Smith Micro Software Inc (SMSI) 2004 Q4 法說會逐字稿

Good afternoon and welcome to the Smith Micro Software Inc. 2004 year end results conference call. At this time all participants are in a listen only mode. Following the presentation we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). Now I will turn the meeting over to Mr. Bruce Quigley, Vice President of Investor Relations. Sir, you may begin.

I want to start by thanking everyone for your patience, we had some technical difficulties here. I would like to start to thank you for joining Smith Micro's discussion for the fourth-quarter 2004 financial results, as well as the year end results which ended December 31, 2004. By now you should have received a copy of the news release. If any of you did not see the release you may acquire it at either the Company's web site at www.SmithMicro.com, or by calling 949-362-5800 and we will fax one or email one to you immediately.

On today's call are Bill Smith, President and Chief Executive Officer, and Bob Scheussler, Senior Vice President and Chief Financial Officer, as well as myself. During the course of this conference call we may make forward-looking statements regarding the future events or the future performance of the Company. Actual events or results, of course, could differ materially. These forward-looking statements speak only as of today's date and are based upon the information currently available to the Company.

The Company disclaims any intent to update publicly any such forward-looking statements whether in response to new information, future events or otherwise. We refer you to the documents the Company files from time to time with the Securities and Exchange Commission, specifically the Company's most recent Form 10-K filed this past March 2004, and the third quarter 2004 10-Q filed this past November 15th. These documents contain and identify important factors that could cause actual results to differ materially from those contained in any forward-looking statements. At this time I would like to turn the call over to Bill Smith. Bill.

Thanks Bruce. I too want to welcome you to our fourth-quarter and year end 2004 conference call. As always I will give you an overview of the results before Bob Scheussler gets into the financial details. I will then come back and provide some overall details on the current market opportunities and then open the call for questions. As indicated in our press release, our fourth-quarter of 2004 was another strong quarter, with net revenues increasing to 4.2 million, representing a 166% increase over the same period in 2003 when we reported revenues of 1.6 million, and an increase of 17% when compared to third quarter 2004 revenues of 3.6 million.

Net revenues for the year 2004 were 13.3 million, an increase of 85% over the net revenues of 7.2 million recorded in the year 2003. Net income for the fourth-quarter of 2004 was 1.4 million resulting in a gain of 9 cents per basic and diluted share. This compared to a net loss of $325,000 or 2 cents per basic and diluted share in the same quarter of last year. This is a 51% increase over the third quarter of 2004 when we reported net income of 1.1 million or a net income of 6 cents per basic and diluted share. For the year, our net income came in at 2.9 million resulting in a gain of 19 cents per fully diluted share. This compared to a loss of $923,000 or 6 cents per basic and diluted share last year.

The Company finished the year with cash and cash equivalents of 8.6 million which was up 132% compared to a year ago. As you can imagine we are very pleased with our 2004 results. We continue to build upon the momentum we started in 2003 as the leading provider of wireless connectivity software. During the year Verizon Wireless, our largest customer, continued to put its full support behind both high speed EV-DO data service rollout and Smith Micro. The fact that Verizon's rollout has only just begun gives us optimism about 2005 and our growth prospects. I will go into more detail later in the call regarding the industry outlook, but now I would like to turn the call over to Bob Scheussler to describe the fourth-quarter financial results in more detail. Bob.

Thank you, Bill. In summary, operating results during the fourth-quarter of 2004 resulted in a profit of $1.6 million, compared to a loss in the fourth-quarter 2003 of $325,000. Fourth-quarter revenue increased to $4.2 million from $1.6 million in the prior year. Looking at the full year 2004, revenues for the entire year 2004 increased by $6.1 million over the previous year to $13.3 million. Net income before income tax for 2004 was 3.4 million, an improvement of $4.4 million compared to 2003. Segment revenues for 2004 are reflected in the consolidated financials.

Regarding revenues from our individual business units, wireless and OEM products posted revenues of $3.8 million, and Internet and direct solutions posted 400,000. Wireless and OEM revenues in the fourth-quarter of 2004 increased $2.7 million, compared to the fourth-quarter of 2003. The primary contributor to this increase was significant growth in data kits and PC Card Software as well as a modest increase in engineering fees. The Internet and direct solutions unit ended the fourth-quarter of 2004 with a decrease of $138,000 compared to the fourth-quarter of 2003, a decrease of 26%. The change in revenue was the reduction in (indiscernible) SDF (ph) product sales.

