Smith Micro Software Inc (SMSI) 2014 Q1 法說會逐字稿

Good afternoon, good evening, ladies and gentlemen. Thank you for standing by. Welcome to the Smith Micro Software first quarter 2014 financial results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions). This conference is being recorded today, May 8, 2014. I would now like to turn the conference over to our host, 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 2014 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 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 and President and Chief Executive Officer; Steve, or better known as Ziggy Yasbek, our new 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 execution of our recently announced restructuring, our ability to halt the decline of our cash reserves in light of our continued losses, 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 potential for disruption and loss of customers and business from the transfer of duties and responsibilities in our recently announced restructuring, the risk that we will continue to incur losses and not regain profitability, the risk that we may need to raise additional capital to fund our operations and such capital may not be available to us at commercially reasonable terms or at all, 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 Form 10-K, Form 10-Q and 8-K, could cause actual results to differ materially from those expressed or implied in any forward-looking statement. 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 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, 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, Bill, please go ahead.

Thanks, Todd. Good afternoon, everyone, and thank you for joining us to discuss financial results for the first quarter of 2014. Revenues for the quarter were $8.4 million, down 29% sequentially and down 27% year-over-year. However, this result was in line with my comments during our fourth quarter and year-end conference call and consistent with our internal expectations. While we typically see a drop in revenues from Q4 to Q1 each year, due to seasonality in our productivity and graphics business, this year decline was more strongly felt as we did not have revenues in Q1 from Intel.

As I stated during our last call, we saw growth and revenue from -- in Q4, over Q3 because of the strong quarter for P&G as well as the revenues from our Intel relationship. While we did not anticipate revenue from Intel in Q1, it was the major reason for this sequential decline in revenue.

As I have stated many times, our goal is to return to profitability. While we were hopeful that we would achieve this goal based on the previous restructure, a significant potential deal that didn't materialize and the uncertainty regarding the timing of future revenues has resulted in the need for additional cost-cutting measures in the near term.

Therefore, we are taking immediate steps to lower our cost structure by approximately $2 million per quarter. I will describe these measures in more detail after Ziggy presents the financial results for the first quarter. But, before I turn the call over to Ziggy, I would like to thank Andy Schmidt for his dedicated service to Smith Micro over the past nine years. Ziggy has been our Chief Accounting Officer for the past six years and the Board has appointed him as our new CFO. With that, Ziggy?

Thank you, Bill. First, let me go over our -- some housekeeping items. As we have in the past, we have provided a non-GAAP result and a reconciliation of non-GAAP and GAAP results. The non-GAAP results discussed on this call net out stock compensation related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly, all results I refer to in my prepared remarks for both 2014 and 2013 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 two. The earnings release can also be found in the investor relations section of our website at www.smithmicro.com.

In detailed manner in for the financial modelers, let me provide the difference between GAAP and non-GAAP on the income statement. In terms of stock-based compensation, stock comp totaled $798,000 for the current period, broken out as follows: $5000 in cost of sales, $82,000 in sales and marketing, $187,000 in engineering, and $524,000 in G&A. While we showed no GAAP tax benefit for the period due to fully reserving the tax benefit, we are showing a $1.7 million pro forma or cash-based tax benefit.

Moving on, for the first quarter, we posted revenues of $8.4 million and a loss of $0.14 per share GAAP and $0.07 per share non-GAAP. Revenue for the quarter compares to $11.6 million for the same period last year. International sales was approximately $400,000 this quarter across all business groups.

Our wireless segment reported revenues for the quarter of $6.8 million as compared to $10.2 million last year, which was down about 33%. Our productivity and graphics segment posted revenues of $1.6 million as compared to $1.4 million last year. And total deferred revenue at March 31 was around $200,000.

Switching to gross profit, non-GAAP gross margin dollars of $6 million compares with $9.2 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 71.4% for the first quarter this year compared to 79.0% for Q1 of last year.

Non-GAAP gross margins by segment were as follows. The wireless segment was 71% and productivity and graphics was 74%.

