Smith Micro Software Inc (SMSI) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Smith Micro Software first quarter 2012 financial results conference call.

During today's presentation, all parties 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, May 2, 2012.

I would now like to turn the conference over to Charles Messman with MKR Group. Please go ahead.

Good afternoon and thank you for joining us today to discuss Smith Micro Software's first quarter 2012 financial results. By now, you should have received a copy of the press release discussing our financial results. If you do not have a copy and would like one, please visit us at www.SmithMicro.com, or call us 949-362-5800 and we will immediately email one to you. With me on today's call are Bill Smith, Chairman, President, and CEO, and Andy Smith, Vice President and Chief Financial Officer.

Before we begin the call, I want to caution that on this call the Company will make forward-looking statements that involve risks and uncertainties, including, without limitations, 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 new market opportunities and interest in introducing new products and new 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 and its customers and their end-users, new and changing technologies, customer acceptance and timing of deployment of those technologies, new and continued adverse economic conditions, and the Company's ability to compete effectively with other software companies.

These and other factors discussed in the Company's filings with the Securities and Exchange Commission including its filings on Forms 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 release and call are made on the basis and views, assumptions of management regarding future events and business performances as of the date of this call 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, President, and CEO of Smith Micro, I want to point that in our forthcoming prepared statements we refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for reconciliation of non-GAAP financial measures.

With that said, I will now turn the call over to Bill. Bill?

Thanks, Charlie. Good afternoon, everyone, and welcome to our conference call to discuss earnings for the first quarter of 2012.

Total revenues for the quarter were $10.1 million, with approximately $8.6 million coming from our wireless products and $1.5 million resulting from our productivity and graphics product line. Non-GAAP gross profit was $7.9 million for the quarter, with gross margins as a percentage of revenues of approximately 78%.

Revenues for the first quarter of 2012 were in line with our internal expectations. Decreases in our connection manager revenue were offset by gains in our wireless backup and messaging product lines. We expect the first commercial launch of our data offload solution to slowly ramp second quarter and anticipate significant volumes in early third quarter. This, along with several other trials and new product agreements we are working to complete, should lead to improved financial results in the coming quarters.

Our operating expenses for the quarter are down 35% compared to the first quarter of last year. We continue to carefully balance a reduced cost structure aligned to current revenue levels, with product innovation and development investments which should increase future revenues.

New solutions for mobile application management and the emerging Windows 8 platform are gaining strong interest in the market, and I will provide more detail about those solutions and several other growing opportunities later in the call.

Now, I would turn the call over to Andy to take you through the details of the Q1 financial results. Andy?

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. Non-GAAP results discussed in this call net out stock compensation-related expenses and noncash tax expense or benefit to provide comparable operating results. Accordingly, all results that I refer to in my prepared remarks for both 2012 and 2011 are non-GAAP amounts.

Our earnings release, which we furnished to the SEC on Form 8-K, contains a presentation of the most directly comparable GAAP financial measures and a reconciliation of the differences between each non-GAAP financial measure provided in the press release and most directly comparable GAAP financial measure. The earnings release can also be found in the Investor Relations section of our website at SmithMicro.com.

In detailed manner for the financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totalled $1.1 million for the current period broken outside as follows. $4,000 cost of sales, $240,000 in selling and marketing, $206,000 in R&D, and $685,000 in G&A. While we showed no GAAP tax benefit for the period due to fully reserving the tax benefit, we are showing a $3.2 million pro forma or cash based tax benefit as we will amend our 2010 tax return to carry back 2011 losses.

Moving on. For the first quarter, we posted revenues of $10.1 million and a loss of $0.27 per share GAAP and $0.15 per share non-GAAP. Revenue for the quarter compares at $17.8 million for the same period last year. International revenue was approximately $1.6 million this quarter across all business groups. Our wireless segment reported revenues for the quarter of $8.6 million, as compared to $16 million last year. Our productivity and graphics segment posted revenues of $1.5 million, as compared to $1.7 million last year. Total deferred revenue at March 31, 2012 was $1.1 million.

