Smith Micro Software, Inc.
Q4 2014 Earnings Call Transcript

Published: 25 Feb 2015

[Operator:]

Good day and welcome to the Smith Micro Software Fourth Quarter and Full Year 2014 Financial Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Todd Kehrli, 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 financial results for the fourth quarter and fiscal year ending December 31, 2014. 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; Steve 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 opportunities, 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 risk factors discussed in Smith Micro's Form 10-K for 2014 with Form 10-Q filings for the three quarters of fiscal 2014, along with the associated press releases. Smith Micro assumes no obligation to update any forward-looking statements or information which speaks only as of the respective date. 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:]

Thanks Todd, good afternoon, everyone. Those of you who saw our announcement of preliminary Q4 results issued last month at the Needham Investor Conference know that we are expecting to be profitable for the quarter and I'm pleased to report that is now official. Revenue for the fourth quarter of 2014 was $10.6 million with non-GAAP operating expense of $7.5 million, resulting in GAAP operating income of $217,000 and non-GAAP operating income of $797,000 for the quarter. These profit numbers represent a significant milestone for us in successfully transitioning our business from baseline broadband connectivity four years ago to a more sophisticated and valuable set of capabilities today for improving quality of experience and creating new opportunities to engage consumers using mobile devices. We believe we are now in the right position to build on our Q4 momentum based upon four key strengths of the company. First, we have the right products at the right time to help our customers capitalize on the widespread adoption of smartphones, Wi-Fi, 3G and 4G networks and content driven mobile applications. Second, we have a credibility and relationships with executives of Tier1 operators, cable providers, device manufacturers and enterprises to get in the door and get deals done. Third, is our technical expertise and operational discipline that ensures we can execute quickly and cost effectively to achieve our objectives. And fourth, we have built a healthy balance sheet supported by a growing base of business that will allow us to invest in new areas and maintain a leadership position in our markets. Before I dive into the details of our progress and growth plans for 2015, I will ask Ziggy to present our financial results for the fourth quarter and full year of 2014. Ziggy?

[Ziggy Yasbek:]

