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Apivio CEO Rob Bakshi catches up with Cantech Letter

Apivio CEO Rob Bakshi.

When we first caught up with Apivio (Apivio Stock Quote, Chart, News: TSXV:APV) CEO Rob Bakshi, he was looking to overcome the idea that the hardware focused company could transition to higher margin business without affecting its topline. Apivio, which was founded in 2003 in South Korea, imagined that desktop phones would become the kind of feature-packed devices that users have come to expect from their increasingly innovative mobile device experience.

Today, it’s clear that Bakshi’s bet is paying off. Apivio has posted double-digit revenue growth in each year since 2012, and for the half year ended June 30, 2015, gross margins climbed to 18.3% from 17.7% in the same period a year earlier. Behind the numbers, a larger picture reveals that a massive upgrade cycle is taking place. Research firm Gartner estimates that of the more than 55-million enterprise phones that are sold annually, 60% are VoIP phones. The Apivio boss thinks there is a large addressable opportunity in Android phones in the enterprise VoIP phone market, which he describes as “virtually non-existent” today.

As for the hardware/software conundrum, Bakshi is excited about the company’s new UT880 Android phone, which was developed for NEC America, and is a platform on which he thinks Apivio can develop and sell premium applications targeted at enterprises. Cantech Letter recently caught up with Bakshi to talk about the latest developments at Apivio.

Rob, It has been a year since we talked, what has Apivio been up to in the time since?

We have been very busy at Apivio over the last year. As you may have noticed, we are coming off an excellent first half in 2015 with more than $26.7 million of revenue and almost $700k in EBITDA. The business has performed very well in South Korea, where we have seen revenue growth with our major customers. Our operating performance in South Korea has improved with higher revenues and profitability. In the meantime, Apivio is gaining traction with its new products in North America. We shipped 6,000 of our new UT880 Android VoIP phones to NEC in the first half while ramping up R&D to deliver on our next generation “L2” Wi-Fi portable phone. We also closed a private placement in March of this year.

We have also brought on key people to the team. We welcomed Jason Donville to our board (more on Jason below) and Rick Krupka as Director of Sales to head up our US sales strategy to carrier and enterprise markets. Rick is also focused on Apivio’s sales and marketing channels for the new Wi-Fi product (Liberty L2). Moving forward, we will announce some exciting initiatives in the next few months so stay tuned.

I think the market is taking note of a number of compelling investment attributes associated with our company. We have shown double-digit revenue growth in each year since 2012.

Your stock has been considerably more active in 2015. To what do you attribute this?

I think the market is taking note of a number of compelling investment attributes associated with our company. We have shown double-digit revenue growth in each year since 2012. The company has been EBITDA positive for the last five quarters and was EBITDA positive in 2014. The business has shown excellent growth in South Korea. We have very strong customer relationships with the largest telecommunications carriers in South Korea who work closely with us when they develop and market their next generations of VoIP phones. We have redeployed surplus cash generated by the Korean business into R&D of cutting-edge new products targeted at the North American and Global markets. Over the previous twelve months, we have launched new products in North America – the UT880 Android VoIP phone and our Liberty series Wi-Fi phones.

In addition, Pardeep Sangha from Pacific International Securities initiated coverage on the company earlier this year. Subsequent to his coverage, a number of funds participated in our over-subscribed private placement in March. Retail interest appears to have picked up noticeably after the private placement and the announcement of strong results in the first half of this year. There has also been additional coverage of our products and overall story. We have been featured on GetConnected and BNN.

You talked a bit about bringing portfolio manager Jason Donville onto your board. What do you think he brings to the table?

As you might be aware, Jason has a reputation of being one of the best analysts and fund managers over the course of his career. He is one of the smartest people I know and has an excellent sense of products that succeed. I will definitely rely on him heavily in areas of financial strategy. Beyond that, he is a big picture person and asks all the right business questions. He will force management to think strategically and to be prepared with all the answers before we propose any business initiatives to the board.

South Korean manufacturing has an excellent reputation for quality and the fact that our products are manufactured in South Korea may appeal to North American customers.

What does the signing of the Canada Korea Free Trade Agreement mean to Apivio?

Apivio, through its subsidiary in South Korea is already extremely successful in the South Korean market. We currently sell to all the major telecommunications companies in that market. Our products are customized to work on their networks, making it hard for competitors to dislodge us. We have been successful in that market even prior to the execution of the FTA. I believe that the FTA will only open more doors. It increases awareness of Canadian markets to the South Koreans and vice versa. South Korean manufacturing has an excellent reputation for quality and the fact that our products are manufactured in South Korea make appeal to North American customers.

How big is the market for VOIP enterprise phones?

