Smith Micro Software, Inc.
Q3 2014 Earnings Call Transcript

Published: 30 Oct 2014

[Operator:]

Welcome to the Smith Micro Software Third Quarter 2014 Financial Results Conference Call. (Operator Instructions). At this time, I would like to turn the conference over to Todd Kehrli, the MKR Group. Please go ahead.

[Todd Kehrli:]

Thank you, operator. Good afternoon and thank you for joining us today to discuss Smith Micro Software's third quarter 2014 financial results. By now, you should have received a copy of the press release with the financial results. If you do not have a copy and would like one, please visit www.smithmicro.com or call us at 949-362-5800 and we will email one to you. On today's call we have Bill Smith, Chairman, President and Chief Executive Officer of Smith Micro; Ziggy Yasbek, Chief Financial Officer; and Carla Fitzgerald, Chief Marketing Officer. Please note that some of the information you will hear during our discussion today will consist of forward-looking statements including without limitation those regarding the company's future revenues and profitability, new product development and new market opportunity. Operating expenses and the company's cash reserves. Actual results or trends could differ materially from our forecast due to a variety of factors. For more information please refer to the list factors discussed in Smith Micro's Form 10-K for 2013 with Form 10-Q filings for the first three quarters of fiscal 2014 and the Form 8-K filed with the SEC today along with the associated press release. Smith Micro assumes no obligation to update any forward-looking statements or information which speak only as of those up today. Before I turn the call over to Bill Smith I want to point out that in our forth coming prepared statements we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for reconciliation of the non-GAAP financial measures. Bill, please go ahead.

[Bill Smith:]

Thank you Todd. Good afternoon everyone. Thank you for joining our call as we present financial results for the third quarter of 2014. I'm pleased to report revenues for Q3 were 9.4 million which is an increase of 11% over Q2 and also 8% higher than the same period last year. As a direct result of our Q2 restructuring we have also reduced Q3 non-GAAP operating expenses versus Q2 by $2 million and by 900,000 if you exclude the restructuring charge of 1.2 million that we took last quarter. Our Q3 non-GAAP loss was less than the total non-cash expenses for the quarter. While no loss is ever good news these results show we’re definitely moving our business case in the right direction. Growing the top line while lowering the total cost of operations. We’re driving the business back to profitability and that continues to be our focus for Q4. CommSuite revenues continue to grow and the new NetWise deals we have discussed on our last earnings call are all progressing in a very positive manner. We expect several orders to close in Q4 and when combined with further growth in CommSuite and continued success in leveraging our NetWise platform these order should tee us up for a strong 2015. As you will hear from Ziggy our cash position at the end of Q3 was also much stronger at $12.7 million. In fact even without the 5.3 million net cash we raised from the sale of stock and the private placement in August we generated an additional 1.1 million cash during the quarter which is a significant turnaround. I will now turn the call over to Ziggy to present the details of our Q3 financial results. Ziggy?

[Ziggy Yasbek:]

