Smith Micro Software, Inc.
Q2 2012 Earnings Call Transcript

Published: 2 Aug 2012

[Operator:]

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Smith Micro Software Second Quarter 2012 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is also being recorded today, Wednesday, August 1, 2012. I would now like to turn the conference over to our host for today, Mr. Charles Messman of the MKR Group. Please go ahead, sir.

[Charles Messman:]

Good afternoon. And thank you for joining us today to discuss Smith Micro Software’s second quarter 2012 financial results. By now, you should have received a copy of the press release discussing our financial results. If you do not have a copy and would like one, please visit www.smithmicro.com or call us at 949-362-5800 and we will immediately e-mail one to you. With me on today’s call are Bill Smith, Chairman, President and Chief Executive Officer; Andy Schmidt, Vice President and Chief Financial Officer; and Carla Fitzgerald, Vice President of Marketing. Before we begin the call, I want to caution that on this call, the company will make forward-looking statements that involve risks and uncertainties, including without limitations, forward-looking statements relating to the company’s financial prospects and other projections of its performance, the existence of new market opportunities, and interest in the company's products and solutions, and the company’s ability to increase its revenue and regain profitability by capitalizing on these new market opportunities and interest in introducing new products and new solutions. Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the company’s products from its customers and their end users, new and changing technologies, customer acceptance and timing of deployment of those technologies, new and continuing adverse economic conditions, and the company’s ability to compete effectively with other software companies. These and other factors discussed in the company’s filings with the Securities and Exchange Commission, including its filings on Forms 10-K, 10-Q, and 8-K could cause actual results to differ materially from those expressed or implied in any forward-looking statements. The forward-looking statements contained in this release and call are based on -- the basis of views and assumptions of management regarding future events and business performances as of the date of this call and release. And the company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this release and call. Before I turn the call over to Bill Smith, Chairman, President, and CEO of Smith Micro, I want to point out that in our forthcoming prepared remarks, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated early today for reconciliation of the non-GAAP financial measures. With that said, I’ll now turn the call over to Bill. Bill?

[Bill Smith:]

Thanks, Charlie. Good afternoon, everyone. And welcome to our conference call to discuss earnings for the second quarter of 2012. Total revenues for the quarter were $10.2 million with approximately $8.7 million coming from our Wireless products and $1.4 million resulting from our Productivity & Graphics product line. Non-GAAP gross profit was $8.4 million for the quarter with gross margins as a percentage of revenues of approximately 82.4%, up from 78% in the first quarter of this year. These financial results are similar to those we saw in the first quarter of 2012. Increases in our backup and messaging products primarily Visual Voicemail and the mid-quarter commercial launch of our NetWise Director solution more than offset a decline in our base connection manager business. The feedback from the commercial rollout of NetWise Director spend has been very positive and we anticipate continued pickup in revenues from this deployment in the third quarter of this year. In addition, we are excited about our new contract with T-Mobile USA for the next-generation connectivity software on mobile hotspots, smartphones and Windows 8 PCs and tablets, which will positively impact revenues towards the end of this year and into 2013. I will provide more information about this deal later in the call. We continue to carefully manage our costs, while maintaining sufficient investment in engineering and operations to support our sales opportunities. Our operating expenses for the quarter are down 13% from Q1 of this year and down 41% compared to first quarter of last year. Despite this lower cost structure our ongoing efforts to bring new and innovative solutions to market are paying off. I will provide more detail about our new solutions and related sales opportunities later in the call. Now I will turn the call over to Andy, to take you through the details of the Q2 financial results. Andy?

[Andy Schmidt:]

