Smith Micro Software, Inc.
Q4 2016 Earnings Call Transcript

Published: 10 Mar 2017

[Operator:]

Good day and welcome to the Smith Micro Software Fourth Quarter and Full Year 2016 Financial Results Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Charles Messman, Vice President of Investor Relations and Corporate Development. 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 fourth quarter and year end results ended December 31, 2016. By now, you should have received a copy of the press release with our 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 949-362-5800 and we will email one to you. 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 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 our risk factors discussed in Smith Micro’s Form 10-K for 2016 and Form 10-Q filings for the three quarters for fiscal 2016. Smith Micro assumes no obligation to update any forward-looking statements or information which speak only as of the respective dates. Before I turn the call over to Bill Smith, I want to point out that in the forthcoming prepared remarks, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for a reconciliation of the non-GAAP financial measures. With that, I’ll now turn the call over to Bill. Bill?

[Bill Smith:]

Thanks, Charlie. Good afternoon. Thank you for joining us today for our fourth quarter and year-end results. Total revenue for the fourth quarter was $7.1 million, up approximately 9% sequentially from the third quarter and down from the $10 million reported in the fourth quarter last year. Non-GAAP net loss for the fourth quarter was $1.9 million or $0.15 per share, this compared to non-GAAP net income of $4,000, or breakeven the same quarter last year. The year-over-year results were primarily driven by the decision by Sprint in January of 2016 do not continue to use our NetWise Wi-Fi offload software as they work to reduce their operating expenses. Before I turn the call over to Ziggy to review our financial results in more detail, I would like to outline the significance that’s taken during the fourth quarter and continuing into the current quarter to restructure our entire organization, reducing cost, creating better utilization of resources and streamlining our processes. These included impacts to our employee base, office locations and overall resources of the company, to better align our expenses with our strategic growth plans for the current year. We have decided to take advantage of our lower cost European locations of Braga, Portugal and Belgrade, Serbia and Pittsburgh here in the U.S. These changes have come in the expense of our traditional locations in California where costs have continued to grow. We expect these changes will not impact our revenue but will enable a rapid return to profitability and generation of meaningful free cash flow in 2017. First off, looking at the changes we made to our overall cost base. Starting in the fourth quarter and continuing in the current first quarter, we have implemented a significant restructuring of the organization across the Board. As part of this plan, we have taken approximately $3.4 million in total cost per quarter, lowering our cost run rate going forward by approximately 32% to $7.1 million per quarter. While making these changes is never fun, we believe we have repositioned the company to be able to return to profitability and free cash flow generation as quickly as possible this year. The cuts we made to our employee base are strategically focused on our product growth strategy. In total, we have reduced headcount by approximately 37% worldwide which has included some members of my senior staff. Our Chief Marketing Officer, Carla Fitzgerald has moved on to a new opportunity. For the immediate future, we will not be replacing the CMO role and has assigned these responsibilities under the team lead by Charles Messman. I want to thank Carla for her hard work and dedication to Smith Micro over the years and we wish her the absolute best. We have also made changes within the leadership of our engineering team. The former SVP of software engineering, Rick Carpenter has also moved on to a new venture. His position has been filled internally through the promotion of David Blakeney as VP of Engineering based in Pittsburgh and he has assumed these responsibilities. I also want to thank Rick for his dedication and hard work for Smith Micro over the years. Looking at our product team, we have replaced the senior management team across the Board. As I spoke of on our third quarter conference call, Marco Leal the Vice President of Worldwide Products - responsibility in Pittsburgh for all of our products, reducing both strategy and product roadmaps across the portfolio. Marco joined Smith Micro through the recent acquisition of iMobileMagic and brings a wealth of experience for the years at Microsoft to his expanded role. As part of our restructuring process, Marco has repositioned the team to better support our emerging business case. The new executive team will continue to focus on improving all aspects of our business to improve efficiency and better leverage our talented engineers while not impacting but rather enhancing our ability to generate increased revenues and improving our ability to deliver high quality software to our customers. With the restructuring has come significant changes throughout the worldwide office locations. First off, we closed our Northern California location which housed the majority of the graphics division. We are in the process of rebuilding our graphics engineering team in our Braga, Portugal location. We have also significantly reduced our staff at our Aliso Viejo location and will rely in the future on both our Pittsburgh and Belgrade teams to pick up the workload. We now have expenses aligned with the realities of our present business case. I am pleased with the overall progress to-date in restructuring our business and will now push forward with a much leaner and well positioned company. I am looking for a profitable 2017 and the resumption that free cash flow generation primarily in the second half. I’ll now turn the call over to Ziggy to comment on our financials for the fourth quarter and year-end fiscal 2016 result. After which I will discuss some of the new exciting opportunities we see for Smith Micro in the year to come. With that, Ziggy?

