Smith Micro Software Inc (SMSI) 2012 Q3 法說會逐字稿

Good day ladies and gentlemen and thank you for standing by. Welcome to the Smith Micro Software third-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 also being recorded today, Thursday, November 1, of 2012.

I would now like to turn the conference over to our host for today, Mr. Charles Messman of the MKR Group. Please go ahead, sir.

Good afternoon and thank you for joining us today to discuss Smith Micro Software's third-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 www.smithmicro.com or call us at 949-362-5800 and we will immediately e-mail one to you.

With me on today's call are Bill Smith, Chairman, President and Chief Executive Officer; Andy Schmidt, Vice President and Chief Financial Officer; and Carla Fitzgerald, Vice President of Marketing.

Before we begin the call, I want to caution that on this call, the Company will make forward-looking statements that involve risk and uncertainties including, without limitations, forward-looking statements related to 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 while capitalizing on these new market opportunities and interests -- and introducing new products and solutions.

Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the Company's products from its customers and their end users; new and changing technologies; customers' 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 Form 10-K, 10-Q and 8-K, could cause actual results to differ materially from those expressed or implied in any forward-looking statements. The forward-looking statements contained in this press release and call are made on the basis of views and assumptions of Management regarding future events and business performance as of the date of this release and the Company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this release and call.

Before I turn the call over to Bill Smith, Chairman, President and CEO of Smith Micro, I want to point out that in our forthcoming prepared statements we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated earlier today for a reconciliation of the non-GAAP financial measures.

Bill?

Thank you, Charlie. Good afternoon, everyone, and thank you for joining our conference call to discuss earnings for the third quarter of 2012.

Total revenues for the quarter were $11 million, up from $10.2 million in Q2, with approximately $9.6 million coming from our Wireless products and $1.4 million generated from our Productivity and Graphics product line.

Non-GAAP gross profit was $8.9 million for the quarter, with gross profit as a percentage of revenues of approximately 80.8%. Our non-GAAP operating expense for the quarter was $13.9 million, down slightly versus the previous quarter and down 37% versus the same quarter last year.

We believe the increase in our third-quarter revenues reflects the beginning of an important turnaround for the Company. Our wireless portfolio, once focused entirely on connection management for laptops, is now strongly leveraged in network control solutions and premium applications for smartphones and hotspots as well, allowing wireless operators to generate new revenue streams and allowing public and private sector organizations to capitalize on the influx of mobile devices among their workforces.

Our revenues and relationship with Sprint and T-Mobile continue to grow and we are helping both companies prepare for the launch of Windows 8 devices with our QuickLink solution for Windows 8. Further, we are establishing new relationships with operators, equipment manufacturers and enterprises around the world that are driving us to refine our business models and develop new go-to-market strategies. I'll talk more about the expected impacts of these developments after Andy Schmidt, our CFO, walks through the details of the Q3 financial results.

Andy?

Thank you, Bill.

Okay, 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 on this call net out stock compensation and related expenses, noncash tax expense or benefit, amortization intangibles associated with acquisitions to provide comparable operating results.

Our non-GAAP results for the third quarter last year net out the goodwill and long-lived asset impairment charge that we took and the reserve allowance established for our net deferred tax assets, both of which were noncash items. Accordingly, all results that I refer to in my prepared remarks for both 2012 and 2011 are non-GAAP amounts.

Our news release, which will be 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 the 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 a 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 totaled $1.0 million for the current period, broken out as follows -- $3,000 assigned to cost of sales; $231,000 to selling and marketing; $202,000 to R&D; and $544,000 to G&A.

While we showed no GAAP tax benefit for the period due to fully reserving the tax benefit, we were showing a $1.5 million pro forma, or non-GAAP, cash-based tax benefit, which is our estimate of the tax benefit carry-forward that may be applied against future profitability.