Thank you, Bill. First let me go through our customary introductory items. As we have in past quarter, we have provided non-GAAP results, a reconciliation of non-GAAP and GAAP results. The non-GAAP results discuss in this call net out stock compensation related expenses and non-cash tax expense or benefit to provide comparable operating result. Accordingly, all results that I refer to in my prepared remarks for both 2012 and 2011 are non-GAAP amounts. Our earnings release, which will be furnished to the SEC on Form 8-K contains a presentation of the most directly comparable GAAP financial measures and a reconciliation of the differences between each non-GAAP financial measure provided in the press release, and most directly comparable GAAP financial measure. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com. In a detailed manner for the financial modulus, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $1.1 million for the current period broken out as follows, $2,000 in cost of sales, $243,000 in selling and marketing, $213,000 in R&D and $619,000 in G&A. While we showed no GAAP tax benefit for the period due to fully reserving the tax benefit, we are showing a $2.2 million pro forma or cash-based tax benefit which is based on our expected cash base tax rate. Moving on, for the second quarter, we posted revenues of $10.2 million and a loss of $0.19 per share GAAP and $0.10 per share non-GAAP, a quarterly result compared to $16.1 million in revenue and a loss of $0.22 per share GAAP and $0.15 per share non-GAAP for the same period last year. International revenue was approximately $2.1 million this quarter across all business groups. Our Wireless segment reported revenues for the quarter of $8.7 million, as compared to $13.8 million last year. Our Productivity & Graphics segment posted revenues of $1.4 million, as compared to $2.2 million last year. Total deferred revenue at June 30, 2012 was $1.3 million. Switching to gross profit, non-GAAP gross margin dollars up $8.4 million, compares to $13.8 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 82.4% for Q2 2012, compared to 85.7% for Q2 of 2011. The reduction in gross margin is due to lower sales volume covering fixed, maintenance and support expense. Non-GAAP gross margins by segment were as follows, Wireless 83%, Productivity & Graphics 80%. Switching to operating expenses, non-GAAP operating expenses for the second quarter of 2012 were $14.1 million, which includes $77,000 return to profit from our restructuring reserve. Our Q2 2012 operating expense was $2.3 million lower than Q1 of 2012, as our cost reduction and restructuring efforts take full affect this period. From a year-on-year perspective, engineering expenses decreased 45%, selling and marketing expenses decreased 35%; administrative expenses decreased 24%. Total non-GAAP operating expenses decreased $8.4 million or 37% year-over-year as a result of our cost reduction efforts. Non-GAAP operating loss for Q2 was $5.7 million, as compared to a loss of $8.8 million in Q2 of 2011. Non-GAAP net loss for the second quarter was $3.6 million or $0.10 per share, as compared to a loss of $5.2 million or $0.15 per share last year. Cash decreased $6.3 million for the quarter, closing at $31.3 million at June 30, 2012. In regard to other matters, the company repurchased 250,000 shares of common stock this quarter at a cost of $424,000. Also, as you may recall, a shareholder class action and related shareholder derivative actions were filed against the company and various officers and directors last summer, shortly after we retracted our 2011 guidance. I’m pleased to report that on May 21, 2012, the court granted our motion to dismiss the federal securities fraud action -- class action and that the plaintiffs subsequently agreed to voluntarily dismiss that case with prejudice rather than trying to amend their complaint. Plaintiffs in the state and federal derivative actions have also agreed to voluntarily dismiss their cases. No payments were made to any plaintiffs in connection with any of these dismissals. In terms of housekeeping, we expect to file our quarter end 10-Q by the end of this week, which will represent our final financial statements for this period. At this point, I’ll turn the call back to Bill.

[Bill Smith:]

