Smith Micro Software, Inc.
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro Software Second Quarter 2013 Financial Results Conference Call. During today’s presentation, all lines will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday, July 31, 2013. I would now like to turn the call 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’s second quarter 2013 financial results. By now, you should have received a copy of the press release discussing these 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 Chief Executive Officer; 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 risk 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 Smith, Chairman and 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. 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 second quarter of 2013. Total revenues for the quarter were $10.5 million, up 3.1% from the same quarter last year. Non-GAAP gross profit was $8.1 million for the quarter with non-GAAP gross profit as a percentage of revenues of approximately 77.2%. Our non-GAAP operating expenses for the second quarter were $14.2 million, resulting in a non-GAAP net loss of $0.10 per share for the second quarter of 2013. Revenues in the second quarter were 9.6% lower versus the first quarter due to several factors including the maturation of our initial deployment of our NetWise Director solution, delays in commercial launch of new NetWise and CommSuite initiatives and continued softness in our legacy connection manager business. As a result of our lower revenues, the Board of Directors has approved a restructuring plan that will reduce expenses by closing and consolidating certain facilities and by reducing our worldwide headcount by approximately 25% to 30%. We believe the cost savings from these actions will put us in a better position to achieve our goal of returning to profitability by the end of the year. Before I discuss our company progress and priorities for the remainder of the year, our CFO, Andy Schmidt will present the details of our second quarter performance and restructuring plan. 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 differences between the two. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com. June year-to-date revenues for 2013 were $22.1 million, up from $20.3 million from June year-to-date 2012. Wireless revenues increased $1.3 million or 7.6% June year-to-date 2013 versus 2012 to approximately $18.8 million. Productivity & Graphics revenues increased $0.5 million or 16.4% June year-to-date 2013 versus 2012 to $3.3 million. From a non-GAAP perspective, the June year-to-date 2013 loss per share was $0.19 as compared to June year-to-date 2012 loss per share of $0.25. In terms of our currently completed quarter, let me provide some detail. 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 $1.1 million for the current period broken out as follows

[Bill Smith:]

