Smith Micro Software Inc (SMSI) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Smith Micro Software fourth quarter fiscal year 2013 financial results conference call. (Operator Instructions). This conference is also being recorded today, March 6, 2014.

I would now like to turn the conference over to Mr. Todd Kehrli with the MKR Group.

Thank you, operator. Good afternoon, and thank you for joining us today to discuss Smith Micro Software's fourth-quarter 2013 and year-end financial results. By now you should have received a copy of the press release with the financial results. If you do not have a copy and would like one, please visit our website at www.SmithMicro.com or call us at 949-362-5800 and we will immediately email 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, Chief Marketing Officer.

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 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. Customer concentration, given 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 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 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 an obligation to update these statements to reflect events or circumstances occurring after the date of this call and release.

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 remarks 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.

With that, I'll give it over to Bill. Thanks.

Thanks, Todd. Good afternoon, and thank you for joining our conference call to discuss earnings for the fourth quarter and fiscal year ending December 31, 2013. Total revenues for the quarter were $11.8 million, up 35% sequentially from the third quarter, primarily due to new revenues from Intel, which is the chip manufacturer we had referenced in previous calls, as well as a strong holiday season for our productivity and graphics products.

Although fourth-quarter revenues were down approximately 2% from the same quarter last year, we saw a total year-over-year increase in our CommSuite, NetWise, and Productivity and Graphics product lines of $4.6 million. In addition to -- in addition, non-GAAP loss per share improved from $0.06 in the fourth quarter of 2012 to $0.01 loss per share in Q4 of 2013 reflecting the positive impact of our third-quarter restructuring.

We achieved significant progress in broadening our channels and establishing key contracts in the last half of 2013, including the reseller agreement with Panasonic, the launch of more premium services with Sprint, and two new NetWise contracts in Latin America -- one with Televisa, the largest cable provider in Mexico, and the other was a wireless operator in Argentina that we expect to formally announce in Q2.

Most notably, we had several connectivity-related engagements with Intel that, when combined with a 21% sequential reduction in pro forma operating costs in Q4, enables us to come very close to achieving breakeven for the fourth quarter.

In addition, we are successfully pivoting our product lines to solve manageability problems and bring increased value-added services to the machine to machine, or M2M, market. Our rich heritage in wireless connectivity and device space policy management is a natural fit in the M2M space, and we have several opportunities coming up that I will describe later in the call.

First, our CFO, Andy Schmidt, will present our full financial results for Q4 and the 2013 fiscal year. Andy?

Thank you, Bill. And 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 GAAO results. Non-GAAP results discussed in this call net of stock compensation-related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly, all results that I referred to in my prepared remarks for both 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 selective 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.

Total year revenue for 2013 was $42.7 million, down slightly from $43.3 million in 2012. Wireless revenue decreased $1.3 million, or 3.5%, in 2013 to $35.9 million. Productivity and Graphics revenue increased from $6.2 million in 2012 to $6.8 million in 2013, an increase of 10.5%.

From a non-GAAP perspective, total year 2013 loss per share was $0.40 as compared to a loss per share of $0.37 in 2012. Excluding the one-time restructuring charge of $5.6 million, a non-GAAP loss per share would've been $0.31 for total year 2013.

From a balance sheet perspective, our cash position closed at $14.8 million at December 31, 2013, a decrease of $17.4 million from the beginning of the year.

In terms of our currently completed fourth quarter, let me provide some detail. First, let me provide the difference between GAAP and non-GAAP P&L metrics for our fourth quarter. In terms of stock compensation for the quarter, stock comp totaled $843,000 for the current period broken up as follows: $4000 attributed to cost of sales; $72,000 selling and marketing; $200,000 R&D; and $567,000 G&A.

As has been the case in past years, we prepared a revised tax provision at the year-end. Since we are in a loss position, our GAAP tax expense is primarily due to foreign income taxes. The fourth quarter of 2013 reflects a favorable non-GAAP adjustment of $0.3 million.

Moving on, the fourth quarter we posted revenues of $11.8 million and a loss per share of $0.04 GAAP and $0.01 non-GAAP. Revenues of $11.8 million compared to $12.0 million for the prior-year period, a decrease of 2%. International revenue was approximately $2.8 million this quarter across all businesses. Our Wireless segment reported revenues for the quarter of $9.8 million as compared to $10.1 million last year. Our Productivity and Graphics segment posted revenues at $2.0 million as compared to $1.9 million last year. Total deferred revenue at December 31, 2013 was $467,000. Our Wireless at 10% customers for Q4 2013 include Sprint at approximately 47% and Intel at 19%.