Switching to gross profit. Non-GAAP gross margin dollars up $7.9 million compares with $15.3 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 78.3% for Q1 2012, as compared to 86% for Q1 of 2011. A reduction in gross margin is due to lower sales volume covering fixed maintenance and support expense. Non-GAAP gross margins by segment were as follows. Wireless 81%, productivity and graphics 74%.

Switching to operating expenses. Non-GAAP operating expenses for the first quarter of 2012 were $16.4 million, which includes a $328,000 restructuring provision. Q1 2012 operating expense was $2.1 million lower than Q4 2011, driven primarily by less restructuring costs of $1.5 million and cost-reductions of $600,000. From a year-on-year perspective, engineering expenses decreased 37%, selling and marketing expenses decreased 36%, and administrative expenses decreased 11%.

Total non-GAAP operating expenses decreased $6.9 million, or 30% year-over-year, primarily driven by our restructuring and cost reduction measures. Non-GAAP operating loss for Q1 was $8.5 million, as compared to a loss of $8 million in Q1 of 2011. Non-GAAP net loss for the first quarter was $5.3 million, or $0.15 per share, as compared to a loss of $4.7 million, or $0.13 per share last year.

Cash decreased $8.4 million for the quarter closing at $37.6 million at March 31, 2012. In regard to other matters, the Company repurchased 125,000 shares of common stock this period at a cost of $329,000. In terms of housekeeping, we expect to file our quarter end 10-Q by the end of this week, which will represent our final financial statements for the period.

At this point, I will turn the call back to Bill.

Thanks, Andy. During our last earnings call in February, I discussed the significant number of carrier trials either underway or being planned for our data offload solution. The strong market interest in data offload to WiFi was a major theme at the Mobile World Congress in Barcelona, oneof the wireless industry's largest trade shows, which took place at the end of February.

Our participation in that event included dozens of meetings with wireless carriers from around the world, and managing congested networks was a common concern for all of them. As a result of those meetings and the spreading news of our launch at Sprint, we currently have more than ten active engagements with global carriers involving our traffic management solutions.

Additionally, mobile trials are underway for our video and visual voicemail solutions, as well. As this activity suggests, we have some very strong sales momentum that seams to be accelerating. I look forward to updating you on the status of these activities as we move through 2012. While these trials involve a tremendous amount of work and we can't guarantee how many of them will result in agreements this year, the knowledge and experience we are gaining from these engagements is proving to be invaluable. It is clear that data offload to carrier provided or public WiFi service is only a first step inhaling the explosion of data traffic and consumer usage trends.

Carriers are seeking support for many other network-related use cases, such as support for private WiFi networks at home or office, which accounts for about 90 percent of WiFi availability for most consumers; onloading of data traffic to 4G networks, particularly important as LTE gets rolled out; automatic connection to preferred roaming partners for least cost routing; extension of premium services to WiFi networks, for example, content filtering applications for parental control, which can't be enforced outside of the carrier network without an intelligent client on the device; and the ability to measure the impact of traffic policies on user experience and update policies over the year based on those insights.

These are just a few of the areas where we can help carriers by combining our wide range of client and server technologies in unique ways. This flexibility has led us to redefine our data offload solution to a more comprehensive suite that will be branded under the name Netwise. For example, Mobile Network Director has been renamed Netwise.Director. And our new application control solution, which we will be formally announcing next week at the CTIA Conference in New Orleans, will be called Netwise Passport.

This new solution addresses several different problems for operators related to network performance, customer experience, and revenue leakage. For example, it can reduce network traffic by intercepting chatty applications that cause excessive network signaling and redirecting them to WiFi, or offering more efficient application alternatives. It can also identify and manage unauthorized tethering to protect scarce network resources, improve capacity planning, and promote convenient upsell opportunities to subscribers.

