Smith Micro Software Inc (SMSI) 2015 Q2 法說會逐字稿

Good day and welcome to the Smith Micro Software second-quarter 2015 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Todd Kehrli, MKR Group. Please go ahead, sir.

Thank you, Operator. Good afternoon and thank you for joining us today to discuss Smith Micro Software's financial results for the second quarter of 2015.

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 www.smithmicro.com or call us at 949-362-5800 and we will email one to you immediately.

On today's call, we have Bill Smith, Chairman, President, and Chief Executive Officer of Smith Micro; Steve Ziggy Yasbek, Chief Financial Officer; and Carla Fitzgerald, Chief Marketing Officer.

Please note that some of the information you will hear during our discussion today will consist of forward-looking statements, including without limitation those regarding the Company's future revenues and profitability, new product development and new market opportunities, operating expenses, and the Company's cash reserves. Actual results or trends could differ materially from our forecast to a variety of factors. For more information, please refer to the risk factors discussed in Smith Micro's Form 10-K. Smith Micro assumes no obligation to update any forward-looking statements or information, which speak only as of their respective dates.

Before I turn the call over to Bill Smith, 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.

Thank you, Todd. Good afternoon, everyone.

Our revenues for the second quarter of 2015 were $9.4 million, which includes a nonrecurring customer chargeback of approximately $500,000. Excluding the one-time charge, revenues would have been $9.9 million, in line with our internal projections and a 15% increase over revenues in the second quarter of 2014.

From a non-GAAP perspective, we reported a net loss of $400,000 in the second quarter, which is again driven by the one-time charge and is a significant improvement compared to the net loss of $2.4 million we reported in the second quarter of last year.

We continue to see growth in NetWise revenues and strong demand for CommSuite services at Sprint. We're actively working on new opportunities with wireless operators, cable MSOs, and enterprises. While we focus our energies on driving sales cycles forward, we are also closely managing our expenses in order to be non-GAAP profitable for the year. I can provide more color on these areas later in the call, but first Ziggy will present the detailed financial results for Q2. Ziggy?

Thank you, Bill.

I first want to 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. The non-GAAP results discussed on this call net out stock-based compensation related expenses and non-cash tax expense or benefit to provide comparable operating results. Accordingly, all results that I refer to in my prepared remarks for both 2015 and 2014 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 differences between the two. The earnings release can also be found in the investor relations section of our website at smithmicro.com.

June year-to-date revenues for 2015 were $19.9 million, up $2.9 million from June year-to-date 2014, an increase of 17.3%. Wireless revenues were $17.1 million, an increase of $3.2 million or 23.5%. Productivity and graphics revenues were $2.8 million, a decrease of $300,000 or 10.2%.

From a non-GAAP perspective, the June year-to-date 2015 earnings per share was zero or essentially breakeven as compared to a June year-to-date 2014 loss per share of $0.13.

In terms of our currently completed second quarter, let me provide some details. 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 $544,000 for the current period, broken out as follows -- $3,000 cost of sales, $86,000 selling and marketing, $157,000 R&D, and $298,000 G&A. While we showed no GAAP tax benefit for the period, due to fully reserving the tax benefit, we are showing a $265,000 pro forma or cash-based tax benefit.

For the second quarter, we posted revenues of $9.4 million and a loss of $0.03 per share GAAP and a loss of $0.01 per share non-GAAP. Revenue for the quarter compares to $8.5 million for the same period last year, an increase of 10%. International revenue was $200,000 this quarter across all business groups. Our wireless segment reported revenues for the quarter of $7.9 million, as compared to $7 million last year. Our productivity and graphics segment posted revenues of $1.5 million, which was essentially flat with last year.

Switching now to gross profit, non-GAAP gross margin dollars of $7.3 million compares with $6.1 million during the same period last year.

Non-GAAP gross margin as a percentage of revenue was approximately 78% for Q2 of 2015, compared to 71.3% for Q2 of 2014. The increase in gross margins was primarily due to the increase (technical difficulty) revenues and cost savings resulting from last year's restructuring. Non-GAAP gross margins by segment were as follows -- wireless was 77.9% and productivity and graphics was 78.2%.

Switching to operating expenses, non-GAAP operating expenses for the second quarter of 2015 were $8.0 million, which was $1.9 million lower than the second quarter of last year. From a year-on-year perspective, selling and marketing expenses decreased 4%, engineering expenses decreased 4%, and G&A expenses decreased 16%.

Non-GAAP operating loss for Q2 was $681,000, as compared to a loss of $3.8 million in Q2 of 2014, which included a non-GAAP restructuring charge of $1.2 million. Non-GAAP net loss for the second quarter was $422,000 or $0.01 loss per share, as compared to a loss of $2.4 million or $0.06 loss per share last year.

