Smith Micro Software Inc (SMSI) 2013 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro Software First Quarter 2013 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, May 1, 2013.

I would now like to turn the conference over to Todd Kehrli of the MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon and thank you for joining us today to discuss Smith Micro Software's first quarter 2013 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 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 CEO; Andy Schmidt, Vice President and CFO; and Carla Fitzgerald, Vice President of Marketing.

Before we begin, I want to caution that on this call, the Company will make forward-looking statements that involve risks and uncertainties, including without limitation, 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 these new market opportunities and interest in 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, customer concentration, given that the majority of our sales depend on a few large client relationships, including Sprint, new and changing technologies, customer acceptance and timing of deployment of those technologies, new and continuing 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 the 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, I want to point out that in our forthcoming prepared remarks, 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?

Thanks, Todd. Good afternoon and thank you for joining our conference call to discuss our financial results for the first quarter of 2013.

Total revenues for the quarter were $11.6 million, up 14.7% from the same quarter last year. Non-GAAP gross profit was $9.2 million for the quarter with non-GAAP gross profit, as a percentage of revenues, of approximately 79%. Our non-GAAP operating expenses for the first quarter were $14.2 million, down 13.4% versus the same quarter last year. Our non-GAAP loss per share of $0.08 for the first quarter is a decrease to nearly half of last year's first quarter loss of $0.15 per share.

As expected, the seasonality of our consumer business impacted the sequential growth trend of our revenues in the first quarter. However, our Q1 performance did improve on a year-over-year basis, thanks to increasing adoption of our NetWise and CommSuite products, along with a steady, long-tail on the legacy QuickLink business at Verizon and other carrier customers.

Our Windows 8 and mobile hotspot solutions continue to perform well for T-Mobile and we see market demand for more secure, more reliable hotspot connectivity and wireless network management extending to enterprises and vertical markets. We have also made good progress, establishing a wider partner network and our sales pipeline is growing as a result.

Before I elaborate on the market traction and latest opportunities, Andy Schmidt, our CFO will walk you through the details of our 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 non-cash tax expense or benefit to provide comparable operating results.

Accordingly, all results that are referred to in my prepared remarks for both 2013 and 2012 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 difference between the two. The earnings release can also be found in the Investor Relations section of our website at smithmicro.com.

In detailed manner for financial modelers, let me provide the difference between GAAP and non-GAAP P&L metrics. In terms of stock compensation, stock comp totaled $1.1 million for the current period broken out

as follows, $5,000 to our cost of sales; $271,000 to selling and marketing; $242,000 to R&D; and $554,000 to G&A. While we showed no GAAP tax benefit for the period due to fully reserving the tax benefit, we're showing a $2 million pro forma or cash-based tax benefit.

Moving on, for the first quarter, we posted revenues of $11.6 million and a loss of $0.17 per share GAAP and $0.08 per share non-GAAP, revenue for the quarter compares to $10.1 million for the same period last year. International revenue was approximately $900,000 this quarter across all business groups.

Our Wireless segment reported revenues for the quarter of $10.2 million as compared to $8.6 million last year, up 18%. Our Productivity & Graphics segment posted revenues of $1.4 million as compared to $1.5 million last year. Total deferred revenue at March 31, 2013, was $2.2 million.

Switching to gross profit, non-GAAP gross margin dollars of $9.2 million compares with $7.9 million during the same period last year. Non-GAAP gross margins as a percentage of revenue was approximately 79% for Q1 2013 compared to 78.3% for Q1 of 2012. Non-GAAP gross margins by segment were as follows: Wireless, 80%; Productivity & Graphics, 73%.

Switching to operating expenses, non-GAAP operating expenses for the first quarter of 2013 were at $14.2 million. Q1 2013 operating expenses were $900,000 higher than Q4 2012, primarily due to payroll-related costs, including payroll taxes and trade shows. From a year-on-year perspective, engineering expenses decreased 18%, selling and marketing expenses decreased 6% and administrative expenses decreased 9%. In 2012 Q1, we had $300,000 of restructuring expenses that we do not have this year.

Total non-GAAP operating expenses decreased $2.2 million or 13% year-over-year. Non-GAAP operating loss for Q1 2013 was $5.0 million as compared to a loss of $8.5 million in Q1 of 2012. Non-GAAP net loss for the first quarter was $3.1 million or $0.08 per share as compared to a loss of $5.3 million or $0.15 per share last year. Cash decreased $3 million for the quarter closing at $28.3 million at March 31, 2013.

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. This point, I'll turn the call back to Bill.

