Smith Micro Software, Inc.
Q1 2013 Earnings Call Transcript

Published: 2 May 2013

[Operator:]

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro Software First Quarter 2013 Financial Results Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, May, 1, 2013. I would now like to turn the conference over to Todd Kehrli of the MKR Group. Please go ahead, sir.

[Todd Kehrli:]

Thank you, operator. Good afternoon and thank you for joining us today to discuss Smith Micro Software’s first quarter 2013 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 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 CEO; Andy Schmidt, Vice President and Chief Financial Officer; and Carla Fitzgerald, Vice President of Marketing. Before we begin, I want to caution that on this call, the company will make forward-looking statements that involve risks and uncertainties, including without limitation, 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 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, customer concentration given that the majority of our sales depend on a few large client relationships including Sprint, 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 Form 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 press release and call are made on the basis of the views and assumptions of management regarding future events and business performance as of the date of this 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, 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. Bill, please go ahead.

[Bill Smith:]

Thanks, Todd. Good afternoon and thank you for joining our conference call to discuss our financial results for the first quarter of 2013. Total revenues for the quarter were $11.6 million, up 14.7% from the same quarter last year. Non-GAAP gross profit was $9.2 million for the quarter with non-GAAP gross profit as a percentage of revenues of approximately 79%. Our non-GAAP operating expenses for the first quarter were $14.2 million, down 13.4% versus the same quarter last year. Our non-GAAP loss per share of $0.08 for the first quarter is a decrease to nearly half of last year’s first quarter loss of $0.15 per share. As expected, the seasonality of our consumer business impacted the sequential growth trend of our revenues in the first quarter. However, our Q1 performance is improved on a year-over-year basis thanks to increasing adoption of our NetWise and CommSuite products along with a steady long tail on the legacy QuickLink business at Verizon and other carrier customers. Our Windows 8 and Mobile Hotspot Solutions continue to perform well for T-Mobile and we see market demand for more secure more reliable hotspot connectivity and wireless network management extending to enterprises and vertical markets. We have also made good progress establishing a wider partner network and our sales pipeline is growing as a result. Before I elaborate on the market traction and latest opportunities, Andy Schmidt, our CFO, will walk you through the details of our Q1 financial results. Andy?

[Andy Schmidt:]

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 compensation related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly all results that I refer to in my prepared remarks for both 2013 and 2012 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 the reconciliation of the difference between the two. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com. In detailed manner for financial modelers 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

[Bill Smith:]