Thank you Bill. Before I go into our customary introductory items I would like to highlight a few of our accomplishments this quarter. First revenues were up 11% this quarter versus last quarter and up 8% from the third quarter of last year. Second, our non-GAAP operating expenses of $7.8 million for our third quarter was $2 million lower than last quarter reflecting cost savings that we have realized from our May restructuring. Third, our non-GAAP operating loss for the third quarter was $584,000 as compared to a non-GAAP operating loss of $3.8 million which included a non-GAAP restructuring charge of 1.2 million last quarter. If you add back a depreciation and amortization of over $700,000 for the quarter our cash basis income statement was positive. And fourth cash at September 30th, 2014 was $12.7 million. If you exclude the net proceeds from the sale of common stock in a private placement of $5.3 million that we did this quarter our cash increased by $1.1 million in the quarter. This is the first quarterly increase in cash in a very long time. Now let me go over our customary introductory items. As we have in past quarters we have provided non-GAAP results and a reconciliation of a non-GAAP and GAAP results. The non-GAAP results discussed on this call net out stock-based 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 2014 and 2013 are non-GAAP amounts. Our earnings release, which will be furnished to the SEC on Form 8-K contains a presentation of selected GAAP financial measures and related non-GAAP financial measures and a reconciliation of the differences between the two. The earnings release can also be found in the Investor Relations section of our website at www.smithmicro.com. September year-to-date revenues for 2014 were $26.4 million down from $30.8 million from September year-to-date 2013. Wireless revenues decreased $3.8 million or by 14.6% September year-to-date 2014 versus 2013 to $22.2 million. Productivity & Graphics revenue decreased $600,000 or 12.9% September year-to-date 2014 versus 2013 to $4.2 million. From a non-GAAP perspective, the September year-to-date 2014 loss per share was $0.14 as compared to a September year-to-date 2013 loss per share of $0.39. In terms of our currently completed third quarter, let me provide some details. For the financial modelers, let me provide the differences between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $560,000 for the current year period broken out as follows; $2000 cost of sales; $66,000 selling and marketing; $169,000 R&D and $323,000 G&A. While we showed no GAAP tax benefit for the period, due to fully reserving the tax benefit we are showing a $218,000 pro forma or cash-based tax benefit. Now for the third quarter, we posted revenues of $9.4 million and a loss of $0.03 per share GAAP and $0.01 per share non-GAAP. Revenues for the quarter compares to $8.7 million for the same period last year. International revenue was approximately $700,000 this quarter across all business groups. Our Wireless segment reported revenues for the quarter of $8.3 million as compared to $7.2 million last year. Our Productivity & Graphics segment posted revenues of $1.1 million as compared to $1.5 million last year. Total deferred revenue at September 30, 2014 was $700,000. Switching to gross profit, non-GAAP gross margin dollars of $7.2 million compares with $6.3 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was 76.7% for Q3 of 2014 compared to 71.6% for Q3 of 2013. The increase in gross margins was primarily due to increased revenues and the product mix. Non-GAAP gross margins by business segment were as follows, wireless was 77.1% and Productivity and Graphics was 73.7% Switching to operating expenses, non-GAAP operating expenses for the third quarter of 2014 were $7.8 million which was $2 million lower than the second quarter and $900,000 lower if you exclude the restructuring charge we took last quarter. From a year-on-year perspective, selling and marketing expenses decreased to 42%, engineering expensed decreased 41% and G&A expenses decreased to 33%. Total non-GAAP operating expense excluding last year's restructuring decreased by $4.9 million or about 39% versus the same period last year. Non-GAAP operating loss for Q3 was $584,000 as compared to a loss of $12.1 million in Q3 of 2013 which included a restructuring charge of $5.6 million. Non-GAAP net loss for the third quarter was $364,000 or $0.01 per share as compared to a loss of $7.5 million or $0.20 loss per share last year. As I mentioned earlier cash increased to $6.4 million for the quarter which included a net of $5.3 million we received from the sale of our stock in a private placement closing at $12.7 million at September 30, 2014. In terms of housekeeping, we expect to file our quarter-end 10-Q by the end of this week which will represent our final statements for the period. At this point, I'll turn the call back over to Bill.

[Bill Smith:]