It can enforce application-based usage policies, such as insuring that corporate-owned devices and data plans aren't being used to stream movies over Netflix. And it can increase revenue potential for carriers by enabling flexible, value-based data plans based on the type of applications being use instead of just charging for gigabytes. In addition to Netwise Passport and Netwise Director, several other products are being developed or repackaged now that will be rolled out over the coming months to extend the Netwise family. We believe that this new solution oriented approach will help our customers by allowing them to strategically consider and plan for a wide-range of network related issues, but incrementally deploy components for each use case as needed based on their own priorities and circumstances.

On the connection management front, we are finding more opportunities to stabilize our revenue streams by extending the QuickLink footprint in several areas. First, MVNOs (inaudible) data service offerings, many are looking for ways to make laptop connectivity to 3G networks easier, and, of course, that's what we've done with QuickLink Mobile for many years. We recently announced that NetZero and Locus Communications, which are MVNOs of Clearwire, are now using QuickLink and we are pursuing similar agreements with other regional and niche service providers.

Second, we believe we are very close to securing our first commercial contract for QuickLink Zero, which we announced in February. QuickLink Zero uses our SODA technology to embed connection management features directly onto mobile hot spot devices and modems, which will reduce customer care costs and accelerate launch cycles for carriers.

Third, several of our traditional QuickLink customers are asking us for help with the connection management for Windows 8. Although the Windows 8 release preview won't be available until June, carriers and device makers are aggressively planning now for the rollout of Windows 8 devices in Q4. The combination of a standard desktop interface with a new metro interface in Windows 8 introduces a number of complexities for carriers that have to support both new devices and legacy devices, while trying to maintain consistency across their user base. We will help reduce that complexity through a combination of software and services that extend Windows 8 connectivity and provide the customization carriers need on the front-end, as well as the integration needed with back-end activation, billing, and support systems.

Fourth, our QuickLink Enterprise Solution continues to win new customers in North America and Europe, notably BRE Bank in Poland, Eandis Utility Company in Belgium, and the first emergency response and public safety customer here in the US. We believe the emergency response deal, in particular, will be launching point for a significant business opportunity in public safety nationwide. As agencies plan for and invest in the federal government's private LTE network rollout. Beyond connection management, we are providing additional solutions to support public safety and other vertical industrials, including our video steaming solution and components from NetWise, expanding our value proposition to enterprise customers and allowing us to grow this business throughout the year.

Skipping now to our productivity and graphics business, two exciting events has occurred in the first quarter for this unit. For years, Smith Micro has enjoyed a collaborative relationship with Wacom, a leading provider of en tablets, used by graphic artists worldwide. We recently released an update to our Anime Studio software that capitalizes on the new multi-touch features of Wacom's marquis line of graphics tablets and enables natural freehand drawing of cartoons and comic characters.

The feedback from our large artist community has been very positive, and both companies are selling each other's products in retail and online, with exclusive promotions in bundles. We also released an update to the Poser 3D graphics product, including International versions for the Japanese and German markets. Poser has a long established history in both markets and our distribution partners are very excited about the enhancements to Poser 9 and Poser Pro 2012, which will begin shipping this month.

Although our Q1 revenues do not reflect the many exciting opportunities we are pursuing, the development progress we are making across our entire business, we remain committed to pragmatic technology, innovation, and managing our business to capitalize on the opportunities that lie ahead. While we cannot predict with certainty when our new wireless products will be deployed by carriers, we are excited about by the volume of deals that we are moving forward to what we hope is a successful conclusion. We remain very positive about the Company's short-term and long-term prospects, as we expand our portfolio to meet the evolving needs of the marketplace.

With that, operator, I will turn it back to you for questions.

Thank you. We will now begin the question-and-answer session. (Operator Instructions). And our first question comes productivity line of Mike Walkley with Canaccord Genuity. Please go ahead.

Great. Thank you. Bill, can you just update us on the WiFi offload?We met with you at Mobile World Congress and certainly WiFi offload was a big theme there. What have you learned from your trials and conversation with carriers and what's leading to your Netwise Passport product? And just update us on the pipeline and how this led to the new products.