Thank you, Bill. Before I go into our customary introductory items I would like to highlight a few of our accomplishments in the fourth quarter. The turnaround that started in Q3 continued into Q4. For the fourth quarter revenues were up 12% sequentially from last quarter and not only were we profitable on a non-GAAP basis with operating income of $797,000, we were also profitable on a GAAP basis with operating income of $217,000. This represents the first profitable quarter for us in the past 16 quarters. Cash increased again in Q4, up $300,000 from September 30, 2014, ending the year at $13.0 million. And as previously announced in January, we gave guidance for the first time in four years. We project our revenues to be in the $45 million to $49 million range for total year 2015. Q1 revenues should be approximately the same as our Q4 revenues, and we also expect to be non-GAAP profitable for the fiscal year 2015. Now let's go over our customary introductory items. As we have in past quarters we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed on this call net out stock-based compensation related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly, all results that I referred 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. Total year revenue for 2014 was $37.0 million down from $42.7 million in 2013. Wireless revenues decreased $4.6 million or 12.8% in 2014 to $31.2 million. Productivity & Graphics revenue decreased 16.4% from $6.8 million in 2013 to $5.7 million in 2014. From a non-GAAP perspective, total year 2014 loss per share was $0.12 as compared to a loss per share of $0.40 in 2013. From a balance sheet perspective, our cash position was $13 million at December 31, 2014, a decrease of $1.8 million from the beginning of the year. In terms of our currently completed fourth quarter, let me provide some details. For the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock based compensation, stock comp totaled $580,000 for the current period broken out as follows; $3,000 cost of sales; $70,000 selling and marketing; $175,000 R&D and $332,000 G&A. It has been the case in past years we prepared a revised tax provision at year end, since we are in a loss position our GAAP tax expenses primarily due to forward income taxes. The fourth quarter of 2014 reflects an unfavorable non-GAAP tax adjustment of $300,000. For the fourth quarter, we posted revenues of $10.6 million and income of $0.01 per share non-GAAP, this compares to revenue of $11.8 million for the same quarter last year. International revenue was approximately $400,000 this quarter across all business groups. Our Wireless segment reported revenues for the quarter of $9.1 million as compared to $9.8 million last year. Our Productivity and Graphics segment posted revenues of $1.5 million as compared to $2.0 million last year. Total deferred revenue at December 31, 2014 was $1.5 million. Now switching on to gross profit, non-GAAP gross margin dollars of $8.3 million compares with $9.5 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 78.8% for Q4 2014 compared to 80% for Q4 of 2013. The decrease in gross margins was primarily due to the decreased revenues and the product mix. Non-GAAP gross margins by business segment were as follows; Wireless was 80% and Productivity and Graphics was 70%. Switching to operating expenses, non-GAAP operating expenses for the fourth quarter of 2014 were $7.5 million, a decrease of $300,000 sequentially from last quarter. From a year-on-year perspective, selling and marketing expenses decreased 25%, engineering expensed decreased 33%, and G&A expenses decreased 28%. Total non-GAAP operating expense decreased to $2.6 million or by 26% versus the same period last year. Non-GAAP operating income for Q4 was $797,000 as compared to a loss of $658,000 in Q4 of 2013. Non-GAAP net income for the fourth quarter was $492,000 or $0.01 earnings per share as compared to a loss of $406,000 or $0.01 loss per share last year. In terms of housekeeping, we expect to file our year end 10-K by the end of the 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. The fourth quarter of 2014 was a great turning point for our business, particularly in the NetWise arena where we gained significant traction with existing and new customers. At Sprint, our NetWise client was installed on three new devices including two iconic devices from a leading manufacturer that sold very well over the holidays. We closed a significant deal with one of the largest cable providers in the country which I have mentioned was in the works during previous earnings calls. This cable MSO is adding NetWise to their mobile applications to simplify Wi-Fi onboarding whether our customer is using Android and iOS smartphones, as well as PC and Mac Laptops. We are well into the installation phase of their deployment and commercial roll out is expected to begin in the next few months. In Q4 2014 we also signed an agreement with a leading wireless operator focused on improving quality of experience for users of their Wi-Fi access points. This project is currently underway and we expect to transition to broad scale deployment before the end of the year. These deals along with several others currently in play continue to reinforce the value of our NetWise Technology for communication service providers. We have now expanded the NetWise platform to support a broader audience including retail, hospitality, consumer goods and service providers that want to enhance their mobile marketing efforts with mobile analytics and user interactivity provided by a NetWise client. Our NetWise Captivate solution detects consumer location, shopping patterns, and mobile activities and combines that information with historical customer and purchase data to deliver more relevant and convenient mobile offers to consumers. In effect, NetWise Captivate allows marketers to create more personalized brand experiences and higher value relationships with our customers. This solution is exciting for us because it dramatically expands both, the value proposition and the target audience for NetWise. We have several prospects in the pipeline and we look forward to updating you on our progress with NetWise Captivate as the year progresses. The other driver of growth for us in the fourth quarter was our CommSuite solution. Sprint continues to shift our CommSuite visual voice mail client on all Android devices, and we continue to generate significant revenues from premium voice detect subscriptions as well as from mobile advertising that is performing very well in both cost per impression and conversion rate. We now have more than $13 million registered users of CommSuite Avatars, and while the revenues associate with Avatars is still small we saw a 300% to 400% increase in message traffic over the holidays, and a 400% to 600% increase in content purchases during that time. This is definitely a learning experience for us as we see what types of content users prefer and develop new features that lead to more time spend in the app and more in-app purchases. Our CommSuite road map spread is rich with enhancements and we hope to develop a more meaningful revenue stream for Avatars and other new features that are coming soon. In addition to CommSuite growth at Sprint, we are currently initiating a strategic partnership with Comverse but a resale of our CommSuite platform to their customers around the world. Comverse is a global partner in billing monetization and unified communication systems and their products are used in more than 125 countries by more than 450 operators serving over $2 billion subscribers. Our technology is already integrated with Comverse and Sprint, and we are taking our integrated offering to more Comverse customers to help them better compete with over-the-top applications. We will be demonstrating our integrated solution in the Comverse both during Mobile World Comverse in Barcelona next week and we are excited to work with them to open the doors for our CommSuite premium service platform with more carrier customers. In our Productivity and Graphics business, we saw strong holiday sales for Anime Studio and Manga Studio in Q4, with both products doing well in retail and direct online channels. We have also received a great response to our Poser Pro Game Dev offering which is a 3D graphics application build specifically for gaming platforms. We are now building on that success by selling Poser content packs to game developers through the Unity Asset Store, a digital content marketplace that serves more than 1 million users. In addition, we are making it easier for artists and gamers to save and share their graphic assets in the cloud through a new reseller relationship with Dropbox. While all of these product and market developments are extremely positive, we recognize that we must continue to manage our expenses very closely. We have downsized our facilities in our headquarters in Aliso Viejo, our development center in Pittsburgh, and our remote offices in Northern California. We are carefully balancing hiring to support the pipeline with committed revenues and we are targeting almost all headcount growth in the more cost effective areas of Belgrade, Serbia and Pittsburgh. We have always been proud of our engineering talent in the outstanding development organizations we have built in Belgrade and Pittsburgh, allows us to more effectively utilize resources across time zones to deliver innovative new technology at a very rapid pace. To summarize, we've worked very hard over the past few years to enhance our product portfolio, streamline our operations and turnaround our business case. We are extremely proud to post profit once again, and we will continue to push ourselves to build a balance predictable base of business in 2015 and beyond. As stated in our preliminary guidance and again today, we expect revenues for 2015 to be in the range of $45 million to $49 million and post a profitable year in 2015. With that operator, we'll open the call for questions.