Thanks, Andy. More than a decade ago Scott McNealy, Former CEO of Sun Microsystems, coined the phrase the network is the computer. Today, wireless operators are realizing that their networks now extend all the way to the smart devices that are connected to it. And the lines between device features, value added service s and that work operations are blurring more every day. That's why our connect, control and capitalized value proposition resonates well with period. Connectivity solutions drive network usage, control solutions manage network usage and capitalized solutions monetize network usage. We have developed our portfolio to support and enhance each of these areas, which is good for carriers as well as our mutual customers and business partners. Last quarter, I described an important focus for Smith Micro on establishing new go-to market partners to apply our connectivity expertise in areas such as public safety, utilities, education and other industries. Recently, we announced a partnership with Getac, a leading manufacture of rugged mobile computers, which optionally will include enterprise class connection management applications with their laptops targeted for mobile field workers and first responders. The reliability and security of our flagship QuickLink solution as well as the ability to provide seamless transactions between 3G, 4G and Wi-Fi networks makes our software a perfect fit for Getac's rugged devices. We have also established a partnership with a full service provider of wireless and telecom solutions targeting the education industry. This partner will resell and deploy our NetWise client application on Android based e-readers used by K-12 schools for online learning and electronic text books. Our solution will help schools effectively manage data traffic over 3G, 4G and Wi-Fi networks to maximize performance while minimizing costs. It will also provide an extra layer of device management to ensure tablets used by students are secured and protected under the Child Information and Protection Act. Our international market reach is expanding through new reseller agreements with leading system integrators in Europe, Latin America and Asia and because our device. And network management solutions are standards based and accessible through well defined software development kits, they can be customized and integrated with other applications and services to meet the unique needs of each customer. For example, by partnering with a variety of Wi-Fi providers, we can incorporate their Wi-Fi access databases into our connectivity and traffic management solutions that automate discovery and authentication for end users. The benefit to operators is the ability to quickly access broad Wi-Fi networks to offload their data traffic, while still ensuring that Wi-Fi connections meet acceptable performance levels based on real time network conditions and operator policies. Quality of experience is an area where NetWise continues to outperform competitive products. We are very pleased to have been selected by second carrier in North America to implement an advanced traffic management strategy for their network that supports several million subscribers. During extensive trials, our solution proved that it can enforce Wi-Fi offload policies based on radio signal strength, data throughput, link speed and many other factors that effect performance. Rather than throwing data traffic over to Wi-Fi without any visibility into performance, NetWise assures that high throughput applications like streaming video can be run over Wi-Fi without interruption to meet minimum service thresholds. We expect to begin commercial deployment with this carrier later this year. We are beginning to grow market traction with our Hotspot Solution as well. The recent launch of T-Mobile’s Sonic 2.0 Mobile HotSpot the second device to include our SODA technology was praised for its compatibility with Windows 8 carrier applications that allow users to easily access real-time data usage information for every connected device. The carrier application is our QuickLink MiTile solution which is been rolled our commercially by both T-Mobile and Sprint and is now being evaluated by operators in Europe and Latin America. The interest by carriers to make hotspots more manageable is consistent with a growing market demand for more secured and affordable mobile hotspot service. In Q1, we conducted a survey of consumers asking about their mobile hotspot usage, and last month we commissioned a follow-up survey of enterprise IT professionals on the same subject. The findings show that almost half of all IT managers did not feel they have adequate controls over the mobile hotspot devices used by their employees. For those companies that allow both dedicated hotspot devices and smartphones used in hotspots, 46% saw an increasing support associated with their usage. And regardless of the type of hotspot device used 75% of respondents listed security of mobile hotspots is a top concern. Smith Micro will be publishing the full survey results in a few weeks and conducting a web conference that shows how our QuickLink hotspot solution addresses these concerns for smartphones and pucks. We believe there is a significant market opportunities for our hotspot solutions with carriers as well as directly with enterprises and consumers. Despite the seasonal decline in overall revenues our Productivity & Graphics group saw better than expected direct business in Q1 due to a successful launch of the new MotionArtist title as well as robust sales of Manga Studio 5 and Anime Studio which were up significantly from Q1 of 2012. The retail portion of the business continues to solidify with new distribution partners now on board domestically as well as in China, Korea, India and the Philippines. We continue to increase our marketing presence at (inaudible), Sam's Club, Office Max and Staples as well as through new partnerships with Newegg and TigerDirect and by growing alternative channels through strong relationships with Avanquest OEM and (inaudible). The development work we are doing to integrate our graphics and wireless technologies is producing positive results. Last week, our CommSuite solution which brings delightful innovative Avatar Messaging to mobile users was selected as a finalist in the Emerging Technology Awards program of CTIA Wireless. Compelling visual messaging applications are a key strategy for helping wireless operators compete with over the top apps. Several large operators have told us that they are losing up to $1 billion per year in messaging revenues due to broad adoption of over the top messaging apps. To address this challenge CommSuite solutions can be rapidly deployed by carriers using a frictionless premium business model that drives recurring revenues through add-on modules and content. We expect our first commercial launch of Avatar Messaging in the U.S. to be in the third quarter of this year. Finally, we recognize that it’s not just innovative software our customers and partners seek from us. These are expertise and creativity developing new marketing methods and deployment strategies to better engage customers drive adoption of new services and ultimately grow revenues. Technology is a tool to achieve a business strategy. By being a business partner first and a software developer second Smith Micro is helping our customers on both fronts. And with that operator, I’ll open the call for questions.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And our first question comes from the line of Mike Walkley with Canaccord. Please go ahead.

[Mike Walkley:]

Thank you. Bill, historically your business seems to be better in the second half than the first half of the year that kind of happen -- how you see the year shaping up? And also, could you talk about just some of the different products in the pipeline and how the business might improve as the year plays out?

[Bill Smith:]

Historically, if you look at our numbers, we always have a little softer quarter in the first quarter due to the normal trend in the consumer part of our business, where they have a big fourth quarter and it falls off in the first quarter. So, this is fairly consistent. We typically look then to grow our revenues throughout the balance of the year, which does tend to resolve in the back half of the year been stronger than the first. As far as products, we’re very happy with our overall product mix on the connectivity side of our QuickLink to connection management as well as our QuickLink hotspot products both for pucks and for handsets. On the network control product, clearly our NetWise continues to grow and mature, and it’s a product that continues to evolve to solve new uses that are coming from our customers and our prospects. And on the capitalized side, our strong focus on our visual voice, voice mail with add-on product offerings like the avatar messaging along with our video capabilities really provide the backbone of the wireless business. On the consumer side, yes, we have launched new titles but if you look at our numbers call brand titles such as Poser and Anime Studio continue to dominate that business.