Cash at June 30, 2015, was $11.5 million, a decrease of $1.5 million from the end of last year.

In terms of housekeeping, we expect to file our quarter-end 10-Q by the end of this week, which will represent our final financial statements for the period.

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

Thank you, Ziggy.

The second quarter was a very busy period in which we expanded our deployment of NetWise at Comcast and supported our CommSuite business at Sprint and moved the sales cycle forward on several NetWise opportunities with cable providers and network operators. For many of them, 2016 planning and budgeting are well underway, and as a result, we have participated in several requests for proposals from companies seeking easier Wi-Fi onboarding or efficient data offloading and improved connection quality for end users.

Our NetWise solution is well positioned with several accounts where we are shortlisted, and we are focusing our efforts on these deals as our top sales priority.

The majority of our revenue continues to come from Sprint. We are working on several projects to grow the adoption of premium services within their subscriber base. We continue to enhance mobile advertising with larger-format ads and more device coverage, which should increase advertising revenues from CommSuite over the coming quarters.

At Comcast, our second largest customer, we have recently expanded our footprint with the deployment of NetWise for iOS and consumer uptake has been solid. We are currently working on NetWise support for PC and Mac users and expect the deployment of these platforms later this summer.

Our working relationship with Comcast has been and continues to be excellent and we are increasingly encouraged that our performance at Comcast will bear fruit with other cable companies as well.

In Q2, our NetWise platform was also selected by a well-known device manufacturer to enable over-the-air firmware and software management on the new device they are launching later this year. We expect this opportunity to grow as more device models are added for more operator networks next year and beyond.

On the CommSuite front, we have completed integration design work and formalized our reseller contract with Comverse, allowing them to upsell visual voicemail, voice to text, and Avatar messaging capabilities to their existing voicemail customers. We also have multiple new sales opportunities underway with Tier 1 operators who are interested in variations of our avatar technology for their own messaging applications. We are not yet in contracting stages with these prospects, but we expect to move through technology evaluation rapidly, with the potential for selection and launch later this year.

2015 has definitely been a year of trial, evaluation, and experimentation for many of our target customers. On the enterprise side of the house, we have met with dozens of Fortune 500 companies who are pilot testing a wide range of mobile marketing technologies, including SMS push messaging and location-triggered mobile advertising.

The general consensus from these giant retailers and brands is, one, more intelligence is needed about consumer shopping habits and their mobile preferences; two, the risk of spamming consumers with poorly targeted ads is huge; and three, excessive or irrelevant messaging will alienate customers quickly.

The good news is our NetWise Captivate platform addresses these challenges by adding more real-time device data and user context to improve targeting and deliver more convenient and relevant services and promotions to consumers through their smartphones. We now have several large brand-name prospects in various stages of the sales cycle for NetWise Captivate, many of which we hope to close before the end of the year.

Switching over to the productivity and graphics business, the new Anime Studio 11 product launch in the second quarter was a great success. Within the first 30 days of launch, the new version achieved a 200% increase in sales compared to the previous Anime Studio version released last year. In addition, there were more than 1,000 participants registered for the product launch webinar, a 300% increase over registration from the previous release.

Anime Studio 11 includes several important new features targeting professional animators and work groups, enabling us to pursue more high-volume sales with animation studios, industrial design firms, and other large enterprises. The ability to bridge the gap between novice artists and professional users with powerful yet easy-to-use animation tools continues to be a strength across our entire graphics portfolio.

Whether for mobile operators, cable providers, enterprises, or artists, our technical expertise and creativity allow us to deliver reliable software solutions that bring our customers closer to their business goals. We have many hurdles yet to jump this year, but we remain laser focused on closing deals, growing revenues, and achieving non-GAAP profitability for 2015.

With that, Operator, we can open the call for questions.

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

Obviously, you guys had given annual guidance on your last call. Would love to get an update on that.

Sure, Rich. Clearly, we had given guidance that this quarter would be a downtick quarter. Obviously, the customer chargeback of $0.5 million impacted us on that.

We are not updating our guidance. We know we have a steep hill to climb in the second half of the year and we still see a path to achieving that goal.

Okay, a couple questions. One, I would appreciate any color on the customer chargeback, if you can say who it's with and is that customer relationship still viable.

And then, secondly, given what would be a very -- pretty steep hill to climb to make even the low end of that annual prior guidance, which I believe the low end was $45 million, can you give us any color on how you think the sequential trajectory would play out 3Q, 4Q? Thank you.

Sure, all right, let me -- you had multi-parts to your question, so come back if I miss one or two, okay?

First off, as far as the customer, the customer relationship is outstanding. The customer had a billing issue with their customers. We believe and they believe that the issue has been corrected, and at this point, I'm really not at liberty to say who the customer was. But I think the point is that it was an issue. It has been corrected and unfortunately resulted in a chargeback of $0.5 million against our sales for the quarter.