Thanks, Andy. As I mentioned in the past, there was more than one path to profitability, the restructuring of the company which is now underway brings us closer to profitability by better aligning our expenses to current bookings. However, we are here to grow the business not just right size the organization. Many of the changes we are making our design to improve our execution, including changes in sales leadership, refocusing our engineering teams on making products adoptable for new markets, and more efficiently engaging customers and partners who want to use our technology in unique ways. These are critical changes that we believe will allow us to grow our business with more efficient use of resources. As evidenced of the power of strong relationships, we can point to the recent win of a new NetWise customer in Latin America through our partnership with Gemalto known largely for the smart card, Gemalto is a world leader in digital security and mobility solutions and they are now integrating NetWise into their robust connectivity and device management platform .We are excited to work with Gemalto as they rollout NetWise to support Wi Fi offload for an operator in Argentina, one of the fastest growing markets in Latin America. We believe our relationship with Gemalto will lead to more international opportunities for integrated device connectivity and traffic management. We are also pursuing a similar integration strategy domestically with partners like Manage Mobility, a provider of custom wireless solutions for enterprise, public sector and government clients. By integrating our device management and traffic management technologies with their wireless campus management products, Manage Mobility can now offer specialized connection manager for cater to our schools that are now deploying tablets for mobile learning. The new solutions provides secured, one touch connection to preferred networks, manage your cellular data usage and uses advance policy management to enforce data traffic through a content filter in order to block access on unauthorized website and software downloads. Integrated our technology with third party products does require an investment, time and resources particularly when industry standards for interoperability are still evolving. For example the wireless network stated to enable automatic switching between 3G, 4G and Wi-Fi networks called A&DSS is still on its infancy from a commercial standpoint. We see this as a hurdle in moving operators to adopt advanced traffic management solutions like NetWise. To address this problem, we introduced the tool kit and partner program focused on A&DSS into operability. Our objective is to mitigate risk for operators by working with partners like Openet and others to validate their net our NetWise clients and their policy servers that they can talk using A&DSS. By promoting standard based solutions that are proven to interoperate, we pave the way for operators to build advanced policy and management capabilities into their networks sooner rather than later, and we are well positioned with NetWise to enable those capabilities. Continuing on this theme of integration with partners, recently we have integrated our comp visual messaging solutions with the pin side media plus mobile advertising platform powered by Sprint to deliver targeted mobile ads to subscribers who opt in for advertising. Mobile advertising is a huge opportunity for operators, but it’s critical that their advertising strategies are based on convenience and value for the subscriber. There is plenty of data that shows consumers are opened to advertising that is relevant and non-disruptive. The model we have implemented in comp suite meets those requirements giving operators the ability to promote advanced messaging services while subscribers interact with more traditional voice and SMS based messaging service. Subscribers have the choice to subsidize a premium service by accepting advertisements or paying a monthly fee of premium services to remove advertisements. Either way the operator can monetize the premium service with no upfront cost, and Smith Micro can share the revenue generated by the monthly fees or the advertising. This is an example of how we are making our products easier for operators to adopt by making them easier for subscribers to adopt. Despite being primarily a white label software provider in the wireless space, we know a lot about how consumers buy software through our Productivity & Graphics business which I’m happy to report is doing very well. In the second quarter of 2013, our productivity and graphics group saw a 40% increase in revenue from direct sales versus Q2 of 2012 and a 42% increase over Q1 of 2013. Much of this growth can be attributed to the strong new product releases proposals and modest video which were well received by our growing community of professional and amateur and graphic artists around the world. We also launch new solutions for picture animation called MotionArtist which performed recently well for an entry level animation product. We continue to expand our worldwide distribution for our consumer projects with partners like Avanquest in the US and Europe, Synnex in Canada and with Ou-Lei in China. We are also expanding into the electronics software distribution market with new way in Amazon. As you now heard, the markets we participate in, continues to offer new opportunities that allow us to take advantage of our deep domain expertise in connectivity, device management, visual messaging and the wireless industry standards. While also leveraging strong partner in channel relationships that will help us to overcome the struggles we have had in failed execution. We have new sales leadership in place to help drive new go to market strategies and better overall execution to develop a strong and fruitful pipeline. Our confidence in our product portfolio is still high, but we are not resting on what we have today. Despite our smaller size after the restructure, we are still a company of innovators. We will continue to invest, apply our technologies as embedded software components for device and chips makers, customizing it and integrating our solutions to serve key enterprise markets and delivering more over the top applications with consumer and the network providers to service them. Focus and execution are the company’s top priorities, and we look forward to sharing our progress with you in the coming quarters. With that operator, we can open the line for questions

[Operator:]

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

[Matt Ramsay:]

Yes, thank you very much. This is Matt Ramsay on the call today for Mike. Thank you for taking our question. I guess just to start off on the revenue side, Bill maybe you could walk us through a couple of things. The first being you talked a bit about the maturation of NetWise revenue, maybe you could talk a little bit about what portions of that NetWise revenue and some of your current revenues are recurring in nature and how much need I guess future sales to be driven to continue to grow? And second, you talked about some delays in rollout of the new programs. Maybe you can talk about the nature of those delays, whether they are just I guess delays in getting the deals done or whether they are technical in nature? Thanks.

[Bill Smith:]

Okay, let me try it and if I don’t answer all your questions come back. I think the way to view the NetWise deployment we get paid as new devices are released into the field. In both cases of - both parts of your question most of this revenue predominantly comes from Sprint. The Sprint’s executive team and the Sprint team in general have been very busy over the last few months with their transactions both with Clearwire and Softbank. Clearly I think it slowed a few things down, we expect them to pick back up now that all of these transactions are closed. Unfortunately they did affect our revenue in this quarter this is basically how we look at it.

[Andy Schmidt:]

And Matt, this is Andy, another way to consider it as well is a normal launch of NetWise type product, it will include catching up with the let’s say devices that are deployed in the field, so when we start out the program we’re going to have acceleration of devices where we are catching up with units in the field. And then it normally migrates to brand new units that they are bringing, brought to the market. So once again that’s going to have so much seasonal effect too and that carriers don’t always consistently bring new phones to the market. They follow certain patterns to match their marketing programs. And also depends on who, what phone device manufacturer is bringing the superstar phones in the market. A regular type phone will have X amount of units where a superstar type phone like an iPhone or a Samsung Galaxy 4 what have you is going to be X times more market penetration for instance. So as Bill pointed out we’ve matured on our Sprint rollout but we will continue to roll forward as new devices are released but will be somewhat seasonal depending on how new devices are brought to the market.