Switching to operating expenses, non-GAAP operating expenses for the first quarter of 2014 were $10.4 million. Q1 this year, operating expense was $200,000 higher than the fourth quarter of last year, primarily due to trade shows.

From a year on year perspective, engineering expense has decreased [to] 29%. Sales and marketing has decreased 28%, and G&A expense has decreased 24%. Total non-GAAP operating expenses decreased $3.8 million or 27% year over year.

Our non-GAAP operating loss for Q1 of this year was $4.3 million as compared to a loss of $5 million in Q1 of last year. Non-GAAP net loss for the first quarter was $2.7 million or $0.07 per share as compared to a loss of $3.1 million or $0.08 per share last year. Our cash for the quarter decreased $3.6 million and it closed at $11.2 million at March 31.

In terms of housekeeping, we expect to file our quarter end 10-Q by the end of the week, which will represent our final statements for the period. And, at this point, I will turn the call back to Bill.

Thanks, Ziggy. As a result of the lost deal impacting our revenues, on Tuesday, May 6, the Board of Directors approved a plan to reduce our overall expenses through the following five measures. First, we are reducing our workforce by approximately 20%. Second, we have consolidated management responsibilities in order to eliminate three positions from the executive team. Third, all remaining members of the executive team have voluntarily agreed to take a pay cut effective this month in order to minimize the staff reduction.

Fourth, we have downsized our office locations in Northern California and will pursue further reductions in facility related expense in Aliso Viejo and Pittsburgh. Fifth, we will continue to press for greater operational efficiencies on all fronts, from the vendors we use to travel to equipment purchases and everything in between.

Based on all of these measures, we expect to reduce our quarterly overall expenses by approximately $2 million. And the Company will occur one-time severance and other charges of approximately $1.6 million to $2 million, about half of which is non-cash, that will be reported in our second-quarter.

While it is never easy to lose good people, we believe we are acting in the best interest of the Company and the shareholders by taking these measures now. These changes should not impede our execution ability for deals that we are currently pursuing, nor should they prevent us from evolving our portfolio to meet the needs of an emerging machine to machine market as we described last quarter.

As we announced last week, we now have a version of NetWise available that can be deployed over the top. This enhances our ability to engage with Wi-Fi providers and enterprises to simplify Wi-Fi on-boarding. While we continue to pursue key deals for NetWise in the Wi-Fi management arena, the most promising of our new NetWise opportunities involves repurposing the platform to address emerging person to machine, or P2M, market opportunities. P2M represents the intersection of the M2M space and the person-to-person mobile communications space.

This P2M intersection includes scenarios in which user devices can interact directly with machines, such as smartphones interacting with digital signage, or passenger tablets accessing commercial vehicle, gateway services. As we engage with partners in developing these P2M prototypes, we are continually reminded that our heritage of serving tier 1 carriers offers a great advantage in the M2M world, where there are many great ideas, but very few platform providers with the experience to reliably deploy millions of devices as we have.

On the mobile P2P front, we are in full swing preparation for the commercial launch of avatars in late June, early July. Our beta program is already validating that end-users have strong interest in customizing the messaging experience with fun characters, enhanced audio and personalized backgrounds.

We have hundreds of artists from the anime studio community interested in building avatars for us. And we are selectively bringing new styles of content into the beta program while we plan for a very rich content store soon after launch.

Our productivity and brought graphics business saw strong performance in Q1 from two new software releases: Anime Studio version 10, and Clip Studio Paint, which is the digital version of Manga Studio EX, as well as the increase in our retail and education markets. International sales in Germany and Japan continue to show solid results as we did through our US channels.

We added more than 1000 to stores to our distribution at Target. We expect an additional major retailer to come online in June. We look forward to expanding distribution in Latin America, Japan, and India.

As I stated last quarter, the strategic transition of our business to new markets will continue to take some time. But, we are making progress. So far, our Q2 numbers are tracking above Q1 numbers, but not as high as Q4 2013. We are hopeful that we will be able to increase revenues with new business in the second half of the year and that, coupled with the completion of our restructuring, will allow us to return to profitability.