Thanks, Andy. More than a decade ago, Scott McNealy, former CEO of Sun Microsystems, coined the phrase, " The network is the computer". Today, wireless operators are realizing that their networks now extend all the way to the smart devices that are connected to it and the lines between device features, value-added services and network operations are delivering more every day. That's why our connect, control and capitalized value proposition resonates well with carriers. Connectivity solutions drive network usage, control solutions manage network usage and capitalized solutions monetize network usage.

We have developed our portfolio to support and enhance each of these areas, which is good for carriers as well as our mutual customers and business partners.

Last year -- excuse me, last quarter, I described an important focus for Smith Micro on establishing new go-to-market partners to apply our connectivity expertise in areas such as public safety, utilities, education and other industries. Recently, we announced a partnership with Getac, a leading manufacturer of rugged mobile computers, which optionally will include enterprise-class connection management applications with their laptops targeted for mobile field workers and first responders.

The reliability and security of our flagship QuickLink solution as well as the ability to provide seamless transactions between 3G, 4G and Wi-Fi networks makes our software perfect fit for Getac's rugged devices. We have also established a partnership with a full-service provider of wireless and telecom solutions targeting the education industry. This partner will resell and deploy our NetWise client application on Android-based e-readers used by K to 12 schools for online learning and electronic textbooks. Our solution will help schools effectively manage data traffic over 3G, 4G and Wi-Fi networks to maximize performance while minimizing costs. It will also provide an extra layer of device management to ensure tablets used by students are secure and protected under the Child Information and Protection Act.

Our international market reach is expanding through new reseller agreements with leading system integrators in Europe, Latin America and Asia. And because our device and network management solutions are standards based and accessible through well-defined software development kits, they can be customized and hence integrated with other applications and services to meet the unique needs of each customer.

For example, by partnering with a variety of Wi-Fi providers, we can incorporate their Wi-Fi access databases into our connectivity and traffic management solutions to automate discovery and authentication for end-users. The benefit to operators is the ability to quickly access broad Wi-Fi networks to offload their data traffic, while still ensuring that Wi-Fi connections meet acceptable performance levels based on real-time network conditions and operator policies.

Quality of experience is an area where NetWise continues to outperform competitive products. We are very pleased to have been selected by a second carrier in North America to implement an advanced traffic management strategy for their network that supports several million subscribers. During extensive trials, our solution proved that it can enforce Wi-Fi offload policies based on radio signal strength, data throughput, link speed and many other factors that affect performance.

Rather than throwing data traffic over to Wi-Fi without any visibility into performance, NetWise ensures that high throughput applications like streaming video can be run over Wi-Fi without interruption to meet minimum service thresholds. We expect to begin commercial deployment with this carrier later this year. We are beginning to grow market traction with our hotspot solution as well. The recent launch of T-Mobile's Sonic 2.0 mobile hotspot, the second device to include our SODA technology was praised for its compatibility with Windows 8 carrier applications that allow users to easily access real-time data usage information for every connected device.

The carrier application is our QuickLink MiTile solution, which has been rolled out commercially by both T-Mobile and Sprint and is now being evaluated by operators in Europe and Latin America. The interest by carriers to make hotspots for management was consistent with the growing market demand, for more secured and affordable mobile hotspot service.

In Q1 we conducted a survey of consumers asking about the mobile hotspot usage. And last month, we commissioned a follow-up survey of enterprise IT professionals on the same subject. The findings show that almost half of all IT managers did not feel they have adequate controls over the mobile hotspot devices used by their employees. For those companies that allow both dedicated hotspot devices and smartphones used as hotspots, 46% saw an increasing support calls associated with their usage. And regardless of the type of hotspot device used, 75% of respondents listed security of mobile hotspots is a top concern.

Smith Micro will be publishing the full survey results in a few weeks and conducting a web conference that shows how our QuickLink hotspot solution addresses these concerns or smartphones and pucks. We believe there is a significant market opportunity for our hotspot solutions with carriers as well as directly with enterprises and consumers. Despite the seasonal decline in overall revenues, our productivity in graphics grew -- saw better than expected direct business in Q1 due to a successful launch of the new MotionArtist title as well as robust sales of Manga Studio 5 and Anime Studio, which were up significantly from Q1 of 2012.

The retail portions of the business continues to solidify with new distribution partners now on board domestically, as well as in China, Korea, India and the Philippines. We continue to win increase our marketing presence at (inaudible), Sam's Club, OfficeMax and Staples, as well as through new partnerships with Newegg and Tigerdirect and by growing alternative channels through strong relationships with Avanquest OEM and (inaudible).