[Steve Ziggy Yasbek:]

Thank you, Bill. I first want to 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, asset impairment charges, fair value changes in liabilities, the amortization of notes, discount and issuance cost and adjust 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 2016 and 2015 are non-GAAP amount. 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 differences of the two. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com. Total revenue for 2016 was $20.2 million, a decrease of $11.3 million or 20.5% from $39.5 million in 2015. Wireless revenues at $23.1 million decreased $10.5 million or 31.2% in 2016 primarily due to Sprint. Graphics revenue was $5.1 million, a decrease of $800,000 or 13.5%. From a non-GAAP perspective, total year 2016 loss per share was $0.72 as compared to a loss per share of $0.02 in 2015. From a balance sheet perspective, our cash position was $2.2 million at December 31, 2016, a decrease of $10.7 million from the beginning of the year. In terms of our currently completed fourth 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 totaled $353,000 for the current period, broken out as follows; $39,000 sales and marketing, $119,000 R&D and $195,000 G&A. In terms of the amortization of intangibles, this totaled $84,000, $73,000 was reported in sales and marketing and $11,000 was reported in R&D. In terms of the amortization of debt discount and issuance cost, this totaled $195,000 reported on the interest income and expense line of the income statement. As has been the case in past years, we prepared a revised tax provision at year-end. Since we were in a loss position, our GAAP tax benefit is primarily due to state of foreign tax provisions [indiscernible]. The fourth quarter 2016 reflects a favorable non-GAAP tax adjustment of $871,000. For the fourth quarter, we posted revenues of $7.1 million and a net loss of $1.9 million or $0.15 loss per share non-GAAP. This compares to revenue of $10 million or $0.00 per share for the same quarter last year. International revenue was approximately $178,000 this quarter across all business groups. Our wireless segment reported revenues for the quarter of $5.6 million as compared to $8.1 million last year. Our graphics segment posted revenues at $1.5 million as compared to $1.9 million last year. Switching now to gross profit, non-GAAP gross margin dollars of $5.3 million compares with $8 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was 75.4% for Q4 2016 compared to 80% for Q4 2015. The decrease in gross margins were primarily due to lower sales. Non-GAAP gross margins by business segment were as follows

[Bill Smith:]