Well, the Netwise Passport product, we had always referred to prior to this as the application control product. While it is a close cousin to the Mobile Network Director, now renamed Netwise Manager, it is -- it serves a different purpose. And we have opportunities that we are aggressively working at the present time and we look forward to talking about successes with that product, as well.

But when you talk about the WiFi offload, clearly, that was a major theme of Mobile World Congress and I'm share it will be the major theme of CTIA next week, and what we are learning is that our approach to this particular problem and solution was very well thought out. We have a very strong product that is meeting the needs of the market and meeting the needs of our customers and a lot of those needs are somewhat unique. It's not like a one size fits all.

As we go from opportunity to opportunity -- and I talked about having in excess of ten opportunities we're working on rights now. Let me try to define what I mean by that. We're either in lab trials, field trials, or proof of concept with all of those. In many cases, we are right now looking at ourselves as being sole source, so this is an effort where we need to demonstrate to the marketplace and to the future customers that the product will indeed meet the needs and objectives that they have laid out and move things forward. Long answer to a simple question, but.

That's helpful. And maybe you can just discuss what you learned so far with Sprint with the ramp appearing in Q3. Is there any technical hurdles that you're learning from it or is it just the timing, just a slow ramp before the larger ramp in the back half the year? And then if you could maybe help us kind of quantify all these deals and how to think about the trajectory of the model, if you're still break even exiting the year if you hit your goals.

Yes, we've learned a lot from Sprint. The first one is always the most challenging, and it's challenging for all parties. It's challenging for us as the software provider, it's challenging for the device manufacturer that has to integrate our client into their hardware and the version of the Android operating system that they're using, and it's challenging for the carrier who is concerned about the overall user experience.

As we have moved through this with Sprint, we have learned a lot. I think all parties have learned a lot. I think it's going fine. We will start the rollout. There are three target cities that will be launched next week, and then it will continue through Q2 with what we believe will be the largest percentage of installs for the install base happening in the early part of Q3.

Okay. Great.

There was more to your question, I think, but I can't recall.

No, thatanswered a lot on the Sprint side. Just more in terms of the pipeline of products and if you still think that they layer on top of each other that you could be reaching a break even level exiting the year. And then I have one follow-up question and I will pass it on.

Okay. Yes, this is what we're focused on. We need to start to really -- we need to see some improvement in the current quarter. I don't think it's going to be a large improvement by any means. And then see it step up in Q3 with the larger volume of the launch of M&D at Sprint, as well as some other wins that we expect to see by Q3. Follow that up with yet more wins that we expect to see for Q4, and meet our overall goals of getting to a break even or positive number by the end of the year.

Mike, just following up, I think you stated that correctly in that it's an internal goal to get to break even certainly and Bill said we have got to close deals. We don't have deals closed yet to get there today, but we have deals on the horizon that are possibilities, we've got to get them closed, and then they have to get launched.

Okay.

And that last part is always the caveat. It seems like you would think going through all the trials and field trials and all that kind of thing and getting a contract done would be the hard part. I think the hardest part is getting it launched after all the contracts are signed, the ink is dry. It just seems to be somewhat of a painful process to get it going.

Yes. Well, good luck closing the deals. It's always tougher with the carriers as you work through the process. And just one last follow-up question on Sprint. Just given the last six months of big share shift within their sales to more iPhone, has that changed these opportunities for you at Sprint or is it still about the same as your initial expectations?

Well, I think it's still about the same as we viewed it going in. We knew that they were going to have the iPhone and, obviously, they've done a great job there and we look for ways to maybe even piggyback on that going forward, so you have to stay tuned.

Okay, great. Well, thanks for taking my questions and look forward to seeing you at CTIA next week.

Thank you.

And our next question comes from the line of Scott Sutherland with Wedbush Securities. Please go ahead.

Great. Thank you, and good afternoon.

Hey Scott.

So following on those questions, you mentioned over ten deals in the pipeline for the Network Director, I guess the new Netwise Director product. How many of those deals do you see that you're the only guy and how many are competitive? Especially as we go into CTIA, we're getting emails from other people who claim to have WiFi offload type solutions.