[Operator:]

Thank you, Sir. [Operator Instructions] And we'll take our first question from Rich Valera at Needham & Company.

[Rich Valera:]

Thank you. First congratulations on achieving profitability.

[Bill Smith:]

Thanks, Rich.

[Rich Valera:]

So Bill, just on the first quarter guidance, I think when you gave that initially you mentioned flat settings slightly up and now you're talking flattish, is that just a function of slightly higher fourth quarter or has anything else changed there in terms of the first quarter expectations?

[Bill Smith:]

I think if I go back to the transcript of what I said at your conference, I think I said that it would be flat to slightly up, and maybe slightly down but it wouldn’t - yes, there wouldn’t be much deviation around it, there was a fairly narrow band and we still feel the same way.

[Rich Valera:]

Fair enough. And you mentioned you expected your big deployment with the cable MSO to deploy in a couple of months - does any of that included in your first quarter of revenue guide?

[Bill Smith:]

Yes, there will be meaningful revenue from our cable MSO in Q1.

[Rich Valera:]

Got you. And I'm guessing you don't want to give much specific guidance beyond Q1 but can you give any color on sort of the revenue trajectory due to balance of the year, I assume just sort of achieve the annual number that you've got to see some sequential progression here. Can you give any color on just qualitatively on how we should expect that to play out over the course of the year?

[Bill Smith:]

Yes, sure. As it is the usual case for us, our strongest quarters are in the second half of the year, I would expect that to be the case for this year as well. I think the real surprise is that we look - Q1 do not be a seasonally adjusted down tick quarter but more of a flattish quarter and I think that's very positive. I think you will see some modest growth from Q1 to Q2 and then that will continue into Q3 and Q4.

[Rich Valera:]

Great. And then on the Comverse resale agreement, any other color you can give us there in terms of what kind of leads you're already been looking at and any thoughts on timing of when that could result in revenue?

[Bill Smith:]

It's too early Rich, I mean I think if you're going to be in Barcelona, I would encourage you to stop by their biz, we'll have folks there - the joint software solution and we will continue to talk about that as more facts come to the table. But we are very excited about, it's a great opportunity, we've been looking for ways to leverage the strength of our CommSuite product offerings and gain entrance into other carriers around the world, and because of their presence we think this is a great partnership, clearly gives them something to talk about other than just voice mail, they now are stepping individual voice mail area, and I think it's positive for both companies.

[Rich Valera:]

That's great. And Bill, just wondering if you could give a little more background on the advertising aspect of CommSuite, just kind of give us a sense of how Sprint is using that and any other color around that usage would be helpful and how that might apply to other customers who are going to be marketing that CommSuite?

[Bill Smith:]

Sure, this is an area of strong growth at Sprint over the last year or so as we started to roll out the capability to deliver, advertising and refine that with spread to upgrade the quality of the ads and the take rate of the ads and the click through of the ads. And we're constantly working with them to improve the whole approach as to how the advertising works within the additional voice mail client. We would view the same opportunity that where other carriers as we hopefully win further the claimers have way through the Comverse relationship where we could leverage that basic technology with different advertising service providers but with the same general result. So we're pretty bullish about that.

[Rich Valera:]

That's great. So it seems like you've got some pretty good visibility into maybe one Q2Q from this large cable deployment. I'm wondering if there is anything you could point to in the back half that would drive the expected sequential ramp there, are there any specific programs do you expect to continue to follow through from the cable program, just anything that would give us some comfort around that implied ramp at the back half would be great.

[Bill Smith:]

I said in my prepared comments we have talked about the fact that we are working on quality of service capabilities, we're the major Tier1 carriers. We do expect that to start deployment in the second half of the year, and so that's one area of growth. We do view that fact that we believe revenues will continue to expand at strength as well as new revenues to come from other Tier1 carriers in North America.

[Rich Valera:]

Okay, that's it for me. Thanks, Bill.

[Operator:]

[Operator Instructions] We'll take our next question from Ian Gilson as Axe Investor Research [ph].