Thanks, Andy. Earlier this year, we announced our next-generation connectivity solution called QuickLink Zero that utilizes our SODA technology to create consistent interfaces across different wireless broadband devices. T-Mobile USA is the first carrier customer to license QuickLink Zero for mobile hotspot pucks, creating a truly plug and play wireless broadband experience to end users. Also, T-Mobile will deploy our QuickLink solutions to enhance the usability of smartphone-based hotspots and to extend the native connectivity features of Microsoft, Windows 8 platform on PCs and tablets through a customize metro tile. Our multi-platform QuickLink family helps operators promote their brand and services on both cellular and Wi-Fi only devices, such as the new Microsoft Surface tablet, allowing them to stay engage with subscribers, utilizing Wi-Fi tablets and laptops connected to mobile hotspots. T-Mobile USA is on the leading edge of delivering a convenient powerful broadband experience for their subscribers, using QuickLink for smartphone hotspots and more traditional connection methods as well. Transitioning from our connectivity solution to network traffic control, we launched two new additions to our NetWise portfolio in the second quarter; NetWise Passport for application level management of network resources and NetWise SmartSpot for managing Wi-Fi access from Apple iOS devices. These new products help to clearly differentiate our client centric approach to managing data traffic by adding more breadth to the platforms and used cases that we can support, while demonstrating the depth of our embedded software expertise. We believe that this combination of breadth, depth and commercial deployment experience with Tier 1 carriers makes our traffic management solution unique in an increasingly crowded data offload market. Experience is something that should not be downplayed and is certainly something that our customers value about Smith Micro. The commercial rollout of NetWise Director at Smith has transition from a three city pilot project to a full nationwide deployment and results have been extremely positive. The pre-installation of NetWise Director on new devices is now in process and expected to increase the activation of this service by customers. Smith continues to be a showcase account for us in traffic management, as well as with our Visual Voicemail and Voice-To-Text solution. And we expect to see continued growth in revenues from this account in coming quarters. The enterprise market is another area of our business that has made great strides in the past quarter. In June we announced two new customers of our video adaptive streaming solution, Guest-tek in Canada and Allin Interactive in the U.S. Both are technology techniques that serve the hospitality industry and both are using our video solution to stream protected content to set-top boxes and personal mobile devices at hotel properties. Allin is also doing the same thing on crew ships. Further, we conducted a survey of more than 700 frequent travelers that confirm strong market demand for mobile access to premium content and services during travel for both business and pleasure. The news resulting from the published survey and the customer announces -- and the customer announcements have garnered several new opportunities for us in the hospitality and other industries where secure delivery of video content is critical. Our Enterprise business is also growing in the public sector. For example, in Q2, we signed an agreement with the Districts of Columbia's Office of Unified Communications. They have licensed our enterprise QuickLink connectivity platform to support secure and seamless mobile connectivity for the D.C. Metropolitan Police Department, which is the 10th largest police agency in the United States. The successful deployment in D.C. has opened the door to several more opportunities in public safety across the country, as well as with general municipalities, airports, hospitals, universities and alike, all looking for secure reliable mobile connectivity and video streaming. We look forward to updating you on these opportunities in the coming months. Now, shifting to our Productivity & Graphics business, this quarter the team launched a new software title called MotionArtist at the annual Comic-Con Trade Show in San Diego, taking our expertise in 3-D animation and comic illustrations to new heights. We developed it powerfully and easy-to-use composition tool for digital comics that come to life. The sizeable market for digital comics and graphic novels is climbing for new levels of interactivity in the stories. In addition, comic creators need the power to export their work to open web format like HTML5 to reach the largest audience. MotionArtist is an elegant solution to both of these growing needs. The product was released as a free beta version last month, receiving a tremendous response from the press and professional artists. It will be generally available for commercial sale in the first quarter of 2013. In summary, we are making headway in all key areas of our business, consumer graphics software, video streaming, secure connectivity for enterprises and government agencies, mobile hotspot, Windows 8 connectivity and wireless data management. As we discussed last quarter, the data offload market is hot but it is also increasingly crowding. It requires extensive carrier valuation to complete agreements. Nevertheless, our device base policy-driven approach has been validated commercially and by wireless industry analysts and we remain confident in our business case in NetWise. We also remain committed to leading the market in connectivity and breaking new ground with premium applications that can help our customers generate revenue and form closer relationships with their users. As we move forward in our quest to return to profitability, we try to leverage the strength of our broad wireless and consumer software portfolios. Rather than focusing on narrow prongs with point products where we may face many competitors, we will be integrating many of our products together to form powerful solutions that address the more strategic needs of our customers. By enhancing and bundling our products into comprehensive solutions, we can elevate ourselves into a leadership position that exceeds our customers’ expectations and makes it very difficult with competitors to keep up. With that, operator, I’ll turn the call back over to you for questions.

[Operator:]

(Operator Instructions) And our first question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead.

[Mike Walkley:]

Great. Thank you. Good job on taking down the overall operating expenses. Any update on targets for potential break-even in terms of timeframe or revenue level? Thank you.

[Bill Smith:]

Yeah. As we’ve always said, our target is to try to get there by the end of this year. If for some reason -- that doesn’t prove to be possible, we do believe we’ll get there in the first half of next year. We feel very comfortable in that state. So in any of that, we see a return to profitability within the next four quarters for sure?

[Mike Walkley:]

Okay. Thanks. Bill, and then you talked about the key mobile hotspot opportunity. Can you give us any help on, maybe the potential size of that on the longer-term basis and when that hits the models, does that -- did I hear you right, it starts in the fourth quarter of 2012?

[Bill Smith:]

Yeah. That’s right, Mike. The way they view it, I think this is more like a traditional OEM product that we’ve talked about in the past. It will start relatively small. We’ll get some revenue in the fourth quarter and then it will continue to grow. And it should grow to be a significant contributor to our quarterly revenues going forward.

[Mike Walkley:]

Okay. Great. Thanks. And then Andy, any 10% customers in the quarter?

[Andy Schmidt:]

Yeah. We had Sprint at 40%.

[Mike Walkley:]

Okay.

[Andy Schmidt:]

And Verizon at just about 16%.