[Matt Ramsay:]

Great, thanks for the additional clarification. I guess Bill just following up on that with I guess well publicized different dealings that Sprint had over the last couple of quarters and you talk about how that might delay some of your rollout but obviously taking this pretty large and dramatic restructuring that you guys are now going to undertake it sounds like you are in your breakeven trying to lower the breakeven point and maybe your go forward TAM or your go forward opportunity for those products, in your view has that come down now, and that’s why you are taking the restructuring from that or is it more driven by the goal to breakeven by the end of the year rather than what the forward TAM looks like for those products. May be you could talk a little bit about the forward opportunity at Sprint and given all the changes they’ve had.

[Bill Smith:]

Okay. Yeah, I said over and over again that our goal as a company is to get profitable in the fourth quarter. I also said there are two ways to do that. One was I sometimes called the right way is to grow your revenues to a level that you just naturally turn profitable. And then I showed there is that other way and the other way represents a growth in revenues but also a reduction in overall expenses. I’ve chosen to present to our Board and they approved a plan that takes the second path. Now does that mean that I think we can’t reach the level of revenues that I hope we could do if we were going to do it what I call the right way? No. I just - pragmatic about the timing. This is really more a question of timing of revenue flow and as then anything else and yes, yes, I think my job as CEO and Chairman is to try to bring value to our shareholders and one of the best ways to do that is to get this company back into profitability.

[Andy Schmidt:]

Matt this is Andy again, just expanding on what Bill commented on, again much refers to timing that frankly build - our sales people have somewhat limited capability to affect and that has to do with how we book revenue and revenue recognition rules and what not so that’s going to also have play a factor on whether or not we’re book profitable in Q4 versus profitable from let's call it a bookings perspective and as the deals close. So there is a number of variables that are going to play in on that and as Bill said being prudent we’re cutting the workforce but it's probably more of a midstream type cut. In other words, we’re still counting on closing business that’s going to bring us profitable – make us profitable while reserving a good portion of our R&D capability. So we still need to close deals but we’re confident that we will, the timing as such will play out in the next couple of quarters. And we’ll communicate each quarter how we’re doing on the timing and will be clear with everyone about what portion of deals we can recognize from the accounting perspective, and what portion of deals might be actually considered just bookings. So it’s a bit of a wait and see but we feel we’re on the right path.

[Matt Ramsay:]

Okay, great and I guess one more question from me and then I’ll pass it on, maybe Andy you mentioned a headcount reduction target in the prepared remarks and in the press release. Couple of questions around that I guess how does that relates to the overall OpEx, or what percentage of your total OpEx and different line items is related directly to headcount. And secondly how much of the reduction in OpEx should we expect in the third quarter numbers given timing of reduction versus the Q4 number, and I guess it looks like just back of the envelop may be 12.5 to 13 million is roughly the new breakeven point, anyway I guess it's more of a statement than question but any response, thanks.

[Andy Schmidt:]

Sure, and this is probably a good time for everyone just to give some broad parameters you know for modeling. As we have discussed before we've talked about the size of our workforce and I am just going to use round numbers here. Post our restructuring here and as we said in our 8-K and then what I said in my remarks here, our restructuring is actually going to take place between now and through the third quarter. So the third quarter is going to be more of work in process to get us in the right place fourth quarter. Come fourth quarter we expect to be roughly 250 heads which still include 150 in engineering and R&D line, so if you can tell we are still preserving a big chunk of our engineering capability, and we still have a very significant workforce at play here that's a key take away. When it comes to expense, again I will just give you some broad numbers. In Q4, not Q3 because Q3 again is going to be a work in process as we go through these different aspects. Q4, we expect to drop our OpEx from this quarter as 14.2, you are probably going to see something right around 11 and that will bring our breakeven down to somewhere little bit over $13 million in recognizable revenue. So those are the parameters we sent for, that's our Q4. Q3, once again this is the headcount reduction, the work and facility closures are consolidation etcetera that's going to occur through September 30th, in other words it's phased and done in orderly manner and as we go forward, we will keep you up-to-date as far as how we are using cash to affect those changes. But you will see a large charge in Q3 called the restructuring charge that we refer to once again in our 8-K in our early marks that are going to be between $ 5 million and $6.8 million in our Q3 quarter. You will see that large charge and you will see a very clean looking quarter in Q4.