Switching to gross profits, total gross profit percentage in the fourth quarter of 2004 was 80%, up 4.9 points compared with the fourth-quarter of 2003. Product gross profit percentages in the fourth-quarter of 2004 increased by 4 points to 82% compared with the fourth-quarter of 2003 gross profit of 78%. This increase was driven by PC Card software sales not present in 2003. Services gross profit margins in the fourth-quarter out of 2004 decreased by 11 points to 50%, compared with the fourth-quarter 2003 margin of 61%. This decrease in gross profit margin is due to the cessation of one consulting contract.

Analysis of expense indicates that overall operating expenses increased by $185,000, or 12% compared with the fourth-quarter of 2003. This represents modest increases in accounting, legal, investor relations compensation and travel related items. In closing our balance sheet summary, cash balance is $8.6 million. This is an increase of 2.9 million from the prior quarter 2004 and an increase of 4.9 million over Q4 2003. Accounts Receivable is a very solid $2 million with all significant accounts reserved and the remaining accounts collectible. Accounts payable is $939,000. All accounts are current. Inventory levels remain nominal and are fully reserved, and again no long-term debt.

This concludes our review of the fourth-quarter financial results. And now let me turn it back to Bill.

Thanks, Bob. The fourth-quarter results represent the continued efforts of both our wireless and OEM sales teams and our Internet and direct sales teams as they continue to exceed their internal goals. These results are also indicative of the growing strength of the wireless data business sector and particularly of Smith Micro's ability to provide software that our customers require to facilitate smooth and effortless installation and utilization of wireless data connectivity. As I believe we are all aware, Verizon Wireless is in the very early stages of its wireless broadband access or EV-DO data service rollout offering service in only 16 cities in the last half of 2004. Despite the limited rollout and the short time span that this service has been available to consumers, Smith Micro has experienced significant growth on both the top and bottom line in 2004 as a result of Verizon Wireless' standardizing on our wireless date connectivity solution.

Moving forward, Verizon Wireless has continued to rollout its wireless broadband access data service at a fast-pace, and in 14 more cities in the first month of the new year. This was welcome news and will continue to be an important factor for Smith Micro as we are the sole source for Verizon Wireless' data connectivity kit and PC Card software. However, this launch of additional cities by Verizon began approximately two months later than anyone, including Verizon, had expected. We believe this two-month delay in the launch of these new cities could result in a temporary inventory buildup that could cause sequential softness in the current quarter's results, a fact that has already been reflected in our analysts' forecast. We believe that this backlog of this -- excuse me. We believe that this explains our backlog of business entering Q1 2005 of approximately $1 million, down from prior quarters.

We believe that this inventory buildup will be burned off during the current quarter thus placing no impact on subsequent quarters of 2005. Having said all of this, let me be clear, we are highly confident that our outlook for 2005 and beyond is very bright. We look forward for continued profitability throughout 2005 and substantial topline growth on a year-over-year basis.

For those of you that heard me speak at the Needham conference last month or at any other time on my IR visits to New York and San Francisco, I have consistently said that the wireless data market is in the top of the first inning, to use the baseball analogy. Verizon has been offering its wireless high-speed data service in a meaningful way for less than six months and in only a limited number of cities. Emerging markets such as these can present tremendous upside opportunities in the long run, but they can also provide short-term lumpiness from time to time as they begin their ramp and rollout.

The current developments in the PC Card wireless data market are very positive for Smith Micro. Increased competition among PC Card vendors will result in a lowering of the cost of PC Cards to the consumer which will in turn provide positive sales for our wireless data services by our carrier customers. Increased sales by our carrier customers will flow directly to both our top and bottom lines. All PC Cards sold by our carrier customers ship with Smith Micro Software without regard for a new built to PC Card hardware.