With that, operator, I would like to open the call for questions.

(Operator Instructions) Rich Valera, Needham and Company.

Bill, I was wondering if you could give any more color on the lost deal and, specifically, if it had anything to do with your Intel business.

Okay. This was a deal we had been working on for an extended period of time and were well down the road towards closing. You know, a deal is not done until the ink is dry and, unfortunately, we were reminded of that very simple fact. It just isn't going to close. And, based on that, we very rapidly took appropriate actions to make sure that we could achieve our goal that we started the year with, and that is to be profitable.

As far as Intel, we are very happy with our Intel relationship. I think I mentioned on the last conference call that we did not expect any revenue from Intel in the first quarter, which we didn't have. We have other business we are doing with Intel and we are actually nearing completion of a project for them right now. As to whether we get to recognize that revenue in Q2 or Q3, it is really a function of how the testing goes with Intel as to when we can recognize the revenue.

And, not to push the point too much, but I think the impression I got on last call was that you had a deal that you were going to finish with Intel in 2Q. Sounds like maybe that 2Q or 3Q, and that you had potentially significant business beyond that, presumably at sort of similar run rates. And I am maybe inferring here that that is not the case, or at least not as certain as you might have thought last quarter. Am I on the right track there?

I would say that we continue to enjoy a very strong relationship with the Intel wireless teams. We look forward to doing business with them for the foreseeable future. Beyond that, I really can't comment.

Fair enough. How about the avatar launch? You have spoken pretty optimistically about a potential launch this year and I thought maybe in the second quarter -- and I don't know if you can say Sprint, but Sprint is a natural -- seem to be a natural customer to launch with. I just wanted to know where you think you are in terms of the launch of the avatar product.

Okay. We are actually making really great progress. The launch of this product is going really to take two forms. One is, there will be an over-the-top app, and that will be provided for iOS devices as well as Android devices. And, secondarily -- or maybe I should have done it in reverse order -- we will offer avatars as part of our visual voicemail product offering. And, as such, as that product launches, which we should have a very sizable user base in relatively short order.

I mean, the strategy is simple. It is a very fun way to get the message across. Our beta testers have given us a lot of feedback. The enthusiasm out of our artist community is extremely strong, and so we remain extremely bullish on this opportunity.

We think messaging is a very important part of our business case going forward. Clearly, it is the most predictable part and we look to really enhance that.

I think one of the key things here is that, as those of us who are users of our visual voicemail send avatars, we will most likely be sending avatars to people on different networks. So that should encourage the viral growth of this opportunity for us.

How about timing? Do you think 2Q or--?

Yes, our goal is we will launch the over the top by the end of this quarter. The launch through visual voicemail requires others to sign off, so whether that is the end of this quarter or early third quarter, that is kind of in their hands.

Great. And then, you mentioned repurposing NetWise, and for it to be sort of this person to machine type of app. I was just wondering what your view is on kind of the Wi-Fi offload, which was the first and foremost intent of that. Do you still see that as a major opportunity? I mean, we kind of got Sprint, rolled them out, and have had very modest success beside that. I'm just wondering how you view the Wi-Fi offload aspect of NetWise going forward.

Rich, this is Carla. I'm going to address that for you with some preliminary comments and then Bill can expand if I missed something. But, we do see still a lot of opportunity in the Wi-Fi area for NetWise. And, primarily, because of the fact that we now have an application that is available to be deployed through app stores. It opens the doors for us.

Our early implementation of NetWise was a preload application. And, while there is advantage of preload in that you get mass deployment because you can put on every single handset as it goes out the door, there is more challenge for operators to be able to continue to add software on devices that is a preload. And, in addition, parties that don't control the software on devices -- for example, cable providers, large enterprises, Wi-Fi providers, et cetera -- they struggle to be able to take advantage of this type of software if it can't be made available to the users aftermarket.

So, the fact that our NetWise capability can now be deployed to customer bases through app stores, opens up more opportunity for us to focus on simple, but powerful, Wi-Fi management that is still policy-based. It still provides analytics that still allows users to get a better experience and allows operators and Wi-Fi providers to get better usage of their access points. So that is the Wi-Fi opportunity.