Sure. There's a split. I mean, obviously, they're somewhere. We are in the very competitive position and there's others where we're not, and I'm not going to break out the exact numbers, but I'll kind of let you know it goes both ways. And the good news is that this has a very global look, that's the good news. The challenge is we also have to manage all of these efforts on a very global platform and we're doing so with somewhat reduced headcount over the size we used to be.

So we have to be very judicious about how we go about this, but we are also very conscious of the need for very successful trials and then very successful implementations. That's the key to our whole recovery strategy. We're very much focused on it and we look forward to good results, and I look forward to being able to tell you about them.

So competitively, you've seen other people come out of the woodwork in offering a network offload. You've really pushed your client side advantage. Are you seeing anyone adopt a client side architecture, as well, or are most of these mostly service side?

No. You see both. You know, there's -- the traditional competitor is Third Step, and we haven't really seen Green Packet, but they have a client. And then we have at least one case where we see some competitive action from Synchronos, but that really is it. The rest are pretty much all non-client side to competitive undertakings and I think the way we view that is it's not necessarily a competitive issue. It's more a matter that as this thing evolves, they could really be our partners because we make our money primarily from selling the clients.

If the carrier wants to use somebody else's server, that's fine, too. We build both. There's no reason to not use us across-the-board, but if that's what they want to do, I think that's a way that you can take what you might view as a competitive situation into a partnership opportunity. But the other thing that I think is really very important and it's the part that I think we are very unique about is we always talk about things in relationship to WiFi.

In many cases, these prospects and customers that we're working with, WiFi is a secondary part of the overall equation. It's maybe more important to some carriers that they establish least cost routing for roaming. It may be more important to some carriers that you seamlessly move between 3G and 4G and WiFi becomes a backup plan. So you have to be careful, we all have to be careful when we talk about this whole area that we don't pigeonhole this thing into just being all about WiFi because it's not, and some of these carriers don't even care about WiFi.

When you look at the ten plus customers in the pipeline, would you say they are across carrier sizes, Tier 1 to Tier 3, or is there anything that dominates there?

Yes, they're almost all Tier 1.

That's great. Last two questions. Last year, you announced a lot of international deals for connection manager. International revenue is still kind of flattish. Any expectations for that to ramp or start benefiting you or is it just a very slow process in international there?

Well, I think the real play for international is going to be with the Netwise Director product because that's where the really significant revenues are. We have some deals in the works that are very substantial to us and we look forward to seeing a successful outcome. I can't talk about them yet, we don't have a deal signed, but everything is looking positive.

Okay. And last, what's your chartered goal for OpEx and cash and CapEx in the quarter?

Sure. You know, Scott, we were right around $16.3 million on the pro forma expenses, which includes $300,000 of restructuring expense in the current period. We look for about mid $15 million, $15.5 million on our pro forma OpEx. CapEx is, at this point, pretty much minimal. We did quite a bit of investing last year in terms of preparation of data centers an whatnot for the current product lineup, so cash flow was pretty much mirrored. Our pro forma operating loss, which was net use of cash of a little bit over $8 million for the period.

And, again, CapEx is going to be under $500,000 at quarter and in many cases maybe about $100,000 a quarter, unless it is specifically lined with a deal or a particular customer is asking us to host a solution. That's somewhat different, but we're not forecasting that scenario at this time.

Okay. Great. Thanks, guys.

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

Good afternoon. Thanks for taking my questions. I wanted to start with your answer earlier on the tougher part as you're getting these things ramped after you sign the deal. I think you signed Sprint in January and we're not going to see that really ramp until Q3. So if I think about sort of the ten engagements you have, it feels to me that the lag would push those into 2013 when we really start to see revenue contribution. I wonder if there's any reason that would come earlier than kind of the same gestation period you have seen with Sprint.

Yes. That's a really good question. I guess first off, obviously, none of us really k now the answer to that until we actually get to that. But let me try to give you the best answer that I can see. First off, a lot of the issues that we have had to work through with Sprint are really all about this is the first time it's ever been done. The next ones aren't the first time, so you learn from those experiences.