Switching to gross profit, non-GAAP gross profit dollars were $9.5 million, a decrease of $200,000 from the same period last year. Non-GAAP gross profit as a percentage of revenue was approximately 80% for Q4 2013 compared to 80.6% for Q4 of 2012. The reduction in gross margin was primarily due to product mix. Non-GAAP gross profit by product groups were as follows: Wireless, 81%; Productivity and Graphics, 74%.

Switching to operating expenses, non-GAAP operating expense for the fourth quarter of 2013 of $10.1 million decreased sequentially to $0.6 million from Q3, excluding the $5.6 million restructuring charge we recorded in third quarter. Non-GAAP operating expense for the fourth quarter of 2013 decreased $3.1 million from the fourth quarter of 2012. Non-GAAP engineering expense decreased 28%; selling and marketing expense decreased 23%; and administrative expense, which includes the cost of our facilities, decreased 18%. Total non-GAAP operating expense decreased 24% year-over-year.

Non-GAAP net loss for the fourth quarter was approximately $400,000, or $0.01 per share, as compared to a net loss of $2.2 million, or $0.06 per share, last year. Cash decreased $3.2 million for the quarter, closing at $14.8 million at December 31, 2013. And in terms of housekeeping, we expect to file our year-end 10-K tomorrow, which will represent our final financial statements for the year.

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

Thanks, Andy. Having just returned from Mobile World Congress in Barcelona, I'm excited about the opportunities that lay ahead in 2014. At the event, we met with executives from more than 40 different companies including top-tier operators, device manufacturers, network infrastructure providers, and a wide range of M2M platform providers. Our solutions to connect, control, and capitalize on mobile devices and networks continues to be recognized as highly flexible and innovative. And most importantly, we were able to demonstrate real working software, while others are only showing slide work.

This year, we demonstrated several new solutions at Mobile World Congress, including an M2M demo in which we integrated our net wise NetWise platform with a CloudGate router from Option wireless. This use case addressed commercial vehicle -- commercial passenger vehicles such as taxis, limos, or charter buses with NetWise-enabling enhanced, ad-sponsored, or pay-per-use Wi-Fi service to passengers. Device agents on a passenger smart phone or tablet can be dynamically activated to invoke customized promotions using location-based services that are displayed on digital signage within the vehicle. In addition, devices used as digital signage or for Internet access can provide analytics data to better understand passenger behavior and generate valuable metrics for advertisers.

Because NetWise is a standards-based platform, we were invited by the Open Mobile Alliance to demonstrate NetWise in their showcase at the conference. In addition to the M2M commercial transportation scenario I just described, we also demonstrated our NetWise I/O toolkit for validating interoperability between clients and servers utilizing the ANDSF traffic management standard. We recently announced that Amdocs completed interoperability testing using NetWise I/O, and we are planning announcements with other partners who have successfully used the toolkit as well.

Our research and development organization invests considerable time contributing to the maturation and commercial application of industry standards, and this work is not only driving our own products but is helping our partners and customers to accelerate the rollout of standards-based solutions as well. Most importantly, these engagements are opening up new sales opportunities with network server providers who want to extend their offerings with our NetWise client.

As I mentioned last quarter, NetWise is being deployed by Televisa in Mexico, and while in Barcelona we've demonstrated our new over-the-top solution to other potential customers. This enhanced version of NetWise SmartSpot supports Android and iOS platforms, offering Wi-Fi discovery and promotion, automated network authentication, and radio management to help cable operators maximize their engagement via Wi-Fi hotspots.

Of course, this product can also be used by wireless operators and enterprises to offload data from 3G into Wi-Fi networks. In fact, growing network utilization and the associated data costs are becoming increasingly important to enterprises with mobile workforces as well as for those deploying end-to-end modules. The flexible design and packaging of the NetWise platform allows us to address a wide range of needs and device form factors, using pre-loaded apps over the top apps, embedded software modules, and APIs that can be integrated into third-party applications.

But NetWise wasn't the only solution garnering high interest at Mobile World Congress. Our CommSuite platform was on display, including our new Avatar Messaging app that lets users select from a variety of characters to send animated messages using their own voice.