Verizon has stated that they intend to announce additional markets throughout the rest of 2005 giving broadband access a national coverage reaching over 150 million people. At the beginning of 2004 horizon wireless announced an investment of $1 billion to deploy 3G high-speed data service throughout 2004 and into 2005. We believe this, as well as Verizon Wireless' recent announcements, should show true commitment to deploying and marketing the service. As you can imagine we are very excited about Verizon Wireless' actions and confident that they are committed to this rollout. However, in addition to Verizon Wireless all of the other Smith Micro wireless customers are equally important to our business success, and we are excited about the opportunities that lie ahead with each of these customers in 2005.

We look for the continued deployment of Edge by both Dobson and Cellular One in 2005. Telus plans to add our QuickLink phone book to all of their data kits. Sierra continues to deploy data kits for their satellite based wireless service in western Europe, Africa and the Middle East. Kyocera Wireless has selected Smith Micro to develop a version of QuickLink Mobile for Kyocera Wireless' EV-DO PC Cards. Additionally, Novatel Wireless will ship our Mac version of QuickLink Mobile with their PC Cards shipped into the Mac channel. We were encouraged by the growth of all of our customers' wireless data offerings.

Moving forward, we anticipate adding new carrier customers both domestically and internationally in early 2005. Last quarter we stated that we would add a domestic carrier during the fourth-quarter. This took a little longer than we expected. The contracts with our new customer has been executed and should be announced in the next few weeks. This new customer will add to Smith Micro's dominance in the north American wireless data market. We still believe our international carrier addition is on track and we look forward to announcing them this quarter. These additional carriers will further accelerate growth and minimize our dependence on a single large customer.

As I mentioned earlier, the high-speed wireless data market is still very early on in its development and is a strong emerging market. Our exclusive arrangement with Verizon Wireless, the leading wireless carrier in North America, is a great endorsement for Smith Micro as we attempt to add new carriers and continue to grow our revenue and our bottom line. As our carrier customers succeed in selling high-speed data services, Smith Micro succeeds because their subscribers need either a data connectivity kit or a PC Card to use this service, and both include our software.

Coming up in March, we will be exhibiting at this year's CTIA conference in New Orleans. We anticipate continued excitement about the overall merging wireless data market. As many of you know, we announced last fall that we are launching a new version of QuickLink Mobile for the enterprise. I am pleased with the progress we have made to date. We believe that our solution will have a significant competitive edge as we are experts in connecting to several different service providers utilizing a variety of handsets and PC Cards with a single application.

The product is on track to be available in the second quarter. Although the sales team does not have the product to be able to sell it today they have been actively prospecting. As I am sure you are aware, selling into the enterprise market is a long sales cycle but we are encouraged by the early reaction to our products' capabilities as we have identified a number of qualified prospects. We are on track with my comments I made during the third quarter conference call. We expect to see enterprise revenue start in the latter part of 2005 and ramping up in 2006.

I would like to finish by focusing in again on our 2004 results. This was truly an exciting year for Smith Micro. I said during the 2003 year end conference call that we saw 2004 as the year when the Company would once again turn profitable and we successfully achieved that goal. We accomplished this effort by increasing our revenue and managing our costs. We are very pleased about the execution across the board by everyone at Smith Micro and look forward to delivering equally impressive results in 2005. With that, I'd like to turn the call over for questions. Operator.

(OPERATOR INSTRUCTIONS). Rich Church with Uttenberg, Tobin.

Good afternoon, guys, nice quarter. Bill, could you talk about, in terms of the new carriers that you're working with, did you see any revenue from the domestic carrier in the fourth-quarter or do you expect to see that in the first-quarter here?

We saw a small about of revenue from that carrier in the fourth-quarter. We expect to see more significant revenues from that carrier in the first-quarter.

And then with regard to the international carrier, I take it from your commentary the contract has not been signed yet, is that correct?

No, I didn't say -- yes, I didn't say that it was signed, and at the present time it is not signed but we expect it to be signed shortly.

Okay. So possibly for revenue in the second quarter?

I would look for it in the second quarter, yes.

With regard to the QuickLink Mobile for enterprise, could you tell us if you've got any customers in data at this point?

I want to make sure I understand. If we have any customers signed up at this point?

That are beta testing.

That's what I didn't make out. No, we do not have any customers in beta yet. We anticipate starting beta in the latter part of the current quarter.