[Unidentified Analyst:]

Congratulations Bill, I hope we can make next time possibly the top end of your numbers for current year. Could you sort of go through where you expect the growth to come from and what its impact would be on gross margins?

[Bill Smith:]

Okay, first off as the revenues continue to grow, the gross margins will gradually tick up and it's just basic loss. So you should look for that. We are a software company so relating to gross margin area is something that we should all be looking forward. As far as where the revenues are going to come from, we have a base of business that comes from our P&G revenue streams, as well as our Sprint business, even though we do believe Sprint will continue to grow, it does provide a very predictable base to begin with. And then we layer on to that, some of the new business like our cable MSO, like this other Tier1 business, like some of the other things that we are working on or have completed that we just can't talk about, and that gives us the comfort to provide the guidance that we did and I would agree with you, our goal is clearly to be at the top end of that guidance, and honestly, our real goal is to beat it. So let's see where it ends up by the end of the year.

[Unidentified Analyst:]

Okay. As we look at operating expenses, primary SG&A and R&D, we cannot - those, it's about the fourth quarter dollar level through the year?

[Bill Smith:]

No, that will pick up, we will be adding hedge through the year as we have been winning more and more business there is a requirement for added headcount, we're looking at somewhere in the neighborhood of maybe 50 heads added over the year that's build off of a headcount at the end of 2014 of about 183 heads, the growth will be - you will see growth in first and second quarters and third quarter starts slowing down again than in Q4 from the headcount growth point of view such that - we have the resources necessary to service all this new business and continue to grow. Other areas we continue to be very careful with our expenses from a facility standpoint and things like that but we will suffer out, so people are our biggest cost and that's something that you should be looking at.

[Unidentified Analyst:]

Okay, thank you very much.

[Operator:]

And we'll go next to Kevin Dede of HC Wainwright.

[Kevin Dede:]

Hi, good afternoon Bill, congrats on a nice quarter.

[Bill Smith:]

Thank you.

[Kevin Dede:]

Thanks for the discussion on the headcount as that was something I was going to ask about. It seems to me that your emphasis then will be on adding those heads in Belgrade and Pittsburgh, could you give me sort of a rough guess on how that might fall out on the 50 heads that you plan to add?

[Ziggy Yasbek:]

The largest number would be in Belgrade but there will still be a meaningful number added in Pittsburgh. So it's about having half Kevin, it's about happen half and it will be like your 10 in Q1, to double that in Q2, and then the rest spread out over Q3 and Q4 assuming that we are hitting our sales numbers.

[Kevin Dede:]

Thanks, Ziggy. On the MSO deal I understand the sensitivity there but can we - and I apologize if you discussed this already because I fell off the call, a little bit of Rich’s questioning. I was just wondering - you say you're going to commercial deployment in the next couple of months, does that mean you weren’t able to recognize revenue or how does that contract work and can you give us some insight on how they will - how you're able to recognize more revenue?

[Bill Smith:]

Okay. Yes, you did miss part of that. We will have significant revenue from the cable MSO in Q1. As I said in the past, the MSO business is little bit different than the wireless carrier business and by nature therefore might be a little lumpy going up and down throughout the year but it will be a very meaningful customer in total for the year and I think that's the way you should think about.

[Kevin Dede:]

Okay. So as it becomes a more customer you will be able to tell us, I mean as you have in the past or how your business falls out, do your customers had a greater than 10%?

[Bill Smith:]

Yes.

[Kevin Dede:]

Okay, fair enough. Then would you mind sort of going through the same sort of dynamics with the quality of service, customers that you have, the Tier1 wireless carrier, you said that that was the deployment that you expected that have rolled out sort of later in the year and I was wondering, I mean I apologize again, I heard it's already…

[Bill Smith:]

No, no, no, that's alright Kevin. That is a large Tier1 wireless carrier, we are doing a lot of work with them, presently they will generate some revenues in the front half of the year and we look for deployment to begin in the back half of the year and it will be a more traditional OEM deployment where it starts slow and grows over a period of time but we think it's very meaningful in business and frankly, the whole area of working on quality of service is fair amount of interest with the number of carriers around the world so this should be just the first of this kind of deployment.

[Kevin Dede:]

Is it fair to assume that this is sharing that ability to load traffic on the Wi-Fi and then off again?

[Bill Smith:]

Well not only to load it on the Wi-Fi but either 3G or 4G, and there are times where the quality of service on Wi-Fi is not good and so you don't want to move somebody to Wi-Fi or maybe you need to blacklist a certain Wi-Fi Hotspot because the quality is very poor. So we work to dynamically adjust to the various circumstances that are out there for that carrier’s coverage area.