[Mike Walkley:]

Thanks. And just on the NetWise product, is that still growing throughout the year with Sprint and then the new customer so that’s a sequential growing business. I know it can be lumpy but it’s still got room to grow throughout the course of 2013?

[Bill Smith:]

Well, we certainly hope so. We’re working hard to make sure that happens. Yes, we all know there is no guarantee but that - that would be the way we've structured our business cases and that we’re working towards.

[Mike Walkley:]

Okay. And then with the features adding to your visual voicemail and I think you said the third quarter, do you think that business has a step function up in the back half of the year?

[Bill Smith:]

It should. If you look at it from a standpoint of what happened since the beginning of 2012 you have seen a steady growth in that overall revenue base as the number of users that are utilizing the various offerings grow. So, I see no reason to expect that to change.

[Mike Walkley:]

Okay, great. And so, Bill, I guess, Andy, when you study your business via the current gross margin level and OpEx level calculate somewhere around $17 million to $18 million in revenue just to get to a kind of pro forma breakeven. Is that kind of how you are sizing the business and do you think those levels are achievable on a quarterly run rate by the end of 2013?

[Andy Schmidt:]

I think, the way you choose where we need to get to is probably right on. However, I want to go back to what I said at the beginning of the year, when we did the year end conference call. I said our goal is to be profitable by the end of the year and there is two ways to do that. You can grow revenues or you can go the other way which will obviously implies expense cutting as well as revenue growth. We retained that right, as the management team we will exercise that right to gain profitability to the end of the year.

[Mike Walkley:]

Okay, great. And thanks for taking my questions. And hopefully it’s on the top-line and not the expense reductions but it looks --

[Bill Smith:]

Yeah that’s always what – that’s what we all hope – hopeful that I just had to say it again thanks.

[Mike Walkley:]

Thanks for reminder. Good luck with all your different programs.

[Operator:]

Thank you. Our next question comes from the line of Howard Smith with First Analysis. Please go ahead.

[Howard Smith:]

I just wanted to first follow-up on the second carrier in North America for NetWise Director. It sounds like it’s through the trial period you said a few million customers perhaps in commercial deployment later this year is it a matter of you’re getting uncertain devices or what is the gating factor for the rollout and how would you expect that to be rolled out by that carrier?

[Bill Smith:]

Okay. Let me clarify something you just said, maybe I read it wrong when I said it so. This particular carrier has a millions of subscribers and we would expect that we would eventually have our software on most of those, I mean, at least all of the Android devices, and we are very busy getting Windows 8 devices on online as well. Clearly, it’s a big focus. For a carrier to launch this kind of an undertaking where they’re going from no intelligent network management, they don’t have clients on the devices, all these things take time, and we need to work closely with the carrier to come up with the deployment strategy that makes sense. It doesn’t introduce risk to their business case and allows them to achieve the goals that they’ve set out and why they chose us to begin with. So, there are many way to get the software on the device. Most common one is the Maintenance Release of the Android operating system something that pin controls by the device OEM. So, we have to work with the OEMs to get the software pushed out get it online. Probably the easiest part is to get the service side software up and running within the carriers' infrastructure, but it is a process that grows over time. And I think if you look at the revenues that we’ve generated from Sprint starting with the initial launch of the NetWise product in the early part of or mid part of last year don’t hold me that I can’t recall exactly when, you’ll see that it has grown over time as more and more devices come up online.

[Howard Smith:]

Okay. Thank you.

[Bill Smith:]

So hopefully that helps.

[Howard Smith:]

Yes. And speaking of Sprint and others, can you give us the 10% revenue breakdown.

[Andy Schmidt:]

Sure, Howard. Sprint this period was 55% and we had Verizon in about 16%.

[Howard Smith:]

Okay. And last question from me has to do with the international revenue. It looks like it was down fairly significantly year-over-year after being down a little bit for the full year 2012. You continue to have kind of wins and interests there but the net result doesn’t -- hasn’t taken hold I should say yet. Maybe you could just add some color to some of the trend lines there.

[Bill Smith:]

Okay. I think we talked about this on the last call I think we’ve taken a really hard look at where we are selling products in various parts of the world. And it’s good to be able to close an account and sell the product to see if it’s better to be paid for. So, we’ve had it to narrow some of our focus to get to the parts of the world that we don’t have that kind of a challenge on. So, we are clearly focused on the European market, we’re clearly focused on the Japanese market. So I think we – that could be part of the what you’re saying.