[Mike Walkley:]

Okay. Great. And then what’s should we read into your comments about the crowded data offload space, your change in strategy there or could you just update us also on how NetWise strengthened and how some of the customer’s crowds might be going in that space you’re talking about being more crowded now. Thank you.

[Bill Smith:]

Yeah. That’s a good question. The way I would view it is this. There are more competitors. We still have with other the best solution and that’s been proven time and time again in the trials that have either just been concluded or just beginning. So while we have more competition, we have the best product. Now, we’re working our way through it. And I think that we still got to come out on top. It doesn’t really represent a change in direction. But I think it really talks about is that with closing of the T-Mobile transaction, which is really for the connectivity software of the future. We now have a customer that will be shipping our QuickLink Zero, will be shipping SODA, will be shipping our QuickLink Windows 8 network of solution as well as and probably more significantly will be shipping software to make the use of Hotspots on smartphones easier and more productive for users. It’s a major step forward and it puts new life and new energy back into the connectivity space that we’ve dominated for years. Until you have the win, till you have the proof point, it’s difficult to talk about it. So the fact we’re talking about today as well as talking about what we’re doing on the NetWise front represent two major focuses, other company going forward and clearly, our premium products led by our visual voicemail, voice-to-text applications are significant contributors to our topline. And so we have three strong parties in the wireless space and the really cool part about is when you start cooking some of these products together. You create solutions that not only meet the needs of your customers and probably far exceed them. You also create some solutions where you are the only competitor in the market place that can service it. And that’s how we really differentiate ourselves and that’s where we think we can win business going forward.

[Mike Walkley:]

Okay. Great. One question, I’ll pass it on. So just to summarize with the momentum now with T-Mobile, is this going to be the key driver to get other carriers that maybe purchase profitability into 2013 or it is T-Mobile first-year momentum where Sprint gets you there, you need to get more carriers for some of these products on top of those two?

[Bill Smith:]

The growth of those T-Mobile and Sprint have been the backbone of our resurgence. We have other deals than that. It doesn’t take a lot more deals to get us where we need to be. It will probably take a few more and we’re well underway with those. These deals would have been in the process for a number of months, trials are being completed. We’re prepared to move forward. And I just can’t talk about it till I have a signed contract. But you can bet as soon as I do, we’ll be out talking about it.

[Mike Walkley:]

Okay. Great. Good luck closing those deals and I’ll pass it on to the next question. Thank you.

[Bill Smith:]

Thanks, Mike.

[Operator:]

Thank you. And our next question comes from the line of Charlie Anderson with Dougherty & Company. Please go ahead.

[Charlie Anderson:]

Good afternoon. Thanks for taking my questions. Just housekeeping, I wondered if I missed the breakout between wireless and product domain graphics and then also within wireless, I wondered if you could help me with how much were, sort of, -- your core connectivity versus some of the new products you have bringing to bear in terms of the competition of that revenue bucket?

[Bill Smith:]

Okay. So looking at wireless versus P&G, I’ll give that for you real quick. All right. So total wireless, total P&G to start with after Q2 is $1.4 million. Okay.

[Charlie Anderson:]

Yeah.

[Bill Smith:]

And lease total wireless had about $8.8 million.

[Charlie Anderson:]

Great. And that was in $8.8 million. Can you kind of give any additional color on -- how big was visual voicemail relative to the connectivity? I wonder if that connectivity has continued to stabilize that we’ve seen in the last couple of quarters?

[Bill Smith:]

Let me kind of address it this way. It’s similar to last quarter. The original, if you will, USB based legacy, connection manager type products is still in that $4 million to $5 million range, but little bit less than last quarter. And as Bill mentioned in his call, our new products that had come forward are more than offsetting the decline. And as we said last quarter, we expect the USB based connection manager to continue to decline. The T-Mobile announcement is a key announcement on how we said we’d start offsetting that decline with other -- with the connection manager if you will in the future. So when that came to fruition and as Bill said, we expect that it will start contributing this year and accelerating next year. So, we are starting to see that demarkation point where we’re bringing a new deals that are the connection manager, the future that offset decline in the USB type base business.

[Charlie Anderson:]

Got it. And T-Mobile deals, it sounds like with inclusion of pucks and then sounds like some PCs and some tablet potentially. If we just sort of looked at a total addressable market, it sounds like it be higher than we’ve seen in sort of your legacy business, right?

[Andy Schmidt:]

Right. You forget an important part with you, the smartphone…

[Charlie Anderson:]

Smartphone, yeah, I’m sorry, obviously, yeah.