Thanks, Ziggy. Before I get into some of the details about our focus for 2017, let me start by giving some guiding principles. We are pleased to be able to talk about a very broad wireless product line up including our NetWise family for carrier and cable network optimization, CommSuite for wireless messaging, QuickLink for wireless connectivity and SafePath for a variety of location based services. We will continue to sell our entire product offerings and meet the needs of our carrier and cable customers as well as to provide solutions for device manufacturers and enterprises. That said, our primary focus for 2017 is to grow our revenues in a profitable manner and to liberate our prowess to once again make Smith Micro a growth oriented company with a growth [indiscernible]. To achieve this, we will focus on those products that are quickest to sell and easiest to implement thus providing the maximum impact of both our top and bottom line in the shortest period of time. We have chosen two product areas for enhanced focus with our sales effort. First we will zero-in on the sale of our SafePath Family of products and second, we will focus on the sale of our Device Management firmware update products from our NetWise family. Now let’s talk about the – issues we are pushing forward and some exciting trends we are seeing particularly after last week attending Mobile World Congress in Barcelona. First let’s start with our SafePath product platform that is garnering significant interest with our carrier and cable customer. As most of you know, we acquired the SafePath Family suite with the acquisition of iMobileMagic, offering a next generation cloud based white label platform that enables carrier and cable/MSOs to provide location and protection services to their mobile subscribers as a value added service. Over the past few quarters, we worked diligently on introducing the product to the market and enhancing the solution. Just last week, we launched our first significant upgrade with SafePath Family 5.0, adding new features and enhancements including parental controls for both iOS and Android, web content filtering and additional capabilities for wearable locators. To-date, as I mentioned in the third quarter call, we have launched post-acquisition in the Asia-Pacific region with two carriers, Digi in Malaysia and AIS in Thailand. During the current quarter, we signed a third carrier [indiscernible] in the Malaysia market that plans on launching in the second quarter of this year. We currently have several ongoing late-stage discussions in profit. First, the Tier 1 operator – is in the final stages of implementing the SafePath family. And second, a U.S. Tier 1 carrier is in the final stages of negotiating the contract for SafePath family as well. We also have meaningful discussions with other carriers around the world for the same product offerings. These opportunities have the potential to be game changers immediately on deployment and can significantly add to both our top and bottom lines. We also announced last week the expansion of the SafePath platform the three new verticals; SafePath Fleet, SafePath Corporate and SafePath School providing a comprehensive management and monitoring services to enterprise businesses with distributed fleet and workforces as well as educational institutions worldwide that require advanced content filtering. As such, SafePath is heavy focused for 2017. Now let’s turn our attention to device management and over-the-air updating software from our NetWise family. We have seen many changes in the marketplace over the past year, with the acquisition of several major players in the device management space. Leading suppliers, and Interpath were acquired and as a result, a void has been created in the marketplace. Adding to this fact is the continued expansion of the IoT market with the need to support and update millions of mobile devices already in the fields with millions more to come. We see growing momentum with our NetWise portfolio, with a need for carrier grade device management software both on the server and client side. Our DM photo solutions have a unique place in the marketplace as one of the only pure-play, end-to-end solutions left. It has been developed and build upon for over 10 years. Device manufacturers and organizations deploy millions of devices are in need of a long-term solution for the management and maintenance of the legacy devices in the field that require the almost standard as well as the onslaught of new devices being launched in the field that require lightweight end-to-end. We are a unique supplier as we provide both products, both clients and server that support of Zanders[ph]. We see this as a fantastic opportunity have several ongoing potential deals that we expect to close during the year. Lastly, as I spoke about earlier in the call, we made significant changes in the graphics teams and have already begun investing to rebuild the engineering and product management team. We will have much more to announce and talk about in the coming months about this product lines as we make changes with new branding, new product releases, new content initiatives, strategic partnership and an expanded channel partner program. These changes will result in the graphics product line with a more aggressive product focus with much lower cost and significantly higher profits. To summarize, we have been extremely busy making significant organizational changes to align our cost structure and maximize the valuable resources and talents we have in place. We have several large great opportunities in play. We have a very clear path to achieve our goals and a great plan to make it happen. We look forward to a strong fiscal 2017, showing solid growth with profitability and expanding cash reserves. Operator, we can open the call for questions.

[Operator:]

Thank you. [Operator Instructions]. We’ll take our first question from Ian Gilson with Zacks Investment Research.

[Ian Gilson:]

Good afternoon, gentlemen.

[Bill Smith:]

Hi, Ian.

[Ian Gilson:]

Hi. From what you said Bill, it looks like you’re moving the focus of the company to outside of the United States.

[Bill Smith:]

That’s a fair statement.

[Ian Gilson:]

Does that mean that you expect the bulk of your growth comes from carriers that are outside the U.S.?