The development work we're doing to integrate our graphics and wireless technologies is producing positive results. Last week, our comp suite solution, which brings delightful, innovative, avatar messaging to mobile users was selected as a finalist in the Emerging Technology Awards program of CTIA Wireless. Compelling visual messaging applications are our key strategy for helping wireless operators compete with over-the-top apps.

Several large operators have told us that they are losing up to $1 billion per year in messaging revenues due to broad adoption of over-the-top messaging apps. To address this challenge, CommSuite solutions can be rapidly deployed by carriers using a frictionless, premium business model that drives recurring revenues through add-on modules and content. We expect our first commercial launch of avatar messaging in the US to be in the third quarter of this year.

Finally, we recognize that it's not just innovative software our customers and partners seek from us, it's our expertise and creativity, developing new marketing methods and deployment strategies to better engage customers drive adoption of new services and ultimately grow revenues. Technology is a tool to achieve a business strategy. By being a business partner first and a software developer second, Smith Micro is helping our customers on both fronts.

And with that operator, now open the call for questions.

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Mike Walkley, Canaccord.

Thank you. Bill, historically, your business seems to be better in the second half than the first half for the year. How do you see the year shaping up and also could you talk about just some of the different products in the pipeline and how the business might improve as the year plays out?

Historically, if you look at our numbers, we always have a little softer quarter in the first quarter due to the normal trend in the consumer part of our business, where they have a big fourth quarter and it falls off in first quarter. So, this is fairly consistent. We typically look then to grow our revenues throughout the balance of the year, which does tend to result in the back half of the year being stronger than the first.

As far as products, we're very happy with our overall product mix, on the connectivity side of our QuickLink to connection management, as well as -- connection management for the enterprise as well as our QuickLink Hotspot products, both for pucks and for handsets.

On the network control part, clearly our NetWise product continues to grow and mature and it's a product that continues to evolve to solve new uses that are coming from our customers and our prospects. And on the capitalized side, our strong focus on our visual voicemail would add on product offerings like the avatar messaging along with our video capabilities really provide the backbone of the wireless business.

On the consumer side, yes, we've launched new titles, but if you look at our numbers, call brand titles such as Poser and Anime Studio continue to adopt dominate that business case.

Thanks. And just on the NetWise product, is that still growing throughout the year with Sprint and then the new customer, so that's a sequential growing business, I know it can be lumpy, but it's still got room to grow throughout the course of 2013?

Well, we certainly hope so and we're working hard to make sure that happens. As we all know, there's no guarantees, but that would be the way we've structured our business cases and what we're working towards.

Okay. And then with the features adding to your visual voicemail and I think you said the third quarter, do you think that business has a step function up in the back half of the year?

It should, plus if you look at it from a standpoint of what happened since the beginning of 2012, you're seeing a steady growth in that overall revenue base as the number of users that are utilizing the various offerings grow slow. I see no reason to expect that to change.

Okay, great. And so, Bill, I guess, Andy, when you study your business via the current gross margin level and OpEx level, it calculates somewhere around $17 million to $18 million in revenue, just to get to kind of a pro forma breakeven. Is that kind of how you're sizing in the business and do you think those levels are achievable on a quarterly run rate by the end of 2013?

I think the way you view where we need to get it is probably right on. However, I want to go back to what I said at the beginning of the year, when we did the year-end conference call. I said our goal is to be profitable by the end of the year and there's two ways to do that. You can grow revenues or you can grow the other way, which will obviously implies expense cutting as well as revenue growth. We retained that right and as a management team, we will exercise that right to bring profitability to the end of the year.

Okay, great, thanks for taking my questions and hopefully it's on the topline and not the expense reductions, but good luck, folks.

Yes, that's always what -- that's what we all hope for, but I just had to say it again. Thanks.

Thanks for reminder, good luck will your different programs.

Thank you, sir.

Howard Smith, First Analysis.

Yes, thank you and good afternoon. I just wanted to first follow-up on this second carrier in North America for NetWise Director. It sounds like it's through the trial period, you said a few million customers perhaps in commercial deployment later this year. Is it a matter of getting on certain devices or what is the gating factor for the rollout and how would you expect that to be rolled out by that carrier?

Okay, let me clarify something you just said, maybe I read it wrong when I said it. So this particular carrier has millions of subscribers and we would expect that -- we would eventually have our software on most of those, I mean at least all of the Android devices and we're very busy getting Windows 8 devices online as well.