With the recent news of Facebook purchasing WhatsApp for $19 billion, it's clear that messaging is a highly valued market. We believe our CommSuite avatars will bring three unique elements to this market. First, we have a large community of professional graphic artists using our top-tier graphic products, and they will be producing avatars and related content for CommSuite that will satisfy a wide range of personalities.

Second, unlike other messaging apps, CommSuite Avatar messages can be sent to anyone, and you don't need an app downloaded on your device to view the message. That means the entire smart phone world can receive Avatar messages out of the gate.

Third, CommSuite content store will be integrated with other messaging apps, social apps, Web services, and operator services, including rich communication services, or RCS apps. And this allows us to create a monetization engine for a variety of markets above and beyond our own CommSuite premium service platform. We are very excited about potential for this platform and look forward to our first commercial launch of avatars in Q2 of this year.

Speaking of avatars, our Productivity and Graphics business had a strong fourth quarter, up 5% year-over-year with Manga Studio, Poser, and Anime Studio all performing well. As in previous years, we had good response to our online holiday promotions, driving up direct sales while also expanding our presence in [Target] stores and increasing gross sales through Amazon by 26% year-over-year and extending our geographic reach through bundled software with Wacom and other OEM partners.

Our commitment to deliver richer functionality with each new upgrade of our graphics products, such as the release of Anime Studio 10 this week, drives our loyal customer base to keep coming back. We continue to look for ways to leverage our P&G assets with a focus on mobile, such as with the CommSuite Avatar product.

Last but not least, we continue to take advantage of the robust and proven connectivity features of our QuickLink product line to engage new customers and partners. While we providing standards-based components for chipsets, broadband modules, or multi-platform Mobile VPN solution for Panasonic's rugged devices, our connection management technology is still garnering -- or still generating returns and opening new doors for us. By establishing a broad footprint of connectivity components and intelligent device agents across a wide range of platforms, we are laying the foundation for policy-based management of these devices by operators and enterprises, opening up a vast set of opportunities within the Internet of Things.

The strategic transition of our business to new markets will take many months, and we will record -- and will require us to take both steps even as we manage our expenses prudently.

While we remain focused on achieving profitability, our transition will result in a lumpy revenue stream in the first half of 2014, specifically impacting Q1 which will be down from Q4 of 2013. However, the revenue stream should get smoother in the second half of the year with a growing base of new business as our evolving portfolio and new partnerships bear fruit. I look forward to updating you on our progress.

Operator, at this time, we can open the call for questions.

(Operator Instructions). Rich Valera, Needham and Company.

First question, on Intel. That's exciting. You got to announce them like, say, accounted for a nice chunk of revenue. Wondering if you can give some color on the -- that project you're doing with Intel. It sounds like you've got a big chunk of revenue in the fourth quarter, and I think there is perhaps more to come on that. Can you give any color on what you expect with this current project and then what might there be beyond what you're doing here with Intel, if there's any color at all you can give on that? Thanks.

Okay, Rich. Our relationship with Intel involves multiple projects. And so the first revenue that we've been able to book was in Q4. We will see additional revenues for the foreseeable future based on how many additional projects we get to sign up for. We are in the process -- we have some already in the works. Some are already signed up, so I guess I can tell you that there will be additional revenues to -- from Intel. And we look forward to growing our business relationship with them. It is incredibly strategic and something we find very exciting.

Okay. That's helpful. And then when we look into next year -- well, I'd say -- sorry, this year and think about the various business lines relative to 2013. I wonder if you could just give any color on how you would see some of those business lines trending; for instance, CommSuite, which sounds like you still have nice growth. Wondering what kind of growth you think you could see in 2014; and obviously you'll have the Avatar launch, I think, adding to that in 2Q. But any color on that business line would be helpful.

I can't give you exact numbers, but what I can say is this. If you look at history, the CommSuite business has grown year-over-year at almost double. We have added, in fourth quarter, Porcitec in Spanish; and we've added advertising feed into individual voicemail, all of which generates revenue for both us and for Sprint.

With the launch of avatars, as you mentioned, we are very excited about that. There was, without any exception, a great deal of excitement around the Avatar Messaging app. Mobile World Congress, a number of companies, carriers, and others that saw the product and thought it was very exciting but something that could really be very successful. How successful? We don't know yet. It has great, clear potential.