To the extent that some of the next wins are product offerings that mirror pretty close to the client server offerings being used by Sprint, and I'm talking about feature (inaudible), those could be deployed much quicker in some cases. Some of the very largest cases, some of the use case cases that the carriers is looking at are much more complex in some areas and very similar in others and that might have some impact on schedule.

I guess the net is as we go through this a number of times with different carriers, I do believe that the overall gestation period of getting the thing from signing to deployment will get much smaller because we will have already gained the experience and know what the potential issues are.

Sure, and, Charlie, adding to that, there is no doubt about that I think a positive is 2013 and beyond is definitely more the part of these opportunities. They're not flash in the pan opportunities where you see a one quarter hit and then you go find other customers.

It's more -- it's similar to the old connection manager business that grew over multiple years. So the best -- again, get these landed. At that point, then you launch on multiple devices and continue to rollout in partnership with your carrier customers, which is good in the longer run. Another side of acceleration, Bill had mentioned before, that in cases of the server-only type solutions, there are partnership opportunities.

Partnership opportunities can actually accelerate revenue trends, but those are yet to be determined. So there's different ways that they can accelerate, but the key takeaway should be these are long running opportunities, not just let's get a good Q3 or four. These are opportunities where we look at them being producers in 2013 and 2014 and so on.

Perfect. Thanks for the clarity there. And I just wanted to move to the connection manager. Do you see it being relatively stable or do you see maybe an uptick with some of these new opportunities you were talking about in the next couple of quarters.

Yes. The new opportunities could be very, very positive. I mean, the opportunities I talked about where we think we do have a deal well in hand now with QuickLink Zero is with a large Tier 1 carrier and that's the positive resurgence of that whole space. This particular usage case will be heavily built around WiFi pucks and so that's exciting as well.

We have other deals that we're talking about. None of them are done yet, none of them are signed, but everything is moving forward and everything looks good. So that could stabilize and actually maybe over some period of time lift that whole sector so that the QuickLink family of products will become more meaningful again in our overall numbers.

And, Charlie, I'm glad you brought up that point because it's an important question. I believe some people thought that that whole line of business was a continued race to zero, and from what we're seeing, that's not the case. We did about roughly $5.5 million in just peer connection manager business in Q4, current periods about $4.9 million, so it's somewhat stable.

This is just basically USB type connectivity business and we've got other business that layers on that shores it up to begin with and then we go from there. So rather than being a continuing declining piece of the business, it shows signs of stability around this $4 million to $5 million, maybe $5 million level, which then adds -- just takes that declining part of the model away and we can start looking at how we layer new deals on top of that.

Perfect.

I think another one that you should not lose sight of, as we talked about, is what we see going on in the first responder federal LTE network rollout. Our (inaudible) connection manager is a big play in that whole space and we see that as having a lot of legs over fairly substantial amount of time and we're getting a lot of leverage there. So that's another area for the overall CM space that will and probably, you know, could grow very nicely.

And then just last for me. Let's say that gestation period turns out to be longer and we're still doing $10 million, $11 million, $12 million in the back half, I wonder if you would adjust OpEx at all if we had a scenario like that beyond this $15 million, $15.5 million?

Obviously, I think we have demonstrated that we will do the right thing about OpEx, and while I'm very hopeful and really don't believe that the -- what you said will actually be the case, of course we would do what we have to do. We're business man; we know what to do.

Great. Thanks a lot.

(Operator Instructions). I'm showing no further questions. I would like to hand over back to management for any closing remarks.

Again, I would like to thank everyone for joining us on our conference call. We will look forward to updating you on our second conference call. I also wanted to note that the Company will be attending CTIA next week, which will be in New Orleans, and Interop the following week in Las Vegas, so if you are there, please come stop by. And, of course, if you have any questions, please feel free to give is a call in the office. Thanks again and have a great day.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and you may now disconnect.