[Howard Smith:]

That makes a lot of business sense.

[Carla Fitzgerald:]

This is Carla, Howard. I just also wanted to point out that one of the ways in which we are looking to be more effective internationally is through partners. For example, one of our major partners in Europe is Gemalto, and obviously they have an extensive reach in the operator community not just in Europe but around the world. And so, that is an example of efforts that we’re taking to make our international presence stronger and give us broad opportunities and more successful ways to engage operators nationally.

[Andy Schmidt:]

Yeah. I guess one of the other nice things about working with office like Gemalto is we don’t have to worry about anything. They can represent us in parts of the world that we may not be particularly excited about going into for a variety of reasons and its just good solid business.

[Operator:]

Thank you. Our next question comes from the line of Steven Zaccone with Needham & Company. Please go ahead.

[Steven Zaccone:]

Yeah. Hi, guys. This is Steven Zaccone on for Rich Valera.

[Andy Schmidt:]

Yep.

[Steven Zaccone:]

Just quickly congrats on the second carrier win. I just wanted to know, you talked about multiple field trials in the past. Do you expect to announce any additional carrier wins this year?

[Bill Smith:]

Let’s just say, I’m very hopeful and I that‘s something that I feel that, that‘s how we grow our business. So, we’re highly focused on announcing more wins. I think I talked about it on the last call 2012 is a little frustrating and that we had a number of different trials around the world but we didn’t come to closure. But I also said I though that in 2013 you would start to see carriers become more serious and start laying down bets on exactly how they, they want to step up to this need. This first carrier is one of those carriers they have been in trial last year, the second carrier, and so this is pretty much consistent with what I said. We’ll continue to work on the rest and we’re adding to that as we go along. So, we’ve a lot of activity; the proof is in the pudding.

[Steven Zaccone:]

Okay, great. That’s very helpful. And then just wondering, if you could elaborate on how the deployment at Sprint is rolling out relative to your expectations with the NetWise Director?

[Bill Smith:]

It’s working quite well. The product has been almost flawless. We have done no in the field update to the software caused by any kind of bugs, problems or otherwise. I believe our customer is very pleased with the quality of the product and they way it’s performing. So, it’s been a good first test and its kind of a big carrier to do your first test done but I think it’s gone reasonably well.

[Steven Zaccone:]

Great. And then just lastly modeling question, OpEx came in little higher than our estimates, how should we think about that trending for the remainder of the year? I know, we’re cognizant of the breakeven target by the end of the year but --

[Andy Schmidt:]

Sure

[Steven Zaccone:]

Just how should we think about that?

[Andy Schmidt:]

Sure, sure. Sure. At this point, we’re assuming flat. It’s primarily headcount driven and again the reason why Q4 was lower than, if you look at Q3 and then certainly Q1 has a lot to do with the fact that we’re primarily a California company with pretty high end engineers. So, we hit the FICA cap come fourth quarter both as a company and individuals obviously do. Some expenses are artificially lower like payroll related tax. So, when you look at our Q1, we have got certain amount of money invested in Mobile World Congress, which is a seasonal expense and then, like I said, we’re back on the FICA expense, payroll related expenses to a pretty good net. So, when we look going forward 14.2 is assuming relatively flat headcount.

[Operator:]

Thank you. And our next question comes from the line of Michael Latimore with Northland Capital Markets. Please go ahead.

[Ryan MacDonald:]

Hi. This is Ryan MacDonald on for Mike. With the second carrier went for NetWise can you kind of quantify what you could thinks this opportunity could be in terms of revenue once fully deployed?

[Bill Smith:]

Let me - let’s cut a hole on that. I can’t even give you the names right now. So, rather than try I understand the reason for your question why don’t you wait until we can actually name the name and then we can talk about size because it will be obvious based on who they are.

[Ryan MacDonald:]

Okay.

[Bill Smith:]

Sorry to dodge the question but I think it’s the right way to help it.

[Ryan MacDonald:]

No, no problem at all. In terms of with the T-Mobile would you expect any – how many of subscribers do you expect to build ahead for T-Mobile this year?

[Bill Smith:]

On the hotspot side?

[Ryan MacDonald:]

Yes.