Now, moving on, for the third quarter we posted revenues of $11.0 million and a loss of $0.13 per share GAAP and $0.07 per share non-GAAP. Revenue for the quarter compares to $12.6 million for the same period last year. International revenue was approximately $1.3 million this quarter across all business groups.

Our Wireless segment reported revenues for the quarter of $9.6 million as compared to $10.2 million last year. Our Productivity and Graphics segment posted revenues of $1.4 million as compared to $2.4 million last year.

Total deferred revenue at September 30, 2012 was $1.9 million.

Switching to gross profit, non-GAAP gross margin dollars of $8.9 million compares with $10.2 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 80.8% for Q3 2012 compared to 80.7% for Q3 of 2011. Non-GAAP gross margins by segment were as follows -- Wireless, 83%; Productivity and Graphics, 72%.

Switching to operating expenses, non-GAAP operating expenses for the third quarter of 2012 were $13.9 million, which includes a $19,000 return to profit from our restructuring reserve. Q3 2012 operating expense was $0.2 million lower than Q2 of 2012, driven primarily by further cost reductions. From a year-on-year perspective, engineering expenses decreased 46%; selling and marketing expenses decreased 29%; and administrative expense has decreased 13%. Total non-GAAP operating expense has decreased $8 million, or 37%, year over year.

Non-GAAP operating loss for Q3 was $5.0 million as compared to a loss of $5.7 million in Q3 of 2011. Non-GAAP net loss for the third quarter was $2.4 million, or $0.07 per share, as compared to a loss of $9.7 million, or $0.27 per share, last year.

Cash decreased $4.2 million for the quarter, closing at $27.0 million at September 30, 2012. However, in October we received a federal tax refund, related to our 2009 and 2010 refilings, of approximately $7.5 million, which has increased our cash balance to approximately $34 million.

In regard to other matters, the Company did not repurchase any shares during this fiscal quarter.

In terms of housekeeping, we expect to file our quarterly (technical difficulty) Q by the end of this week, which will represent our final financial statements for the period.

At this point I'll turn the call back to Bill.

Thanks, Andy.

We're very encouraged by the increase in revenues we saw in Q3, not only in the sales execution it represents, but in the execution of a technology strategy we have been working on for several years that is now beginning to produce meaningful results.

As most of you know, broadband connectivity has been the lynchpin of our portfolio for the past decade. With the rapidly changing landscape of mobile platforms to support, our strategy for connectivity solutions has been to simplify integration through development enhancement of industry standards. This allows us to focus our expertise and resources on improving the user experience and developing advanced features that help operators to differentiate their offerings.

This strategy fits perfectly with Microsoft Windows 8 platform, where basic connectivity is available out of the box but operators must develop their own tile applications to have a brand presence on the device and promote new services.

This is the value of our latest connectivity solution, called QuickLink MiTile, which is being deployed by T-Mobile USA for devices running Windows 8. As Microsoft builds momentum and market share for Windows 8 devices, we expect demand for our QuickLink MiTile solution to grow, opening the door for us to extend our footprint across new Windows phones as well.

Another exciting development at T-Mobile is the technical acceptance of our first QuickLink Zero installation on a mobile broadband device. You may recall that we announced this project with T-Mobile in August and in less than three months we have integrated our software, completed multiple rounds of testing, and are now ready for commercial launch. The new device is scheduled to hit store shelves for the 2012 holiday season, and we are already working on the next hotspot device.

Shifting now to Sprint, our revenues from this key account continue to grow. In addition to broadband connectivity on Windows 8 devices, we are making good progress on the roll-out of NetWise Director across their existing Android smartphones, as well as on new LTE smartphones. Our NetWise platform is an important component of Sprint's unlimited data strategy and we are honored to have been invited to speak about Wi-Fi offloads at their recent Sprint Open Solutions Conference.