Clearly it's a big focus. For a carrier to launch, this kind of an undertaking, whether going from no intelligent network management, they don't have clients on devices, all these things take time and we need to work closely with the carrier to come up with a deployment strategy that makes sense. It doesn't introduced risk to their business case and it allows them to achieve the goals that they've set out and why they chose us to begin with. So, there are many ways to get the software on the device, most common one is the maintenance free release of the Android operating system, something that controls by the device OEMs. So we have to work with the OEMs to get this software pushed out there, get it online. Probably, the easiest part is get the server side software up and running within the carriers' infrastructure. But it is a process that grows over time and I think if you look at the revenues that we've generated from Sprint, starting with the initial launch of the NetWise product in the early part of or mid-part of last year, don't hold me, I can't recall exactly when, you'll see that it has grown over time as more and more devices come up online.

Okay, thank you.

Hopefully that helps.

Yes. And speaking of Sprint and others, can you give us the 10% revenue breakdown?

Sure, Howard. Sprint this period was [55%] and we had Verizon in about 16%.

Okay. And last question from me has to do with the international revenue. It looks like it was down fairly significantly year-over-year after being down a little bit for the full-year 2012. You continue to have kind of wins and interests there, but the net result hasn't taken hold, I should say, yet. Maybe you could just add some color to some of the trend lines there?

Okay, I think we've talked about this on the last call. I think, we've taken a really hard look at where we are selling products in various parts of the world and it's good to be able to close an account and sell the product to see if it's better to be paid for. So, we've had it to narrow some of our focus to get to the parts of the world that we don't have that kind of a challenge on. So, we are clearly focused on the European market, we're clearly focused on the Japanese market. So, I think that could be part of what you're saying.

That makes a lot of business sense.

This is Carla, Howard, I just also wanted to point out that one of the ways in which we are looking to be more effective internationally is through partners. For example, one of our major partners in Europe is Gemalto and obviously they have an extensive reach into operator community, not just in Europe, but around the world. And so that is an example of efforts that we're taking to make our international presence stronger and give us broad opportunities and more successful ways to engage operators internationally.

One of the other nice things about working [with an office] Gemalto is we don't have to worry about getting paid. They can represent us in parts of the world that we may not be particularly excited about going into for a variety of reasons and it's just good solid business.

Great, thank you.

Steven Zaccone, Needham & Company.

Yeah, hi, guys. This is Steven Zaccone for Rich Valera. Just quickly, congrats on the second carrier win, just wanted to know, you talked about multiple field trials in the past, do you expect to announce any additional carrier wins this year?

Let's just say, I am very hopeful and I -- that's something that I feel that's how we grow our business. So, we're highly focused on announcing more wins. I think, I talked about it on the last call, 2012 is a little frustrating and that we had a number of different trials around the world, but we didn't come to closure. But I also said, in 2013, you'd start to see carriers become more serious and start laying down bets on exactly how they want to step up to this need.

This first carrier is one of those carriers that's been in trial last year -- excuse me, the second carrier. And so this is pretty much consistent with what I said. We'll continue to work on the rest and we're adding to that as we go along. So, we have a lot of activity that proofs in the pudding.

Okay, great, that's very helpful. And then just wondering if you could elaborate on how the deployment at Sprint is rolling out relative to your expectations with NetWise Director.

It's working quite well. The product has been almost flawless. We have done [no] in this field update to the software caused by any kind of bugs, problems or otherwise. I believe our customers are very pleased with the quality of the product and the way it's performing. So it's been a good first test and it was kind of a big carrier to do your first test done, but I think it's gone reasonably well.

Great. And then just lastly, modeling question, OpEx came in a little higher than our estimates. How should we think about that trending for the remainder of the year? I know we're cognizant of the breakeven target by the end of year?

Sure.

Just how should we think about that trajectory?

Sure. At this point, we're assuming flat. It's primarily headcount driven. And again the reason why Q4 was lower than, if you look at Q3 and then certainly Q1 has a lot to do with the fact that we're primarily a California company with pretty high-end engineers. So we hit the FICA cap come fourth quarter, both as a company and individuals obviously do. So expenses are artificially lower like payroll-related tax. So when you look at our Q1, we've got certain amount of money invested in Mobile World Congress, which is a seasonal expense and then like I said we're back on the FICA expense, a payroll-related expenses to a pretty good [net]. So when we look going forward, [14.2], assuming you know relatively flat headcount.

Okay, great, thanks very much.

Michael Latimore, Northland Capital Markets.

Hi, this is Ryan MacDonald on for Mike. With the second carrier went for NetWise, can you quantify what you could take this opportunity could be in terms of revenue once fully deployed?

Let's kind of hold on that. I can't even give you the name right now. So rather than try -- I understand the reason for your question, but why don't you wait until we can actually name the name and then we can talk about size, because it will be obvious based on who they are.

Okay.

Sorry to dodge the question, but I think it's the right way to answer.