[Bill Smith:]

No, no, it’s just that our workforce predominantly will be outside of the U.S. base and the workforce in the U.S. will be predominantly based in Pittsburgh, but we will continue to service our traditional strength carriers that are here in North America and of course yeah, we are looking for further growth in Europe and Asia-Pac. So, yeah, but that part hasn’t changed.

[Ian Gilson:]

Okay, you kind of moved the corporate headquarters?

[Bill Smith:]

Yeah, that’s a decision that we’ll be looking at and talking about, that’s not something we’re going to say anything about it at this point, clearly from a just a pure sizing headcount, the largest location by far is Pittsburgh.

[Ian Gilson:]

Okay, fine. Thank you very much.

[Bill Smith:]

Thank you.

[Operator:]

And we’ll go next to Scott Reed with Vict10n Capital Strategies.

[Scott Reed:]

Hi, everyone. So sort of quick, it sounds like you are just back of the envelope guiding to revenue probably north of about $10 million per quarter in the second half of the year, and I’m just basing that on very rough calculations here. But with that in mind, would you characterize that revenue projection as being tied to any one or two specific deals that you have in process or is that sort of an estimate based on a handful of deals and projected close rate based on those deals and the deal sizes?

[Bill Smith:]

Okay, let me first say, we’re not giving guidance so I just want to be clear about that. Now as to the numbers that you came up with, we’re looking for some meaningful growth and we’re looking for meaningful growth predominantly in the second half of the year but we’d like to see some growth in the front half as well. We are looking for profitability, we’re looking for the generation of cash and adding that building our cash free reserves back up. We believe that much of the growth will come from the sale of the two focused products that I spoke of, it will come from the sale of SafePath, it will come from the sale of our Device Management over-the-air update services. We will continue to sell the balance of the portfolio, but if you really want to focus on where we can make a significant difference, it’s going to come from those two families. I outlined in my prepared script, I think some significant growth opportunities that are in the SafePath area. I would say to you that we believe SafePath offers us the greatest single upside for 2017 and beyond. We have a great product, it’s relatively straightforward to sell, it is very easy to implement and it is a quicker sale than some of our other more complex products. That said, we’re looking for that growth to come from a number of different deals, some will obviously be larger than others and I alluded to couple of Tier 1 deals and Tier 1 just by pure size and to me the bigger deals that we’re going to focus on.

[Scott Reed:]

Okay, great. Two more questions that are more high level about the wireless industry generally and this is a bit of a U.S. focused here I suppose, but overall, of course last year was a little tough on the company because Sprint decided to drop use of your NetWise product. Is there a chance now that things look a little bit better for Sprint’s operations that you might be able to win back that account?

[Bill Smith:]

I really don’t want to comment on that publicly I mean clearly that would be fondest hope, and it’s obviously something that our account team is working on. I can’t give you any encouragement at this point that that will happen, we’ll just have to wait and see.

[Scott Reed:]

Gotcha. And then finally, would a merger and this is of course based on pure speculation and rumors, but a merger of T-Mobile with either Sprint or Comcast, if that were to happen, would you see that as being additive to your situation or is it too early to speculate on something like that?

[Bill Smith:]

Well yeah, it is a little early I mean, both Sprint and Comcast are meaningful customers to us that we have a lot of work that we do with, but I think a lot has to play out. I think it has to become a lot clear whether SoftBank wants to be a seller or a buyer and I don’t think that’s clear yet and these things take some time in any event. So, I don’t think it really has a significant impact on 2017.

[Scott Reed:]

Thank you.

[Operator:]

[Operator Instructions]. And we have no further questions in the queue at this time. I’d like turn the call back over to Charles Messman for any additional or closing remarks.

[Charles Messman:]

I want to thank you every one for joining us today. We look forward to speaking to you on the next call. Should you have any further questions or comments, please feel free to call in the office. Again thanks again and we’ll talk to you in our next quarter conference call. Bye

[Operator:]

And that does conclude today’s conference. Thank you for your participation and you may now disconnect.