Thanks Ziggy. As I described last quarter we have several NetWise deals underway that are in various stages of contract negotiation or implementation with top tier service providers. Making the mobile experience fast, easy and secure no matter how devices are connected, it's one of the most important things that a service provider can do to attract and retain subscribers and that’s what NetWise does. It gives unmatched insight and control to optimize network connections while improving the quality of experience for users. It also provides a platform on which to build policy based solutions for M2M and P2M business opportunities raging from size efficient over the year firmware updates that reduce operating cost to location based context aware [ph], marketing promotions that increase mobile engagement and revenues. We have made significant investments in our NetWise platform allowing us to provide cost cutting, mobile solutions to new and existing customers. Of course we recognize that revenues from these investments are ultimately what matters. Our customer feedback has been unequivocally strong and we expect to begin generating revenues from these new deals in Q4 and into the first half of 2015. On the connectivity side of our business, we have continued to garner QuickLink revenues associated with both carriers and non-carrier engagements including USB and mobile hotspot connection manager licenses, specialized device drivers for a leading chip manufactures chrome devices [ph] and Windows 8 connectivity enhancements for devices used in public safety. Mobile security and connectivity go hand in hand for public safety and earlier this week we featured our mobile VPN solution for Android running on (indiscernible) tablets at a conference held by the International Association of Chiefs of Police. However, public safety is not the only industry that needs secure mobile connectivity and we’re continuing to engage a variety of advertisers for utilities, to maritime ships, to financial institutions, to expand our enterprise footprint and leverage our heritage as the connectivity experts. Switching over to our messaging business, CommSuite continues to perform well for us with growth in subscription services, advertising revenues and most recently content purchases. Early in the third quarter we announced the launch of AniMates and over the top avatar messaging app for iPhones and Android smartphones. A few weeks later Sprint joined us at the Art Institute in Pittsburg to kick-off the avatar challenge and education program designed to teach digital animation skills to students through the creation of avatars. And in late-August, Sprint announced their new avatar enhancement to visual voice mail also powered by Smith Micro and available free to millions of Android users on Sprint Boost and Virgin networks. We have been very excited to see steady growth in the avatar service with 100s of 1000s of new users each week and 10s of thousands of messages sent daily. Feedback from users have been very positive and the ability for users to send avatars to anyone via SMS, email and Facebook is starting to have the desired viral effect. Although Sprint launched the avatar service with free content, we will soon be offering a broad light grade [ph] of paid characters and backgrounds for Sprint users to enjoy, just as we have done for AniMates. With the holiday season fast approaching we believe holiday theme avatar messages are the best way to deliver season's greetings to friends and family. Avatar's are great example of utilizing our assets and expertise in digital content creation to expand our opportunities in mobile messaging. We’re now doing the same thing with the gaming industry. In Q3, we announced a new version of our Poser graphic software called Poser Pro Game Dev. It was designed to let content developers design and optimize this 3D content specifically for gaming platforms such as the Unity game engine used by millions of game developers worldwide. This might sound simple but the attributes of content used in gaming are very different from those used in high quality print, film, advertising and other professional design work which is the more traditional use of our Poser software. By enhancing Poser to transform rich, exciting 3D characters and the game ready characters almost effortlessly, we’re opening the door for our large Poser community to expand the work into gaming and also exposing a huge community of Unity developers to the power and convenience of Poser and it's huge library of world-class 3D content. Whether it's our graphics business, avatar messaging, enterprise and WiFi connectivity, or M2M and P2M or network policy management this is an exciting and pivotal time for Smith Micro. Our team is working with outstanding efficiency and productivity. Our products are proving to offer unmatched functionality and value to our customers. Our balance sheet is getting stronger and we’re quickly narrowing in on posting profits instead of losses. Even as the wireless market undergoes dramatic shifts we’re intensely focused on closing deals, delivering high quality software and building a solid base of new business of which we can grow. With that operator we can now open the call for questions.

[Operator:]

(Operator Instructions). We will take our first question from Rich Valera with Needham & Company.

[Rich Valera:]

So, Bill I was wondering if you can give us any more color on the NetWise opportunities in terms of timing and potential magnitude. I know you probably can't call out customers by name but any color in terms of when you might land some and what kind of impact they could have going forward, it will be very helpful. Thank you.

[Bill Smith:]

As we have said on the last call, we have deals that are in the process and when I say in the process in some cases it's final redline of contracts and other cases it's preparing final products such that these new customers can launch. All of which is moving ahead smoothly and we do expect to see revenue from some of these deals in Q4. We also expect that there will be public announcement of one or two of these in the fourth quarter as well. So all-in-all, all looks pretty positive.

[Rich Valera:]

And are you willing to give any color on the trajectory of revenue into 4Q I assume, up but I'm wondering if you would be willing to put any kind of magnitude on how much you might be up in the fourth quarter? And then similar for OpEx, do we think that we were flat at this baseline or might there be a little bit of a bump up in Q4?

[Bill Smith:]

First off yes we do, expect the top line to continue to grow into Q4. Clearly we’re focusing in on trying to get profitable into Q4 and that’s one of our major goals. As far as OpEx I would suspect OpEx for Q4 to be relatively flat. However you know as we go into 2015 where we should see continued growth in the top line, you will probably see some marginal growth there will be OpEx line at the same time. We’re tending to grow from an OpEx in the software that was mostly it heads. So we’re tending to grow our workforce and to our least costly locations that being the Belgrade, Serbia and Pittsburg and so that’s part of our plan as to how we manage the OpEx level as we continue to grow the business. As far as guidance we continue to not give guidance for 2014. However we’re looking seriously at whatever would give some sort of guidance for 2015.