With regard to new carriers, can you give us some sense of how many opportunities that you're bidding for currently, whether or not it's an RFP type of process, or what kind of sales cycle do you expect?

We expect a sales cycle that will continue throughout 2005. I can't give you exact numbers. I can only say that if you are a carrier somewhere in the world offering wireless data service, we're talking to you right now. We obviously have a very strong offering and we feel very positive about what our product allows us to sell.

With regards to the PC Card side and Sierra and Novatel with Verizon Wireless and your comment about the backlog, basically from what I understand you to say, there's no impact of introducing new cards in terms of delaying the ramp up at Verizon Wireless. Is that true?

I believe what you are asking and I'll answer it this way, as they add new PC Card manufacturers, will that impact their rollout I guess in a negative way? And the answer is, none that we can see. We see additional PC Card vendors coming online actually assisting Verizon in their rollout because of the fact that competitive pressure will have the effect of reducing the cost of the PC Cards. And from our point of view, it doesn't matter whether you sell brand A, B or C, our software is with all of them. So the more cards that are sold, the better it is for Smith Micro.

Thank you very much.

Ed Chang from Rodman & Renshaw.

Great quarter. A couple -- well, more than a couple. One, with the deployment of these handsets, these EV-DO handsets, you officially don't have any kind of agreement -- or you can tell me if you have an agreement with these guys to provide the software for the connectivity. And I'm not sure if the handsets need it or not. Is that something that is on the radar screen? And to piggyback on that, when these guys sell -- when the Verizon Wireless retail shops sell the handsets or when you buy it online, will there be probably since you host the website, a fact that maybe it's a recommended solution to have the Smith Micro, or the office kit there to go along with the purchase of the phone?

Okay, let me see if I understand exactly what you're saying and if I don't come back and ask the question again. On the EV-DO handsets, your question from a Verizon point of view, when Verizon offers dated kits for EV-DO handsets we would expect that it's just like any other handset data kit and we would provide that. Now that being said, there will initially probably be EV-DO phone book data kits rather than fully functional data kits for the EV-DO handsets as they start to cut in these new handsets. That also causes a little bit of disruption for us from the standpoint that there will be a transition from 1xRTT data kits to EV-DO data kits. And I hope I answered your question and didn't confuse it more.

No, that is what I was looking for. Does it pay for you guys to sort of try to get an agreement with the handset manufacturers to ship or have QuickLink on their phones when it goes out there?

Remember QuickLink Mobile resides on the client, not on the phone, first of all. We are talking to all of the EV-DO handsets manufacturers. And as you might guess, we are working with every single one of them now with their free release handsets. I won't identify who everybody is, but just rest assured that we are actively in that market and at that point our sales team is talking about, especially those EV-DO handsets that would be sold to carriers that we don't currently do business with. If they are sold to carriers we currently do business with we would expect that our software, and you should expect that our software, would go with the data kit.

Since you mentioned the sales team, on the enterprise version of QuickLink Mobile is the sales team right now currently working with the Verizon Wireless enterprise sales team at all, or are you guys piggybacking off their opportunities or are there -- what's going on there?

There are two separate sales team, there's an OEM sales team and there is a direct sales team. The OEM sales team supports and works with Verizon Wireless in all facets of our relationship with Verizon. That sales team therefore is working with them in their efforts to launch into the enterprise. Now we also recognize that there are many corporate accounts that while they may want to have access via the Verizon network, may also want to have access via a number of other networks. Now in that particular case, Verizon is not particularly going to be intent or want to provide access with their client to competitive networks.

In that case our direct sales team will step in and will sell the product to the client. Now under no circumstance does our direct team competes directly against the Verizon team, or for that matter any of our other customers' teams. We will first wait to see if our customer, with the help of our OEM sales team, can close the enterprise. If that becomes a problem because of competitive pressures, the direct team will step in.

What I alluded to in my prepared comments is that we have started a very active prospecting capability looking at everybody who has bought QuickLink Mobile in multiple copies of it over the last year or so. In doing so, we have identified a number of highly qualified prospects in the enterprise space. We also attended the CTIA show in San Francisco and got a number of very qualified prospects out of that activity. So we have a very active and energetic sales effort underway directly to the enterprise with our branded products.