[Bill Smith:]

Again that’s kind of sense of how – that’s a question you have to ask T-Mobile, I really as a partner can’t get into that so we – the products performing extremely well. The new product Sonic 2.0 is a full 4G device it’s being very well received in the marketplace. I think as we mentioned earlier we did a study that we could commission the hotspot usage and the interesting time for – the interesting point was that T-Mobile scored the highest of all the carriers as far as how the users use the hotspot device and the ease of use.

[Ryan MacDonald:]

Okay, okay. And then any – and then my final question is just on you went through I think you said with the $3.5 million in cash this quarter is 3.1?

[Andy Schmidt:]

About 3.8.

[Ryan MacDonald:]

3.8, okay. I mean is there – is that a concern at all going forward throughout the remainder of the year is there a level that you want to try and keep that cash level above?

[Bill Smith:]

Rather give you that obviously is a concern and that’s why we’re focused and said that we would be profitable by fourth quarter I mean that’s an absolute necessity we will be very prudent in the use of our capital as we have been. And in no way shape to perform where we let this thing go the other way so there is a lot of leverage to pull. We operate with about an 80% margin so we have a lot of leverage in our business case and we have a lot of different options available to us and fully in 20 years all that we need to achieve our goal.

[Operator:]

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. Sort of going off that last point I wonder pricing as a level to pull, could there be a elasticity in this market to convert all these people have been testing for quite a while to sort of move along and adopt the solution?

[Bill Smith:]

Well, it’s interesting question. Clearly there is a play there and the way to look at is like this the basic Wi-Fi offload is an area where you can see the most pressure on price because there is a number of players that can do it. We firmly believe nobody has technology or a platform that even approaches ours but that’s an area where you could hold the price level if you want to but then on the backside of that is all the advanced use cases all the new ideas of how you can take the fact that you now having an intelligent client in the device in the field talking to a server within the infrastructure, this is where we can really shy this is where the strength of our software architecture and just the overall capabilities that Smith Micro brings to the table and make the difference. And so if we do a little bit of price reduction on the WiFi offload we can make it back more than that on the backside so that’s something to keep in the back of your mind.

[Charlie Anderson:]

Perfect. And then I don’t know if I missed it but do you give you breakdown on the wireless revenue between the two categories where you used to?

[Andy Schmidt:]

Probably not, okay. So if you look at basically that’s got legacy connectivity as well as new offering in connectivity that was about $4.4 million. And then when you consider our new offerings to CommSuite and NetWise that’s about 5.8.

[Operator:]

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

[Brian Swift:]

Yeah. Just like maybe just to follow-up on the question about your pipeline with carrier surrounding the NetWise product I know on previous call I had asked if you expect to do anymore and but could you maybe elaborate a little bit more on how many companies are in your pipeline that have finished doing the trials that you were doing last year you mentioned you are in negotiations with the number of carriers. Could you just kind of give us a little color on how many of these that you are active with even though you don’t, you can’t be assured that you are going to land in near these things but just give us a little bit of an idea how many more that might be out there?

[Bill Smith:]

If I answered that question, you guys got to keep scoring and drive me crazy. So, what I can say is that we’ll have a - we’ve a number of carriers that we’re dealing with. They are of a global nature and pretty much around the world. You know that because we told you last year, we had 15 to 20 trials on going at all times some ended and other picked up. So, there is a number of carriers out there that we’re working with. And as soon as we have the deals done, we’ll be the first ones to (inaudible) out and tell you all about it.

[Andy Schmidt:]

And something to add to that is, last year as Bill is pointing to, we were working primarily direct and Carla alluded to the point that we now have some very interesting resellers untapped so that’s going to help quite a bit as far as numbers of people in play to where. It’s less trialing and more actually getting a foothold where there is strong infrastructures place by our partners where we can piggyback along with and that’s probably going to be a lot better vehicle for us and probably a lot better way for us to talk about the business versus just direct trials.

[Operator:]

Thank you. And I’m showing no further questions. I would like to turn the call back over to management for any closing remarks.

[Todd Kehrli:]

Thank you for joining us on the call today. For those of you who are planning on attending CTIA in Las Vegas at the end of this month I would encourage you to reach out to the MKR Group if you are interested in meeting with Bill while he was at the conference and we can certainly arrange the meeting. That’s it and thank you for everything and have a good day.

[Operator:]

Ladies and gentlemen, this concludes the Smith Micro Software first quarter 2013 financial results conference call. If you would like to listen to a replay of today’s conference call please dial 1800-406-7325 or 303-590-3030 and enter the access code 461-2071. We’d like to thank you for your participation and you may now disconnect.