[Rich Valera:]

And then Ziggy, do you have -- I don’t know if you had the full impact of the deal in the third quarter. Do you’ve the current share count the one that we would use for the fourth quarter available?

[Ziggy Yasbek:]

For the fourth quarter in my model I'm using bear with me one second, I'm using 45219 for Q4.

[Operator:]

We will go next to Howard Smith with First Analysis.

[Howard Smith:]

First of all kind of housekeeping question, 10% revenue, I assume Sprint but what percent?

[Bill Smith:]

Sprint was 67% for Q3 and also a year-to-date.

[Howard Smith:]

Okay. Any other with FastSpring or any other 10% customers or is that the only one?

[Bill Smith:]

No, FastSpring was 10% for the third quarter and they are 12% year-to-date.

[Howard Smith:]

Okay and historically Q4 has a little seasonal uptick for Productivity and Graphics, is that kind of, is the slope, I don’t know if there is onetime as a little light this quarter, kind of the normal seasonal pattern still expected with that?

[Bill Smith:]

Yes I think we should see a uptick in Q4 out of P&G and probably the same seasonal downtick in Q1 and then followed by upticks for the rest of 2015. That part probably doesn’t change. We are also transitioning some of the P&G business away from selling software and retail outlets to the more software send outs over the year as well as more software being leveraging some of the expertise we have in the graphics area. So the mix at P&G will continue to evolve.

[Howard Smith:]

Right, some of the revenue that might have previously being in P&G as you use it for content and things and monetize it, going to transfer into the wireless lines?

[Bill Smith:]

I think we’re working our way through exactly how we wanted to present that in 2015. That’s not a big number, the content part, I think you’re really talking about the avatar. That’s not a big number in our own model. We’re not looking for a lot of revenue for that in Q4. So the revenue growth is -- this isn't where it's coming from. Clearly we will look to have everything online and start to see growth in 2015 and we will talk more about that when we get to the fourth quarter call.

[Howard Smith:]

All right. Well congratulations on generating some cash from the operations and hopefully profitability in Q4. So, one step a time here. Thanks very much.

[Operator:]

(Operator Instructions). We will go next to Kevin Dede with HC Wainwright.

[Kevin Dede:]

Ziggy, can you just take me to your cash flow calculation again? I know you gave us some of the detail on a call but I don’t think I was quick enough with my pen.

[Ziggy Yasbek:]

Yes so our cash went up in the third quarter by $6.4 million from the end of June, 5.3 of that net was from the pipe and then 1.1 was work in capital.

[Kevin Dede:]

Right, followed that but I was wondering how we might get there from the P&L? Your depreciation and amortization number?

[Ziggy Yasbek:]

That number was about $700,000 for the quarter.

[Kevin Dede:]

Bill, I know you’ve got a good view into the AniMates progress. I was just wondering if you could give us a feel for it's -- I guess how viral it's -- can you tell what's been added in terms of messages and users on Sprint's network and those that are using that system that are not on Spring's network? I think just a measure of how viral it's been?

[Carla Fitzgerald:]

Yes we really are starting to see just the beginning of the viral impact of launching at Spring on the AniMates platform. And what we’re seeing really we measure in areas -- in couple of areas, one is the difference between in-network and out of network messaging. So as an example because we designed our avatar messaging application to allow you to send a message to anybody, you don’t have to AniMate source or Sprint client to receive a message.

[Kevin Dede:]

I follow you Carla, because you can just download the message (multiple speakers) browser.

[Carla Fitzgerald:]

That’s right. So we measure out of network messaging as a metric of the viral nature of the app, right? If I'm sending it to somebody who doesn’t have the app, we call that an out of network message and we’re seeing those at about 2 to 1 right now. So for every message that gets sent to someone in that work, there is two being sent out of network.

[Kevin Dede:]

But there is no way for you to see from where you’re there is no way to see whether or not people are downloading the app or is there?