The enterprise phone market is huge. Gartner has estimated that more than 55 million enterprise phones are sold annually of which more than 60% are VoIP phones. The percentage of VoIP phones of the total market continues to increase each year with more and more TDM enterprise systems being replaced with VoIP systems. Interestingly, even though VoIP was a major innovation in the enterprise market, the user experience did not change in a material way. In other words, there is not much difference in the way office workers use their VoIP phones compared to their TDM phones. However, when you look at the difference in use patterns between smart phones and traditional cell phones, you can imagine why there could be a large market for our new Android based VoIP phones. The market for Android phones in the enterprise VoIP phone market is virtually non-existent today so there is a large addressable market.

What kinds of customers are switching over to Wi-Fi phones?

We believe that Wi-Fi phones will be popular in both, the enterprise and the home markets. Users in an enterprise environment will value the mobility that the Wi-Fi phone enables within the office. While the traditional office phone stays on an employee’s desk, a Wi-Fi phone can be carried around the office. Employees in warehouses, workshops, campuses and similar large distributed work environments can take their office Wi-Fi phone wherever they go. They can even have the flexibility to use their office phone at home or when they travel. Similarly a residential user can take his or her home phone to work, vacation or elsewhere and make toll-free calls back to their home area code with no roaming charges associated with cell phone usage.

Apivio has historically been a supplier of hardware endpoints. The hardware business is competitive with constant pressure on margins. We are changing our strategy to include products with recurring revenue streams. Our applications and cloud initiatives are a large part of this strategy.

Your topline has been consistently climbing. Your gross margins are rising, but how long will R&D expenses continue to affect your bottom line?

Good question. We have seen remarkable revenue growth over the last few years, from $29M to $35m to $46M in 2012, 2013 and 2014 respectively. Significantly all of this revenue was generated in the South Korean market. During that time, we increased our outlay on R&D in order to develop products for the North American market. Our efforts have begun to bear fruit since North American revenue from new products was $1.9M in the first half of 2015. We were cash flow positive in 2014 and the first half of 2015 even while we invested in the development of new products that will drive revenue, profitability and market share growth in the future.

What kinds of non-hardware opportunities do you see for Apivio in the future?

Apivio has historically been a supplier of hardware endpoints. The hardware business is competitive with constant pressure on margins. We are changing our strategy to include products with recurring revenue streams. Our applications and cloud initiatives are a large part of this strategy. Our UT880 Android phone is a platform on which we can develop and sell premium applications targeted at enterprises. We are developing applications that have been requested by the channel. These applications increase productivity or serve a specific need to enterprise clients. In some cases, the applications create new revenue streams for the customers themselves. So they more likely to pay for these applications. Our recurring revenue from these applications will increase as the UT880 install base grows.

We are also developing a cloud-based provisioning system for our Wi-Fi phones that will be tremendously value added for our customers. Our customers can use this system to send targeted advertising messages to their user base. We can hook up certain peripheral devices to our cloud-based system and invoice for services on a recurring revenue basis. More on these initiatives will be announced in the months ahead.

Can you tell us about your relationship with NEC and how that is going?

We are indeed lucky to have partnered with NEC on our first Android phone. There have been a number of learning curves that we have negotiated along the way and NEC has helped us with their relationships and skills across the globe. I think that both of us have benefited tremendously through what has become a very symbiotic relationship. We are able to brainstorm on a number of ideas with NEC. While we initially began speaking with NEC of North America in early 2014, its subsidiaries in other countries have taken notice and are now interested in selling our phone in their countries. As you may know, NEC is the third largest vendor of telecommunications equipment to the enterprise globally and we hope to leverage their established dealer network and customer base to be able to grow this new product line. Please see the NEC videos featuring the UT880:

What is your focus for the next year?

The joke in the company is that we have so many opportunities that our main challenge is staying focused! Having said that, we know that we have to do the following:

-Concentrate on maintaining our status as the leading vendor of centrex VoIP phones to carriers in the South Korean market

-Continue to focus on improving our operations in South Korea, thereby improving margins, cash flow and working capital management

-We need to deploy as many UT880’s in the market as possible

-Develop, test and deploy specialized value-added applications in the enterprise market

-Work on integrating various peripheral devices with the UT880

-Work hard to increase the deployment of the Wi-Fi phones in North America

For a small company with 80 employees, I know that we will have our hands full to successfully deliver on all these initiatives!

Disclosure: Apivio is an annual sponsor of Cantech Letter

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About The Author /

Cantech Letter founder and editor Nick Waddell has lived in five Canadian provinces and is proud of his country's often overlooked contributions to the world of science and technology. Waddell takes a regular shift on the Canadian media circuit, making appearances on CTV, CBC and BNN, and contributing to publications such as Canadian Business and Business Insider.
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