Just two last questions. How are you guys differentiating your enterprise solution as opposed to competitors, or as the guys in the space like to say, GoRemote or iPass? And my last question is, since I'm hogging up all the time is, with the international carrier have you deployed a test, beta version with them already? That's it.

I'm thinking right now. Let me answer the second question last or first. I believe at this point they have seen product, whether it is a final beta or not, I just don't know. But we are moving through the process. Could you repeat that first question?

How is your sales team differentiating QuickLink Mobile from competitors like say GoRemote or iPass who are sort of also targeting the space? I know it seems to me that within that whole industry everyone is starting to play up the security angle and coming to enterprise and saying well everyone provides a version of what we do. We are the most secure. And with everyone worried about security issues with Wi-Fi, as well as cellular, and anti-spam coming to your laptop or your phone or everything else like that. I was just wondering how you guys were going to put yourself apart from those guys?

That is a great question and it's got a pretty strong answer. To provide Wi-Fi access to the enterprise is probably the easiest part of this applications job. And so then you talk about security and you talk about implementing 802.1x (ph) and we are doing that. But where the real differentiating part starts to kick in is in the wireless LAN side. Because to be able to effectively provide a client to the enterprise that will service all the different hardware, all the different headsets, all the different PC cards, you really need to have a relationship with major carriers in the marketplace because that's how you get the early releases of the hardware before they are available to the consumer. That's how we can be sure that when new hardware ships we already have a product that will support it. And that's how we can say to the enterprise we don't care what hardware you want to use, we guarantee you we're going to be able to support that hardware. None of those other guys you mentioned can even come close to that. That is a major problem for them.

Thanks.

Orin Hirschman with AIGH Investment Partners.

Congratulations on the results. I apologize, my voice is very weak. Can you just reiterate, I know you gave a little bit of qualitative guidance on Q1 with the inventory issue. I know that you said at the same time you hoped to remain profitable and you said analysts have factored it in. Can you be more specific in terms of Q1? And is it purely confined, as well as you can tell, to Q1, particularly based that we're almost halfway through your Q1?

That is a good question. I think the best way to answer it is to say simply that we believe that there was a lot of inventory brought in for a launch of 14 additional cities in mid Q4 of 2004, and those cities didn't really launch until the middle of January 2005. As such, that inventory needs to be burned through. Those cities are launched, they are up and running. There is active marketing efforts on the part of Verizon, and all of Verizon primaries, including Smith Micro, to go out and spread the word about what EV-DO means to these new cities.

So we believe that the inventory will get burned off during Q1 and we believe that there could be softness in Q1 because there won't be enough time to buy what we would normally see the normal buy-in for Q1 of PC cards because they were already bought in Q4 and that will cause a sequential softness. Now we believe that at no point in time does Verizon order that much product be it hardware, PC cards or data kits, that far in advance. And so based on that, we are confident that the problem will be corrected during the current quarter and we can move forward in a more normal state for the balance of the year.

(technical difficulty) magnitude are we talking about? Is it a $1 million type of magnitude or millions?

I think you should look at the analyst report that is already out there. It shows somewhat of a drop in hundreds of thousands, and you know I think look for the analysts then to give you better guidance on the go forward.

Thanks so much.

(OPERATOR INSTRUCTIONS). Gentlemen, I show no additional questions.

Once again, I would like to thank you for being patient with us and we look forward to all of you being on the call --.

Gentleman, I apologize for the interruption. We now have three questions in queue. Thank you. Our first coming from Ian Gilson from Granite Financial.

Congratulations, first, on the great quarter. When you talk about inventory, are you talking about inventory at Verizon?

Yes.

I'm a little confused about a new carrier to be announced. We have a new domestic carrier to be announced in the next few weeks?

We actually said in our third-quarter conference call that we believe we would announce a new carrier in the fourth quarter. That was (multiple speakers) the contract is now executed, and all-in, the indications are that that new carrier will be announced in the next few weeks.

You also have a nondomestic carrier that you are very close to signing with?

Yes, and we look forward to that before the end of the quarter. Obviously that assumes that everything gets done in time and we don't have any slippage. Everything at this point in time looks like it's a go.