[Matt Ramsay:]

Right, thanks and best of luck gentlemen for the restructuring.

[Operator:]

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

[Charlie Anderson:]

Hey, good afternoon, thanks for taking my question. Just a sort of ahead on $13 million breakeven point, it's not far where you were a couple of quarters ago but it is looks a little bit far from what you just reported so I wonder just kind of taking your confidence level on reaching that goal.

[Bill Smith:]

Sure, and that's good question. Clearly, I have shuffled the deck. I have new management running sales and this particular choice was one that made about six to seven months ago and he ran strategy for that period of time given an opportunity to learn our business, learn about our customers, learned about the market place. And he comes into the job with just a different approach and I think the approach is going to be very orderly, and very methodical. And one of our biggest issues has not been could we have deals, we always had deal flow. We just didn't have bookings. And so we need to give him a little bit of time. I don't expect to see much change in the revenue level in Q3. But we have enough to going on that we think we have good shot at Q4. Do we know we can make in Q4? Of course, not. What we can do is say that is our goal. That's where everybody points towards. You have to have a goal or you don't where to shoot. And so that's kind of where we are. And keep in mind, there is another key point. That our total cost to run this business is around $13 million, there is also about a million of non cash expense in that. So one of the other things that could easily happen or could happen would be that we could at least get to cash flow deposit, we are going to be offset for time of course but you could get the drift where I am headed. We're all about getting this company out of this red ink stuff, back to black ink and growing our business. We’ve adjusted the management team; we have taken new approaches in sale that should lead to better execution. And as long as we perform then we’ll have more fun calls than this one in the future.

[Andy Schmidt:]

And surely, once again Andy here, one of the key aspects that I referred to before is going to be the deals that we’re looking at closing as Bill said they’ve been in place for some time so they are not starting from scratch, and of course the deals that we’ve never talked about until products out in the street because customers won’t let us those deals are also in play. Certain part of it has to do with all the accounting recognitions plays in Q4, one thing that is despite the fact that we have this hard goal to be profitable in Q4, and profitable in as soon as we can frankly, we are still choosing to do right things as far as how we structure deals. Often times there are customers they have a CapEx requirements or an OpEx requirements, they are constrained either area, or we work with them to structure deals that are a win - win. But we always been and you’ve covered us for some time very-very we shy away from one time deals. We’ve always been a company that looks for recurring revenue because the last thing we want to do show Q4 profitable number than run rate in the Q1 and go back in the red ink, we’re looking for sustainable profitability, and that is all about and it’s in our power to craft the deals correctly. So that we have recurring revenue but we’ll be very communicative as far as what that number turns out to be in Q4, and why to build that way and the status of these particular deals that we’re trying to land here that we’ve been working on for some time.

[Charlie Anderson:]

Great, sorry go ahead

[Bill Smith:]

Let me try to add to that I mean this company has the opportunity to talk to anybody in the industry. The doors are always opened to us, we don’t have trouble getting in front of key people, getting in front of key executives, and we are well regarded. What we have to do now is that make sure that we match our technical capabilities to match the needs of our customers going forward, and we’re busy doing that. As we look at the restructuring, one of our biggest concerns was to ensure that we did not impact our current customers in any negative way. I had an opportunity to talk with the key executive of Sprint just a few hours ago to brief them ahead of this call of what we had done, and to assure him that we had done everything possible to make sure that these changes would not be felt by our customer at all. That’s part of how we do business. Now our job is to close deals, get our revenues back online keep, our revenues in our cost rationalized so that we are consistently posting black numbers. I believe we can do that. It doesn’t matter what I believe this is what we actually do so want to stand by

[Charlie Anderson:]

And then just a real quick as it relates to the downtick in the quarter, what were sort of the recurring elements of your revenue is pretty stable I’m thinking of like the comps suite, your voicemail stuff may be some of the connection manager stuff, you kind of walk me through sort of what’s the base here and what’s variable portion here on your revenue?