[Carla Fitzgerald:]

Yes absolutely we see that. So we’re able to measure how many -- of course within the over the top app you can measure downloads through the App Store, that’s one of the services provided by the App Store. So we’re measuring downloads on the over the top site and that’s growing tremendously as a result of the launch at Sprint and we’re also able to measure how many users are upgrading -- their visual voicemail clients at Sprint to take the new release that includes the avatar and so we measure that as well. We’re seeing good uptick of that. The roll out of new clients is always done at a moderate pace because we want to make sure that users are -- we do it on a certain device models in an orderly fashion. We want to make sure that the client behaves and performs as it's rolled out. We also want to make sure that users aren't burdened by having too many updates in a short period of time. So we always expect anywhere from 6 to 8 week period that for all of the devices international the field and clients to have kind of the typical opportunity to upgrade and of course you never get a 100% upgrades of any client release just because there are some users that want -- stick to the old version. So we’re monitoring all of that. We’re monitoring downloads of the new client, we’re monitoring messaging traffic especially the out of network because that’s the viral nature and we’re monitoring the influence of that on AniMates downloads.

[Kevin Dede:]

Two more questions related to that, one is when do you think you will have the iPhone version up and running and when do you think you are paid for library will be available?

[Bill Smith:]

First off on the iPhone side, the iPhone over the top app is out and running. Keep in mind at Spring iPhone users do not use Sprint's visual voicemail, they use Apple's. So when we talk about visual voicemail at Sprint, this is Android only. So everything we need for an iPhone is out there. It's up and running and for the iPhone side there is a number of paid content options for users. On the Sprint visual voicemail side where they have access to avatars we’re in the process of launching the ability to buy additional characters and backgrounds and that will happen throughout this quarter. We purposely started the launch at Sprint as a free content to get people into the -- and to using it and now we’re in the process of providing added content for them to buy and obviously we look for the revenue to ramp as a result of that.

[Kevin Dede:]

So the takeaway is that the a grant selection of your paid for content library will available for the holidays? I think that’s the point that you’re really trying to communicate on the call, is that correct?

[Bill Smith:]

Yes that’s very true.

[Kevin Dede:]

I was wondering if we could just do another pass over NetWise given there are so many different aspects of that solution. Can you give me or us rather an idea on what you think is the most promising and where you’re putting most of your sales and marketing effort in NetWise?

[Bill Smith:]

Well I guess if I were to say the most promising and I'm pretty excited with what's happening at the cable MSO part of the market. I see a lot of growth there. I also see a lot of growth for different P2M applications both through carriers as well as directly to enterprise customers. Clearly the use cases that have been deployed at Sprint continued to be of great value and have their home at -- other carriers as well but I guess if you were to press me as to where I'm most excited, I think the key thing is the growth in the cable MSOs I think could be really a good part to follow.

[Kevin Dede:]

Okay, could you let me understand which specific applications you think will be the most successful? I apologize for not making myself clear, it's just that they are I mean as you know there is just so many different I guess different facets of what you can offer in your whole realm of solutions and I'm just kind of wondering what you’re putting forward first?

[Bill Smith:]

I think there has been a lot of commentary in the industry press about the focus of cable MSOs and building out WiFi networks. They clearly have enormous points of presence and that is a network that holds great promise for the whole cable industry. One of the things you’ve to be able to do is get users easily on those networks so that you can get the business case rolling. That’s our major focus. Also the rest of it is all new.

[Kevin Dede:]

That’s very helpful. Thanks, but I guess I wanted to try and (indiscernible) on that. I appreciated the commentary that you offered on the call but that’s just so deep and varied that I was just hoping to zoom in on it a little bit. So congrats.

[Bill Smith:]

Thanks Kevin.

[Operator:]

(Operator Instructions). It appears there are no further questions at this time. I would like to turn the conference back to Todd Kehrli for any closing or additional remarks.

[Todd Kehrli:]

Thank you operator. I would like to thank everyone for joining us today. We look forward to updating everyone on our progress over the coming months and of course if you’ve any questions please feel free to contact me and I will be happy to answer them. Thank you and this concludes our call. Have a great day.

[Operator:]

This concludes today's conference. Thank you for your participation.