revenue, which was up 7.63% from the third quarter. The first quarter of '05, which is the quarter we're reviewing now, was $1,128,000, approximately, which is up 14.29% from the fourth quarter. So you can see there that not only are we out of the low point, or the trough, in the third quarter of 2004, but we're starting to show ever-increasing growth of 7.63% in the first three months after that, and 14.29% in the succeeding-- [mike moves?].

And I'm happy to report that our select partners, which represent a relatively low amount of the overall revenue, are growing at a faster rate than the overall revenue's growing. So as they continue to contribute, we'll continue to see our rate of growth increase.

NAT KANNAN: Chris, I want to add …