No, no problem at all. In terms of with the T-Mobile, would you expect -- how many of subscribers do you expect to be able to add for the T-Mobile this year?

On the hotspot side?

Yes.

Again, that's kind of a sense of how -- that's a question you have to ask T-Mobile. I really -- as the partner, can't get into that. So, the product is performing extremely well. The new product, the Sonic 2.0 is a full 4G device. It's being very well received in the marketplace. I think as we mentioned earlier, we did a study that we commissioned of hotspot usage and the interesting point was that T-Mobile scored the highest of all of the other carriers as far as how the users view the hotspot device and the ease of use.

Okay. And then my final question is just on, you went through, I think you said with the $3.5 million in cash is this quarter $3.1 million?

About $3.8 million.

$3.8 million. Okay, I mean is that a concern at all, going forward throughout the remainder of the year? Is there a level that you want to try and keep that cash level above?

Rather [get into that], obviously is a concern and that's why we're focused and said that we would be profitable by fourth quarter. I mean that's an absolute necessity. We will be very prudent in the use of our capital as we have been and no way [shape to perform will] we let this thing go the other way. So, there is a lot of levers to pull. We operate with about an 80% margin. So, we have a lot of leverage in our business case and we have a lot of different options available to us and we fully intend to use all that we need to achieve our goal.

All right, thank you very much.

Charlie Anderson, Dougherty & Company.

Good afternoon. Thanks for taking my questions. Sort of going off that last point, I wonder pricing is a lever to pull, could there be elasticity in this market to convert all these people who have been testing for quite a while to sort of move along and adopt the solution?

Yeah, it's an interesting question. Clearly, there is a play there and the way to look at it is like this, the basic Wi-Fi offload is an area where you can see the most pressure on price, because there's a number of players that can do it. We firmly believe nobody has technology or a platform that even approaches ours, but that's an area where you could pull the price lever if you want to.

But then on the backside of that is all the advanced used-cases, all the new ideas of how you can take the fact that you now have an intelligent client in the device in the field talking to a server within the infrastructure, this is where we can really shine. This is where the strength of our software -- our architecture and just the overall capabilities that Smith Micro brings to the table can make the difference.

And so if we do a little bit of a price reduction on the Wi-Fi offload, we can make it back more than that on the backside. So, that's something to keep in the back of your mind.

Perfect. And then, I don't know if I missed it, but do you give the breakdown on the wireless revenue between the two categories we're used to?

Probably not, okay. So, if you look at basically, let's call it legacy connectivity as well as new offering in connectivity, that was about $4.4 million. And then when you consider our new offerings to CommSuite and NetWise, it's about $5.8 million.

Great, thanks so much.

(Operator Instructions) Brian Swift, Security Research Associates.

Just like -- let me just follow-up on the question about your pipeline with carrier surrounding the NetWise product. The previous caller had asked if we're expected to do anymore, but could you maybe elaborate a little bit more on how many companies are in your pipeline that have finished doing the trials that you were doing last year. And you've mentioned you're in negotiations with a number of carriers. Could you just kind give us a little color on how many of these that you're active with even though you can't be assured that you're going to land any of these things, but just to give us a little bit of idea of how many more that might be out there?

If I answered that question, you guys are going to keep scoring and drive me crazy. So what I can say is that we have a number of carriers that we're dealing with, they are of a global nature pretty much around the world. You know that, because we told you last year, we had 15 to 20 trials ongoing at all times, some ended and others picked up. So there is a number of carriers out there that we're working with. And as soon as we have deals done, we will be the first ones to want to raise out and tell you all about it.

And something to add to that is, last year as Bill was pointing to, we were working primarily direct and Carla alluded to the point that we now have some very interesting resellers untapped. So that's going to help quite a bit as far as numbers of people in play to where it's less trialing and more actually getting a foothold where there is strong infrastructure is in place by our partners where we can piggyback along with them. That's probably going to be a lot better vehicle for us and probably a lot better way for us to talk about the business versus just direct trials.

Okay, that's helpful. Thank you.

Thank you. And I'm showing no further questions, I'd like to turn the call back over to management for any closing remarks.

Thank you for joining us on the call today. For those of you who are planning on attending CTIA in Las Vegas at the end of this month, I would encourage you to reach out to the MKR Group if you're interested in meeting with Bill while he's at the conference and we can certainly arrange a meeting. That's it and thank you for everything and have a good day.

Ladies and gentlemen, this concludes the Smith Micro Software first quarter 2013 financial results Conference Call. If you would like to listen to a replay of today's conference call, please dial 1-800-406-7325 or 303-590-3030 and enter access code 4612071. We'd like to thank you for your participation and you may now disconnect.