To your first comment about using NetWise in P2M and other M2M scenarios, the opportunities there are very wide because of the fact that we have very powerful, intelligent rules in engine processing in our client. Because our client can look at event triggers and cause things to occur on a device -- for example, being able to look at a location, to look at a user approaching a digital sign, and be able to trigger a promotion that is relevant to that user -- those types of things are all capable because of the way the intelligent rules engine that works in NetWise.

So we are exploring many different areas there. And, as bill mentioned, kind of this person to machine space looks to be in our sweet spot because of the expertise we have in embedding these types of capabilities on mobile devices.

Great.

Let me add to that a little bit, too. We were one of the first to launch the intelligent management of Wi-Fi offload. And Sprint was really one of the leading companies focused on that. And the rest of the market has taken more time to warm up.

But I might point your attention to a press commentary that I believe was last week from the CFO of Verizon, now talking about how Verizon also looks to the fact that there needs to be harmony between the wireless -- cellular networks as well as Wi-Fi. I think that speaks to a continued growth of this market. And as the market continues to mature, we are in the right spot to take advantage of it.

I also think that the fact that we are also finding additional uses for this intelligent rules engine from a server as well as a client perspective, talks about the strength of the offering. While it hasn't necessarily generated huge revenues that maybe we all would have hoped to be stronger, I still think it has a very strong future going forward.

Thanks for that, Bill. A question on the restructuring -- the $2 million; I am assuming you wouldn't expect to see the full impact of that in Q2. I am wondering if, do we think maybe you would see half of that as we look at Q2 versus Q1, from an expense level. And then have it fully phased in, in Q3. Is that maybe a way to think about it?

Rich, this is Ziggy. So most of the -- there will be about $600,000 to $800,000 of expense that would hit -- of cash that would happen in Q2.

So would we expect a $600,000 to $800,000 reduction quarter over quarter in expenses? Is that the way to think about it?

No. Cash. Cash.

Okay. I see. Cash expenditure; I see. I was referring to modeling OPEX -- how we should look at our OPEX versus the Q1 baseline. And I would think by Q3 that we would maybe be down $2 million for the plan, but in Q2 presumably only part of that would be reflected. Is that --

Yes. If you exclude the restructuring charge, our expenses will be down about half of what we said. Right.

Final one for me, just on the liquidity front. One, where, based on your current projections, would you expect that cash would bottom? And do you think that leaves you with a comfortable cash position around the Company? Thank you.

Yes. That is a great question and it is something that we all have been looking very, very carefully at. As we look at our cash flows, clearly, we are going to drop under the $10 million level. There are different points during a quarter, we can get a little lower than others, but we believe we have the cash required to meet our goals for the balance of the year. And we are going to be constantly monitoring it. It is clearly a very significant part of our business guys.

Got it. Thank you and good luck with the restructuring.

Mike Latimore, Northland Capital.

What percent of revenue was the largest customer in the quarter?

It was 64%. It was Sprint.

Okay. Got it. And the big deal that didn't materialize, what product area was that were you with there?

It was in the wireless space and it was a combination of a couple of different products that we were working together on.

Okay. And then the P2M market, could the customer be a variety of different entities? Or are you focused on selling to a carrier there, or who will be the customer for your P2M applications?

We have opportunities to sell that both to operators who may want to offer it as their own service to end customers as well as going direct to enterprises that would be rolling out the M2M initiative within their own environment.

And then, as you look to the second half of the year, it sounds like you expect that to be higher than the first half. What would be some of the key new revenues versus the second half to look for?

Well, clearly, we will have the launch of the avatars. While our internal expectations are rather modest because it is the first time we have launched this kind of an offering, that is one place. We look for continued growth of our messaging services with our largest customer as more new initiatives start to take hold. We have been launching new offerings through them since the start of the year. And we have more that will happen through the balance of the year.