[Kevin Dede:]

Okay. Then how those - I mean how does that contract work, is it based on a subscriber number that the carrier has pushed it to your software out for their clients on or…

[Bill Smith:]

I don't really want to get into the terms of this contract because there is so much interest in this area I just don't want that out there. So let me just say it's a typical OEM relationship of the nature that Smith Micro has done in the past, we leave it at that.

[Kevin Dede:]

Okay, fair enough. So - but the MSO deal is different than that because if you work on the subscriber account or I just kind of want it for…

[Bill Smith:]

Okay, here is the difference between wireless carriers and MSOs, in the case of wireless carriers typically the software is preloaded onto the Android handset before it shifts and there is a very predictable number of handsets that are going to be sold throughout each quarter of the year so it's a very predictable model as to how the revenues will roll. In the case of the cable MSOs, they will be embedding our technology, our NetWise technology into various Apps that they already have in market to facilitate ease of on-loading on to their Wi-Fi networks. The way they do that then is they do it in tranches for each different app and then there is growth after that fact as they grow the number of subscribers to those Apps. So it will look a little lumpier, that's all.

[Kevin Dede:]

Thank you very much for that detail Bill, that's a lot to get my arms around it. And since the Comverse deal includes the packaging, the advertising, that's been successful at Sprint?

[Bill Smith:]

Yes, we probably wouldn’t be using the same advertising provider or we could, it doesn't matter. But the concept is the same, your offering value added services where you can do a redshirt type of model and that has worked out very nicely for us at Sprint, both for us and our customers, we both have seen growing revenues for a number of quarters and I think we're both pretty happy about that.

[Kevin Dede:]

Okay. So is it fair to assume that once Comverse turn the customer on, you're able to recognize revenue fairly quickly, if not immediately?

[Bill Smith:]

Yes, we haven't done it yet, I mean I would say as I sit here hypothetically I would say yes, but until we are actually sitting with a one piece of business and we can sit with that carrier and figure out how they are going to deploy, that will be the time that I probably will be able to answer your question better. My guess is…

[Kevin Dede:]

I completely understand it, right, you've got - we have a bidding coming out [ph]. Okay, you mentioned Captivate which I know is just a recent press release and it seems like you may have a customer pretty well down the - I'm just kind of wondering how were you able to connect location and customer shopping preference, is that tied into a Mobile Wallet application or how are you able to extract that information from the user, was it purely based on location?

[Carla Fitzgerald:]

Hi Kevin, it's Carla and the capabilities around NetWise Captivate are really on being able to detect a wide variety of elements that we consider the context of the consumer. So the context of the consumer might be where they are located and that can be measured by nearness to Wi-Fi access points, it can be measured by geolocation, it can be measured by nearness to beacons that are installed on a premise; there is a number of different ways to detect location but that's just one aspect of context for our consumer. There are a number of things that can be detected in real time, so in addition to location, it seems like information that's available on the device, applications that are being used, the time of day, things that can be collected from device application, like what's the weather outside, if it's raining outside there might be certain types of services or offers that would be more relevant to the consumer than if it's sunny outside, etcetera. So a lot of information can be gathered on the device and through the device that surrounds the consumer. The solution that we're offering is not intended to replace the Mobile Wallet or to replace an authorized engine, it's designed to utilize those services but to allow them to be put into the right context of the consumer through our expert system that we put on the device. So it can integrate with Mobile Wallet or other types of authorized engines, advertising engines etcetera, but it's an enhancement to mobile capabilities - mobile purchase or commerce capabilities that might already exist.

[Kevin Dede:]

Is it something that you're able to package with Comverse as well or is it something that you're just trying to market on your own?

[Bill Smith:]

I think we are working to present this capability to wireless carriers, it's NetWise so it's not necessary for us to partner with Comverse, on the NetWise side we have pretty good access and leverage on our own, and we're also talking to large enterprises, so it's got a broad audience and it leverages all the NetWise technology.

[Kevin Dede:]

Okay. Carla, thank you very much for the deeper explanation in the operation there, it sounds impressive and obviously there are lots of people that would be interested in having that power. Thank you Bill for the detail on the major contracts, I appreciate that. And congrats again on the nice job.

[Bill Smith:]

Thanks, Kevin.

[Operator:]

[Operator Instructions] And currently there are no questions in the queue.

[Todd Kehrli:]

Thank you. Thank you for joining us today, we appreciate your participation on the call and certainly we have Mobile World Congress coming up next week and we look forward to seeing those of you who are attending at the conference, and this concludes the call. Thank you.

[Operator:]

Thank you gentlemen and that does conclude today's conference. We thank you for your participation.