[Andy Schmidt:]

Alright, let me jump in and give you some numbers of that we typically rollout and Bill can follow. In our legacy connection management time products when you consider the $8.5 million in wireless, we did about $3.5 million, that number fluctuates let’s say within a million depending on order patterns for instance again on enterprise side the USB sticks, and then on the high over the last several quarters but the ordering patterns aren’t necessarily consistent. So that’s 3.5 and then all other category which includes our comp suite and NetWise we did about $5 million. As we commented to a little earlier the NetWise product is somewhat mature in terms of its initial rollout, and now we are relying on new future phones to be released which are going to be a little dependent on our customer release in new devices which are not consistent quarter to quarter to quarter. Obviously we are looking forward to adding more customers so that we don’t see as much variability quarter-to-quarter that will help even that out but we’re not quite yet there.

[Bill Smith:]

Let me add to that and that as you look at the various product areas for our wireless products that while there has we have serviced in installed base at our first customer to a certain extent. We announced last quarter that we have procured a second customer. And we just talk to you about that we’ve procured a third customer. There are no revenues being recorded at this point for either customer two or three. They will come online I mean couple of quarters. So that bodes well for us as for as come suite. The comp suite product line is basically tied to the visual voicemail offerings at Sprint. That product area continues to grow. Some of the new initiatives that we have developed with Sprint that will increase the size of the pool of cash that we each split at the end of each quarter, we’ll be starting to be deployed now. It was held up a little bit slowed down little bit but things were getting back to normal, and we look forward to seeing that pool of cash getting bigger each quarter, which will then give us higher revenues.

[Charlie Anderson:]

Perfect. Thanks so much.

[Operator:]

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

[Howard Smith:]

Yes thank you for taking my question. Most of them are answered so just some record keeping here the 10% customers this quarter.

[Andy Schmidt:]

Sure Sprint was 51% and Verizon was 18%.

[Howard Smith:]

Okay and it is sometimes difficult as we've talked about the past on international revenue just given the size of the organization and its reach etcetera. But it sounds like you are leveraging your partners there maybe a little better in addition to this Argentinean win, can you discuss a little bit what you’re seeing on the international opportunity.

[Bill Smith:]

Not in much detail what I can say is that in the case of our partner Gemalto, we are joint bidding a number of opportunities, Gemalto in almost each case is presently a vendor to the carrier that we are bidding on so they are well known. And the general reaction is positive. So this is an opportunity to leverage what we do with 100s of additional feed on the street that we don’t have. And we share the revenue between Gemalto and us but we think we’re going to have a much higher close rate than we would have expected to have prior to this. So there is a number of opportunities, I am very hopeful and I look forward to having the opportunity to tell you we’ve closed even more in the coming quarters and also look forward to the – eventually once they are all closed and the carrier tell us we can say who they are actually been able to tell you who they are so I just can’t do that right now.

[Howard Smith:]

Okay, very good thank you very much.

[Operator:]

(Operator Instructions) Our next comes from the line of Michael Omari with a Marico Incorporated. Please go ahead

[Unidentified Analyst:]

Hi, could you please tell me guys how, what is the cash per share now that you have?

[Andy Schmidt:]

We ended the quarter at $23.5million in cash and our total shares outstanding are $37 million

[Unidentified Analyst:]

So that's come out what $0.77 a share

[Andy Schmidt:]

I don't have a calculator in handy

[Unidentified Analyst:]

So if the stock (inaudible) to one dollar so which means the whole company like about $0.30, it is just ridiculous price, do you have any buyback even though you are restructuring?

[Bill Smith:]

Yes, there has been buyback announced and we that the board constantly looks to use of our cash. And we will see where we go from there. So and we thank you for your question. Operator, are there any other questions?

[Operator:]

I'm no showing any other question at this time.

[Carla Fitzgerald:]

Alright, thank you very much. This is Carla Fitzgerald. I would like to thank everybody for joining us today. We look forward to updating you on our progress over the coming quarters. Of course, if you have any other further questions, you can feel free to give us a call at our main corporate headquarter in Aliso Viejo. This concludes our call today. And again we thank you for your time.

[Operator:]

Thank you, ladies and gentlemen, that does concludes our conference call for today. If you would like to listen to the replay of today’s call you may do so by dialing 303-590-3030 or 1800-406-7325 using the access code 463-29863. Thank you for your participation. You may now disconnect.