And we've mentioned, there are other companies that have come before us with something similar. We take it a little bit further, but if you look at a company like [Line], Line in the first quarter of 2013 on the launch of their stickers, which are a way of getting a motion across in a message, is static. It's not full-motion. It's not animated like ours. It had about $18 million in sales. They then followed that by doing $10 million a month for the balance of the year. Do I think we can do that? I can't say that. That would be totally irresponsible. But what I can say is there is a track record and is something that potentially could be very exciting.

I appreciate that color. Looking at the overall revenue line, I'm wondering if you could give any kind of qualitative color on -- you mentioned you thought revenue might be down in the first quarter and then presumably up again in the second. Can you give us any sense of maybe how much down? Are we talking down to sort of second-quarter levels? I would presume not down all the way to third-quarter levels, but any color in terms of how you might see that first-quarter, second-quarter ramp going -- and I know it sounds like you expect the second half to be maybe a little more stable and presumably stronger.

Yes. I guess the way -- I would kind of go back to what I said in my script. Fourth quarter was up substantially from Q3 primarily based on two drivers. The first time we've been able to book significant -- well, add any revenue from Intel. And also the fact that P&G had a very strong holiday season. Now, we know P&G is a cyclical business and that Q1 is always their weakest quarter. Also, in the case of Intel, I wouldn't look for much revenue, if any, from Intel in Q1. I'd like to see it return in Q2. And that should give you some sort of color that you can draw a picture from.

That's helpful. And from an OpEx standpoint, Andy, I was wondering if you would be willing to comment on how we should think about OpEx, you know, into 1Q from 4Q. Should we think about it sort of flattish, or might there be some just beginning-of-year costs that creep in there?

Sure, Rich. Typically in our first quarter, we have a couple of $100,000 really at obviously Mobile World Congress, CTA, and our collective trade show push. That's primarily it. Otherwise, relatively flat with Q4. That's been established as our new baseline expense.

And would you look to kind of hold it roughly at that line as we move through the year?

You know, we are going to take it quarter to quarter. Obviously, that's where we will start. We can pull the lever any which way we choose to pull it, but right now we're looking at the mid-10s as probably our baseline for 2014.

That's great. Very helpful. Thanks gentlemen, and best of luck with new initiatives.

Howard Smith, First Analysis Corporation.

I just wanted to follow-up, for starters, on Intel. It sounds like at this point it's kind of episodic project work that's discrete and you recognize the revenue and then you wait for the next project. But are you being built into something that will have more of a recurring or transactional every times there's a chipset set out or something that over time will build, or is that not the nature of the relationship at this time?

Okay. I really can't answer the question. My deal with my customer in Intel was that they would allow us to tell the world that they are our customer under the proviso that I didn't tell the world what we are doing for them. And so from that standpoint, I'm sorry, I just can't answer it.

No, we'll just congratulate you on it being a major customer now and move on. And then -- so, on the international, did I hear right that it was $2.8 million for the quarter?

That's correct.

Okay. So Televisa or some of these other things in Argentina starting to ramp. Again, more generically but the same question, is there a kind of a significant either stocking or one-time component that then they absorb and will become more regular over time? Is that how to think about what's causing the spike in international?

In regard to the particular relationships you mentioned, those are not one time type spiky revenues. Those are types of deals where we build a relationship and hope to see that business build over time. International is a little bit also chunky right now. It would include some one-time revenue. But, once again, we just hope to back-fill that revenue in future quarters with these other deals that we've already closed. And as bill mentioned, and as you can tell from the script, a lot of the new relationships, they are international in nature or they are with big partners such as Panasonic that actually do have international distribution.

So, once again, it's a pretty broad model we have. I think international is no different than our total revenue line in that right now it is subject to some lumpiness. But, in total, it represents, obviously, a much better profile for the Company.

All right. Okay. Well, thank you very much. That's all for me.

(Operator Instructions). I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

Thank you, operator. I'd like to thank everyone for joining us today. We look forward to updating you on our progress over the coming months. And of course, if you have any other questions, please feel free to contact me, and I will be happy to answer any questions you might have. Thank you, and have a great day.

Ladies and gentlemen, this concludes the Smith Micro Software fourth-quarter and fiscal-year 2013 financial results conference call. Thank you for your participation. You may now disconnect.