[Andy Schmidt:]

Yeah. You had, kind of, exclamation point on your -- and your point is -- we used to be there in narrow, USB tied to the PC or MacBook market right. Now, we’re much broader, which is an important deflection point for the company. We have said all along that’s place we have to be and this is very strong contract for the very large carriers, so it’s a starting point for us.

[Charlie Anderson:]

Great. And then in terms of OpEx, should we expect it to decline further from here or is it kind of going to stabilize at this point?

[Andy Schmidt:]

What we said before which is we’re going to invest there as required, as Bill has commented and we’ve commented consistently. It’s difficult to forecast exactly when these deals are going to close. We’ve got plenty in the works. So it’s hard to forecast when they close. And then once the deal close, it’s always a measured rollout. But we’re not particularly patient people, so we will look at OpEx and [back to that as] required, if the deals are slower than we’re comfortable with, we will look at OpEx to bring it down again. But right now, we’re at a $14.2 million. We’ve taken over $10 million a quarter out year-over-year, doing a lot of hard work on that, and as Bill said, we really -- we feel we have the right level of investment at that level to roll the products out. But -- so if it’s not as quick as we wanted to be, we will definitely make changes as we go.

[Charlie Anderson:]

Great. Thank you so much.

[Operator:]

(Operator Instructions) And your next question comes from the line of Brian Swift with Security Research Associates. Please go ahead.

[Brian Swift:]

Thank you. I wondered, if you could give us a little bit more color on your pipeline of carrier customers like you have in the past. On your last call, I think you said you had maybe 10 trials going and that our conference in May, it was like 15. Can you give us any color as to, I mean, how many of these concluded and our out of the picture and maybe how some maybe moving further along as far as -- and contract discussions or something and any more color you can give us on the pipeline, it would be helpful?

[Andy Schmidt:]

Okay, Brian. Let’s see -- let’s take it in a couple of different takes. First off, we still have a very large number of trials ongoing. It’s a double-digit number. I don’t know exactly. It’s in the 10 to 15 range and so that’s still very active part of one of the things that we do. We have not lost any deals, where we have done trials. So that’s a very important note. We have trials therefore that are concluding and we are now moving to the next stage. And next stage is when you ask for the order. And we -- now we get to find out whether we are going to get in that. I feel very bullish about where we are. I feel positive. And I think if we will close the business that we need and we will get back to profitability and then we will just continue growing. We’re at a good spot. We are well-positioned. We have very strong products. We have an incredible employee base that’s very dedicated to making all this happen. And that’s why we think we are -- Brian I hope that answer your question, come back if it didn’t.

[Brian Swift:]

No. I think that’s helpful. Interesting part about that, none of the trials have dropped out of the picture, so that’s good. I mean, customers doing trials have dropped out of your picture.

[Andy Schmidt:]

Exactly. Exactly.

[Brian Swift:]

All right. Thank you.

[Operator:]

Thank you. And our next question comes from the line of Stephen Zaccone with Needham & Company. Please go ahead.

[Stephen Zaccone:]

Good morning. This is Stephen Zaccone on behalf of Rich Valera. Most of my questions have been answered. But can you briefly touch upon, how you are doing share wise at Sprint with the deal sourcing of its mobile client?

[Bill Smith:]

Can you ask that question again and speak louder please?

[Andy Schmidt:]

Yeah. It’s hard to hear you, sir.

[Stephen Zaccone:]

Sorry. Sorry. Good afternoon this Stephen Zaccone on behalf of Rich Valera. Can you guys just speak, talk about how you are doing share wise at Sprint with the deal sourcing of its mobile client with you and Birdstep?

[Bill Smith:]

As we’ve said there is deal vendor strategy there at Sprint. We are, I think, increasing the difference between our solution and the competitive solution. And as those kinds of things happen, we usually have the right to have a different conversation. And we look forward to do that.

[Stephen Zaccone:]

Okay. Thank you.

[Operator:]

Thank you. And management, there are no further questions in the queue at this time. Please continue.

[Bill Smith:]

Well, thank you all for joining us today for our second quarter conference call. And we certainly look forward to talking to you and reporting about the continued growth of the company at the end of the next quarter. Thank you very much and bye.

[Operator:]

Thank you, ladies and gentlemen. This does conclude our conference for today. If you’d like to listen to a replay of today’s call, please dial 303-590-3030 or the toll free number of 1800-406-7325, and enter the access code of 4553101 Thank you for your participation. And you may now disconnect.