Smith Micro Software, Inc.
Q1 2017 Earnings Call Transcript

Published: 3 May 2017

[Operator:]

Good day, everyone, and welcome to the Smith Micro First Quarter 2017 Financial Results Conference Call. Today's call is being recorded. And now your host for today's conference, Mr. Charles Messman, Vice President of Investor Relations and Corporate Development. Mr. Messman, please go ahead sir.

[Charles Messman:]

Thank you, operator, and good afternoon, everyone. Thank you for joining us today to discuss Smith Micro Software's financial results for the first quarter ended March 31, 2017. By now, you should have received a copy of the press release with the financial results. If you do not have a copy and would like one, please visit the Investor Relations section of our website at www.smithmicro.com, or call us at [phone] and we will email one to you immediately. On today's call, we have Bill Smith, Chairman, President and Chief Executive Officer of Smith Micro; Steve Ziggy Yasbek, Chief Financial Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation those regarding the company's future revenue and profitability, new product development and new market opportunities, operating expenses and the company's cash reserves. Actual results or trends could differ materially from our forecast due to a variety of factors. For more information, please refer to Risk Factors discussed in Smith Micro's Form 10-K for 2016 and Form 10-Q filings for the first quarter for fiscal 2017. Smith Micro assumes no obligation to update any forward-looking statements or information, which speaks only as of the respective dates. Before I turn the call over to Bill Smith, I want to point out that the forthcoming prepared remarks we will refer to certain non-GAAP financial measures. Please refer to our press release disseminated earlier today for a reconciliation of the non-GAAP financial measures. With that said, I'll now turn the call over to Bill. Bill?

[Bill Smith:]

Thank you, Charles. Good afternoon. Thank you for joining us today for our first quarter earnings call for 2017. As I mentioned on our last earnings call, we have been very focused on completing the implementation of a restructuring plan, designed to streamline our business processes and grow our leadership team. We have essentially completed that process. At the same time, we have continued to push forward with some exciting and significant new revenue and business opportunities. This should have a profound effect on our second half. As such, the first quarter continued to be transitional for us. Revenue for the quarter was $5.6 million with a non-GAAP net loss of $1.4 million, or $0.11 loss per share. Although revenue for the first quarter was down from the prior year first quarter, this performance was in line with our expectations due to a couple of key factors. First, our revenues are typically the lowest in Q1 due to the seasonality of our consumer-facing businesses, and second, our teams have been focused on the transitioning of knowledge and responsibilities as a result of our substantial organizational changes. Later in the call, I will provide greater detail regarding some exciting new opportunities that we expect to land this year, as well as update you regarding our MSO customer base relative to some recent market news. I remain enthusiastic about the year ahead, and will continue to look for a profitable 2017 and the resumption of free cash flow generation, primary in the second half. With that said, I will turn the call over to Ziggy for more detailed financial analysis of the quarter. Ziggy?

[Steve Ziggy Yasbek:]

Thank you, Bill. First let me go over our customary introductory items. As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed on this call net out stock-based compensation related expenses, the amortization of intangible assets, fair value changes in liabilities, the amortization of notes, discount and issuance costs and adjusts for pro forma tax expense or benefit to provide comparable operating results. Accordingly, all results that I refer to in my prepared remarks for both 2017 and 2016 are non-GAAP amounts. Our earnings release which will be furnished to the SEC on Form 8-K contains a presentation of selected GAAP financial measures and related non-GAAP financial measures and a reconciliation of the two. The earnings release can also be found in the Investor Relations section of our website at www.smithmicro.com. In terms of our currently completed first quarter, let me provide some details. For the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp expense totaled $446,000 for the current period broken out as follows

[Bill Smith:]