Further, we are working closely with Sprint to significantly expand the use of our Visual Voicemail application among their subscribers and across their MVNO partners. By continuing to enhance the user experience and streamline the trial process, we have increased adoption of the Visual Voicemail voice-to-text premium service by 62% in Q3 versus the same period last year. We are exploring many more initiatives with Sprint and are excited at the opportunity to participate in their growth as a result of the announced investment by Softbank.

Our highly successful revenue share model for Visual Voicemail is a great example of several ways we are evolving our business models along with our technology to capitalize on market trends. Video mail and video casting are new enhancements to our Visual Voicemail platform that not only provide an up-sell opportunity to mobile subscribers, they also extend to other vertical industries, such as public safety, with video surveillance to field agents, and manufacturing, with video streaming of operational procedures to remote workers.

As discussed during our last quarterly call, the ability to integrate several technologies and apply them to new use cases will be one of the primary drivers of our recovery. We have been proving out these capabilities in Q3 and will continue to engage in commercial activities along these lines in Q4.

Likewise, we are pursuing broader channel strategies and go-to-market initiatives with new hardware and software partners that could dramatically accelerate our entry into new markets and reduce our sales cycles.

To support these efforts, we are reallocating headcount to invest in seasoned sales and business development executives that have experience in launching new products into new channels and growing sustainable revenue streams.

One area in which we are already seeing results from these investments is our Productivity and Graphics business unit. In the third quarter, the team focused on reinforcing and enhancing major sales channels. The increased attention to our retail partners is laying a strong foundation for revenue performance in 2013. We are also working to add new distributors and new markets that will extend our retail exposure in North America and abroad.

In the direct channel for P&G we launched major website redesigns for two of our core brands and enhanced our online shopping experience, resulting in significantly increased web traffic and a 96% increase in our average close ratio. New cross-promotion features have also help0ed to increase our average online order value. To culminate the quarter, the Productivity and Graphics group released a new version of our popular animation software, Anime Studio 9. The market response has been excellent and sales from the launch period eclipsed our last release by more than 175%. With these third-quarter investments in marketing and business development and technology enhancement, we believe that the unit is well positioned to end the year with solid performance.

We continue to work with operators around the world on trials for our NetWise family of solutions. While data offload has been very popular in the media for the past year, it is still largely remedial in practice. The ability to support complex use cases such as secure tunneling with seamless transitions between 3G, 4G, and Wi-Fi requires extensive interoperability testing with existing network servers.

And we have demonstrated robust test results with several leading network providers. We are not able to comment on specific results until commercial negotiations are complete, but we hope to have news to share before the end of the year. Of course commercial agreements are only half the battle. We expect device integration and commercial deployments of our NetWise solutions to be moderate, but successful, just as you have seen at Sprint.

Finally, as we approach the Company's 30th anniversary at the end of November, we are optimistic about our ability to successfully rebound from a down cycle in our business as we have done more than once in the past three decades. Virtually every industry has suffered under the current economic conditions, but we have proven time and time again that we can adapt and recover through the peaks and troughs of each economic and technology cycle.

We remain prudent about managing costs while at the same time recognizing the need to think and act creatively, which requires investments in new areas. Our current pipeline of opportunities, if successful, should allow us to grow revenues at an even pace over the coming quarters and return to profitability in 2013. We look for continued growth in revenue and stable expenses in the fourth quarter of 2012 as we manage the Company towards a cash flow positive business case.

With that, I'll turn the call over to the operator to start the questions.

Thank you, sir. (Operator Instructions) Scott Sutherland; Wedbush Securities.

So a couple questions here for you. First of all, maybe some housekeeping questions. What are any 10% customers? And, secondly, how much legacy Connection Manager revenue did you have in the model?

Scott, this is Andy. Okay, we had Sprint at about 46% for Q3, and Verizon at 19%. Those were our two 10%-plus customers.