Now do you happen to have the end of fourth-quarter Verizon Wireless EV-DO subscriber count?

No, we don't. That is a question that nobody really has, and that's a question you're going to have to ask Verizon.

They normally announce it, but this quarter I either didn't hear it or they didn't announce it.

They did announce a number at the end of third-quarter, but I have not heard a number and we have not been privileged to a number at the end of the fourth-quarter. That would be a very intriguing number for all of us.

Great, thank you very much.

Ed Ching from Rodman & Renshaw.

I guess to beat up on the enterprise stuff, when you guys -- the guys you are basically prospecting right now, can you give us some more color on the size of the enterprise? I mean are you targeting a specific sector like finance, health care, insurance? And then the pricing relative.

We haven't really (multiple speakers) ourself by sector, Ed. And the prospects that we have identified very -- they are all fairly large. And some of them are thousands of employees and others are hundreds of thousands of employees and fall between those two extremes.

What do you think the pricing is going to be for the system? Besides the QuickLink Mobile software, what else are guys going to deploy and how that's going to affect the cogs going forward there? Are you going to put in wireless routers? Are you going to take the equipment that's going on there as well and build into that?

Let me clarify, because I think there might be some confusion. What we are going to do is we go to a corporate account and they say they would like to procure our client software and deploy it throughout the enterprise. They also -- that would be on a per seat basis and we said our published per seat rate starts at $30 per seat and then becomes a negotiable item based on the number of seats that an enterprise wants to sign up for.

Now the server in the case of tying into the Wi-Fi on campus type service, the server could be anybody's server, anybody from Cisco to Microsoft. Or you can purchase the QuickLink server product that we announced, where we OEM that product and private label that product, and that product will sell for anywhere from $2,500 to $25,000 depending upon the number of concurrent Wi-Fi users that the enterprise wants to have service for.

Thanks, guys.

Orin Hirschman from AIGH Investment Partners.

Just a follow-up. (indiscernible) the point that you made about the number of subscribers. Based on the guidance for Q1 and the fact is, the inventory factor, does that mean that the growth from the existing markets is not enough by itself to create growth for you? I'm not sure I follow that.

Let me try answering the question. The causal for why we see softness for Q1 on a comparison to Q4 is the fact that inventory we believe was purchased in Q4 for a launch of 14 additional cities. Those cities didn't launch, they launched in the second week or third week of January instead. As such, we didn't get the sell through in those 14 additional cities for approximately eight weeks. And that means that there was inventories in there to sell into cities that hadn't launch.

That is really the driver of this. It is not in any way, shape or form anybody here at Smith Micro saying that they do not have significant adoption. Quite to the contrary, we have been told by our partners that they are quite pleased by their adoption rate. They just have not given us any hard numbers. We look forward to seeing those as soon as Verizon wants to put those out in public hands, but at the present time they have chosen to keep that to themselves.

(indiscernible) that calculation, my point is it would mean to say that existing cities that have been deployed (technical difficulty) inherent in those cities, where again you saw (technical difficulty) data and data kits. It's not enough by itself to create growth versus the inventory issue, unless they really (technical difficulty) magnificent inventory.

Let's go back on the again. We think and from what we have been told by our customer that the adoption rate in the cities that they had launched was very acceptable and they were very pleased with that. In no way, shape or form do we want to be quoted as saying we think they didn't get the final break they were looking for. It's quite the opposite. We just believe that they bought inventory for twice as many cities as they had cities launched. And as a result, you could do really well in the 16 cities they have but they can't make up for the fact that they may have bought inventory for 30.

(technical difficulty) can you actually tell when you expect the (technical difficulty) kits, can you tell where its' going, meaning which cities it is headed for, so to speak?

No, we have no visibility to that at all.

Is it fair to say that existing adoption continues to grow and that is just being offset by this bit of inventory that you are mentioning?

It is safe to say that, yes, I think that is a safe statement.

Thanks.

I show no additional questions.

Once again, I would like to thank everyone for being on the call. We look forward to our next which will be our first-quarter 2005 results sometime in April. If you have any additional questions, feel free to give me a call or you can reach our investor relations firm, NKR, at their location as well. We thank you.

Thank you for participating. Today's conference has ended and you may disconnect at this time.