Thank you, Ziggy. Our primary focus for fiscal 2017 of new revenue growth in a profitable manner, with a focus on those products that are quickest to sell, easiest to implement and will also provide maximum impact to both our top and bottom line in the shortest period of time, namely those products are our SafePath platform and our Device Management firmware over-the-air, also known as DM/FOTA update products. We believe that our DM/FOTA offerings will provide a significant opportunity for us in 2017 and beyond. As such, we have decided to rebrand these offerings using our strongest brand name, QuickLink. This move demonstrates the importance we place on this part of our product portfolio. Going forward, our DM/FOTA offerings will be known as our QuickLink IoT services, building on the success of our QuickLink brand, it is already enabled carrier-grade wireless connectivity and security for hundreds of millions of devices around the world. We see great opportunity in the booming IoT segment for our DM/FOTA technology. As it is one of the few independent end-to-end solutions available in the market today, a void has been created in the marketplace by recent M&A activity where some of the traditional players, such as Red Bend and InnoPath are now owned by specific chipset manufacturers. We believe that customers do not want to be tied to a particular chipset vendor, opening up an opportunity for the Smith Micro QuickLink IoT solution for not only legacy business but also for new deployments. Later this month on May 17 through 19, we will be hosting a TestFest event at our Pittsburgh location, organized by the Open Mobile Alliance, focused on the new LightweightM2M device protocol. As the IoT use cases continues to mature and proliferate, although as LightweightM2M protocol is essential for standardized and secure management of connected devices. This open testing forum allows for ecosystem suppliers to perform interoperability tests between devices and infrastructure components. We are proud to host this worldwide event, and I believe it demonstrates our thought leadership. We have also seen some exciting new initiatives are Comcast that recently spoke about launching their new wireless service. While we were very excited about this significant opportunity, we remain temperate with our revenue expectations as they work to grow their user base. We are optimistic about the timing and associated revenue impact of this opportunity for our future. Now let's talk about SafePath. During Q1, we made significant progress with our SafePath platform in terms of both the technology and sales aspect of the product. As such, we expect to significantly increase our user base and revenues in the remaining part of the year. To-date, we have successfully launched SafePath with three carriers in the APAC region, including AIS and DTAC in Thailand and Digi in Malaysia, with a similar number of carriers in Europe, including Portugal Telecom. I believe these initial rollouts are significant for Smith Micro as we build momentum for our SafePath land with carriers around the world. This month we expect an additional SafePath launch with our first tier-one carrier. In addition, as we mentioned on our fourth quarter conference call, several late-stage SafePath discussions are on process, particularly here in the U.S. We expect to have our tier-one U.S. carrier in the very near future. The demand for our SafePath platform is strong as we offer a unique full-service platform that works seamlessly across both Android and iOS and integrates important functionality, such as parental controls, family location, geo-fencing, notifications, alerts and phone security. We are also seeing demand for the product in relation to several types of wearable devices. Wearables may provide yet another potential new revenue stream. I believe SafePath represents a true game-changer for Smith Micro. Turning to graphics. We continue to push forward with our plan to rebuild and rebrand our two key products, Moho and Poser, bringing to the markets a stronger graphics product line with a more aggressive focus on content creation. During Q1, we participated in two co-marketing event featuring Microsoft's new Surface Studio PC and our award-winning 2D animation software, Moho. As part of these initiatives, we collaborated with Microsoft to showcase the functionality and unique user experience of Moho Pro 12, running on the Surface Studio PC as Super Bowl 51 and as part of the launch events for Disney's live action Beauty and the Beast film held at Microsoft's retail stores. In summary, I am pleased with the progress of our strategic restructuring over the past two quarters. With the restructure essentially complete, we are now focused on maximizing these efforts to return the company to growth and profitability. We continue to work diligently at closing new opportunities here in the U.S. and abroad, executing to deliver high quality software to customers and continue to look forward to a strong fiscal 2017, showing solid growth with profitability and expanding cash reserves. With that said, I will now open the call for questions.

[Operator:]

Thank you, sir. Ladies and gentlemen, our question and answer session will be conducted electronically. [Operator Instructions]. And we will pause for just a moment to allow everyone the opportunity to signal for a question. And for our first question, we go to Brian Swift with Sutter Securities.

[Brian Swift:]

Thanks. Bill, can you - there are a couple of things. One in the SafePath area, you were talking about going after U.S. carriers, and they pretty much all currently offer location type services. And so how do you propose to displace the incumbent since carriers have been - they are hard to get opportunity fairly sticky. So what kind of competitors do you have [ph]?

[Bill Smith:]

Sure. Let me try to step through that. There is a competitor that has been used by the North American carriers. All of them use the same one. That competitor was acquired couple of years ago by another firm. That firm was just acquired a few months ago. And as such, they have lost their focus on the family safety side of their business. And what we are being told by our perspective customers is that they did not believe that this competitor is moving the product forward and therefore they are looking to make some changes. That has provided us with very strong opportunity. We have a better product today than what they offered. It's more complete, covers more area, and that really sums it up. It's a strong product. It's a product that's got a good recognition already in the marketplace and we look forward to some very significant announcements.

[Brian Swift:]

And on the new DM or QuickLink IoT area, can you give us - not mentioning names but can you give some ideas of what - some examples of what type of products should be - you're out there chasing try to get designed in?

[Bill Smith:]

We already have wins with a number of devise manufacturers who need to update mobile phones et cetera around the world and so they are already using the product for that purpose, but in addition to that especially with an IoT marketplace gaining momentum, there is the opportunity to provide the same kind of capability for mobile devices around the world whether it's on trains or trucks or wherever to update these devices in the field and our product offering, as I said in my prepared comments, is the really only end-to-end solution available in the marketplace right now as the more traditional providers have been acquired either by Qualcomm or Samsung. And the folks building the devices want to have the flexibility to use different brands of chipsets, and as such, we offer the best answer for them.

[Brian Swift:]

Okay. Thanks.

[Operator:]

[Operator Instructions]. And with that ladies and gentlemen, we have no further questions on our roster. Therefore Mr. Messman, I will turn the conference back over to you for any closing remarks.

[Charles Messman:]

Thank you, operator. Thank you everyone for joining us today. Should you have any further questions, please feel free to reach out to us directly and we'll look forward to talking to you on our second quarter conference call. Have a great day. Thanks.

[Operator:]

And again, ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may now disconnect.