We also are looking at closing other opportunities that we have been working on over the last 12 months. And I think the other thing is we are looking for some growth in the enterprise plus the more logical growth with P&G, because the further into the year you go, you go towards their strongest quarters. And the net-net is that, that, coupled with the fact that we are bringing expenses down $2 million a quarter, should put us in a spot where we should be able to print black numbers and move forward from that point.

Howard Smith, First Analysis.

Good afternoon. First, just some housekeeping following up. I heard Sprint was 64%. Any other 10% customers in the quarter?

Yes. It was FastSpring, who sells a lot of our P&G product. And I have that number handy. They were 13%.

13%. Okay. And I am just 90% sure of this. Just want to confirm the deal that doesn't look like it is going to materialize, that is a new initiative, you said, a combination of products. It is not in any way -- was a renewal of something you currently have in a slightly different form. There is no kind of lost run rate business on that, is there?

Absolutely not, no. We have no business that we are aware of that is in jeopardy anywhere. This was a new opportunity that we had worked hard on and it just didn't happen.

Right. Right. That is what I thought. And then, lastly, in thinking about Sprint revenue down just a little bit sequentially, should we thinking about that? I know there is a recurring portion, a rev share have that kind of grows over time as the customers on that. And then, is there more of a cyclical kind of one-time component of it and we are seeing the net of those two?

No. From a messaging standpoint, our revenues are all generated from a rev share point of view. So this could just be reflecting some -- a little bit of changes within the quarter. I do not believe it represents a trend. It, frankly, is a market that should continue to grow.

We also see some expansion in the usage of our NetWise client at Sprint. And that is a very positive event with them using our client on some other handset providers. So, all in all, I feel very, very strong about the overall Sprint business and look forward to continue to grow throughout the year.

Howard, one other thing. On Sprint, from the fourth quarter two the first quarter, they were only down about $100,000 and that was in the old Quick Link business. So, all of the newer stuff is up.

Right. Okay. That is what I thought. I saw there was a little part that -- yes. So that is the quick one. That makes perfect sense. Got it. Thank you.

(Operator Instructions) Brian Swift, Security Research Associates.

Yes. One of my questions got answered, but the second one, if you could give us a little bit more color on your pipeline of business. In the past, you have talked about a little bit major cable company down in Mexico with a carrier in South America, and I think in reviving some of your business historically with Verizon. Could you kind of give us a little idea of how some of that is going and whether one of those things that you had talked about in the past was the deal that didn't happen?

No. Brian, none of those were the deal that didn't happen. The deal that didn't happen was one (technical difficulty) we had talked about. The other deal that you did mention, however, is in Mexico. They are looking to go into full deployment, I believe, this quarter.

And as far as down in LatAm on the NetWise side, they are also close to full deployment. And those are going well, and we expect them to be harbingers for new business not only in LatAm, especially when we look at the cable side is, but also through new business with cable providers throughout North America and the rest of the world.

How about anything new that is entering in, other than what you have already talked about in the avatars?

Well, clearly, yes. The avatars are probably our biggest short-term launch. And then, I think if you look back at prior transcripts, I think the way we talk about the M2M space is definitely maturing as we really are focusing in on our markets. We have a number of opportunities that we are in close discussions with different partners on in that marketplace. So that is a good area of growth, and you may see some of that before the end of the year.

And then, lastly, probably one of the biggest ones is that we are nearing the point with Panasonic where we think we are going to actually see revenue starting to flow. And we see a lot of excitement, not only on our side, but also on the Panasonic side, for the launch of various offerings through them. So that partnership -- we haven't talked about it a lot, but that partnership is about to really start moving forward and we look forward to revenues in the back half of the year and believe that those revenues will continue to grow as we go into 2015.

Okay thanks.

And I am showing no further questions. I would like to turn the call back over to management for any closing remarks.

Thank you, operator. I would 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 questions, please feel free to contact me and I will be happy to answer any of your questions. Thank you and have a good day.

Ladies and gentlemen, this concludes our conference call for today. If you would like to listen to a replay of today's conference call, please dial 303-590-3030 or 1-800-406-7325, and enter access code 468-1051. We would like to thank you for your participation and you may now disconnect.