And when we look at product mix, our base connectivity business that you're familiar with from prior years, that had an uptick. We had about $3.8 million in that in Q2. Sequentially that went up to $4.4 million. So as we've spoken to you in the past, that business is not going down to zero. That business is going to find kind of a spot where we kind of baseline for a bit, and then expect some modest increases. Bill talked to some business that we've got coming forward with new launches. So we expect that to, as we've said in the past, stabilize and increase modestly.

Looking at the road back to profitability, I think we've talked about kind of getting to the mid-high teens level to get back to profitability. Are we going to be seeing kind of this step-up function every quarter? Or are we going to see more an inflection point of maybe Sprint or T-Mobile or some of these new deals ramping up? And how should we expect that? Because I think we are hoping to get there by the end of this year.

That's true, Scott. I think the way you're going to see it -- from a conservative standpoint you'll see a step-up function every quarter. I think what will happen at some point in the next three or four quarters, whatever it takes, is you'll see a larger step-up, so that at some point it will just kind of take off a little bit more. But I think to be conservative and reasonable in the approach, we're looking for a step-up every quarter in the forecast tree going forward.

Okay. And last, can you discuss a little more about the Windows 8 opportunities? Are you the only vendor addressing this? Or have you already won the Windows 8 devices at some of your carrier customers?

I haven't heard of any of the other competitors really focusing on Windows 8. Don't tell them. But, nonetheless, we have won a few. We've talked about one here that is ready to deploy. And we expect that there will be others.

The key point here is, with the Windows 8 operating system, with the tile system, the carriers can have their own tile. But they have to have an app, then, to make it work, to bring it to life, to give them the [advantage] that you have access to (technical difficulty) feature. And that's where QuickLink MiTile comes in.

Okay, great. Thanks, guys.

(Operator Instructions) Howard Smith; First Analysis.

Two questions, one a housekeeping. The other income I think ticked up a little bit and I was wondering if there was a little explanation behind that.

And then, on a fundamental basis, you've planted a lot of seeds internationally. It jumps around a little bit. But maybe you could talk about what you're seeing and what some of the roll-out schedules from some of the ones you've had in the past look like as we exit this year and go into next.

Howard, this is Andy. In terms of your housekeeping, there was a other income item that was related to our Core Mobility acquisition some time back. There was an earn-out that the Core Mobility folks missed that had to do with timing of certain revenues. And they took us to court on it, and we prevailed. So we had that set up as a contingent liability that we were now able to take off the balance sheet. And it shows then as an other income item.

Okay.

Okay. And then talking And then, talking about the overseas opportunities, we have been quite active in Europe, in (inaudible), and in the Japanese market. We do expect to win some business in one or all of these geos over time and we do expect to be able to talk about it. They are more challenging when you're doing trials and some of them are in far corners of the world because that's where the operating unit that they choose to do the trial at exists. And we've worked through that. We've had people in lots of different places. But I guess the best news is that our product has performed extremely well and we're moving forward.

Okay, thanks.

Brian Swift; Security Research Associates.

Bill, in the past you've given us some color on some of the trials that have been going on with NetWise and some of your other new products. Could you -- I think you mentioned it, but can you give us a little more color on that in terms of how these are going and people -- if anybody's dropped out or any new ones that have come in or anything along those lines?

Sure. I guess before I start, let me first say to you that I apologize for not making the SRA Conference earlier this week. I had a family member who was sick.

Brian, as far as the other question, the real question you asked, yes, we've had a number of trials. We are still in trials in a number of locations. They have all by and large gone very well. We have proven our software and now we're going through the excruciating process of trying to negotiate a deal and put a contract in place. So that's really all I can say at this moment. I look forward to being able to say more to you as soon as we have deals done.

Okay, thanks.

Thank you. And there are no further questions in the queue at this time. Please continue.

I just want to thank everyone for joining us today. Should you have any further questions, please feel free to give us a call in the office. And we'll look forward to talking to you on our year-end conference call.

Ladies and gentlemen, that does conclude our conference for today. Thank you again for your participation and you may now disconnect.