So that said, as far as how we go about reaching the guidance that we have provided, clearly we are looking at strong growth from our existing customers. I have alluded to a number of new transactions that are in the works, all of which are important steps. We need help, obviously, from both our cable MSOs and our carriers and we're -- we have got our head down and we're just focused on trying to get that job done.

Bill, last quarter you were good enough to give us some sequential guidance, acknowledging that the Comcast order from Q1 wasn't going to repeat in Q2, and that helped us to model Q2 appropriately minus that chargeback. Are you willing to give us any color on where you think you will be in Q3 relative to, call it, the $9.9 million pro forma number that you would have printed in Q2 ex the chargeback?

Okay, what I can say is this. Last quarter was a very special circumstance. As you have covered us for a number of years, you know we don't give quarter-to-quarter guidance, but we thought because it was rather unusual to see a drop-off in sales to a large customer like Comcast, we thought we had better give you some guidance.

This quarter, all I can say is clearly we are focused on delivering a stronger quarter in Q3 than we did in Q2 and continuing to grow that through the end of the year, because that's the only way we can get to our guidance.

So am I taking it that you are guiding for sequential improvement, but not saying how much? Is that a fair statement?

That's a fair statement.

And since we are, I guess, a month into Q3, just wondering what you see needing to happen to make the full-year guide? You have mentioned a lot of things, but I imagine if these things were to close late in this year, this calendar year, they might not contribute all that much revenue. So just wondering, from a timing perspective, what needs to happen to make the year come together, if there is any color you can add to that.

We believe that we will have continued growth at both of our large customers, both one on the cable side and one on the carrier side, so we expect Sprint revenues to continue to grow throughout the year and we expect to see a lot of activity out of Comcast. So, that's how -- as I sit here now, that's the best crystal ball that I have got.

Great, and you had mentioned, and I didn't catch exactly what you said, that you expected to have some other deployments with Comcast in the back half of the year, or just from -- basically in the second half of the year. Can you give us any color on what those are expected to be?

Yes, we deployed for the first time our iOS version of NetWise for Comcast. That is now in market and the uptake has been quite strong, so we are quite pleased with that. We also will be providing to Comcast a version of our NetWise product that will support Windows-based and Mac-based users with laptops or PCs.

Got it, okay. All right, thank you. Those are my questions.

(Operator Instructions). Kevin Dede, Rodman & Renshaw.

You mentioned a little about the Comverse opportunity, but no real contracts yet. I was wondering if you might offer a little more color about who you think their end customers are and how substantial you think that could be.

Yes. On the Comverse side, we continue to move forward. We have done a lot of integration work with Comverse as to how our Visual Voicemail will integrate into their infrastructure in the most effective way.

We do believe that we will start to see some real marketing activities in the second half of the year. It all depends upon when we can deliver and get product up and running and accepted as to when we can actually realize the revenue. So, that's a bridge too far for me right now. I really can't tell that because it does have a lot to do with who a new customer would be and what integration issues into their billing systems or whatever would have to take place.

Can you give us an indication on the breadth, I guess? I am kind of curious if you think you are seeing this deployment perhaps in Europe, in Asia? I am just wondering how far Comverse is taking your solution, geographically?

Yes, the goal is we have developed a list of a handful of target carriers to try to go after first. Comverse does business with about 300 different carriers around the world, and so we don't want to focus on all 300 at once. We'd like to focus on a few target deals that we can try to get done and work through how to bring these up in a nice seamless manner, working both with the new customer and with our partner, Comverse.

Okay, so it is clear that you've got more initiatives moving forward for Comcast. Congratulations on that. I know one of the advantages of working with them initially was that they're looked to as a leader in the cable industry and I'm just wondering if you are seeing any of that spill over yet, given that, I guess, there is still a lot of M&A activity in that end and just wondering how warmly that might be accepted, given all the other activity.

Okay, so you're talking about Comcast now, right?

Yes, Comcast, right. Sorry.

Okay, good. I just want to make sure. Clearly, we are really excited. Comcast is very excited. The early adoption or the early implementation on Android and now on iOS has gone extremely well. We have performed very, very well and we look forward to continuing that trend. They are a very happy customer.

And clearly, we want to leverage off of that success with other cable MSOs, and at the present time, we have a number of different opportunities in work with cable MSOs, many of which are down to a short list of one or two different names, and so we are in that final, final stage.

I can't tell you that I've got one to talk about. I can just tell you that I'm close enough that I can see the light at the end of the tunnel and I'm running as fast as we can.

Okay, fair enough. With Comcast, things are growing, so that's good. It's not clear, though, based on your comments thus far, Bill, that Sprint has adopted other initiatives that you have offered, I guess, outside of AniMates. I was wondering if maybe you could talk to that a little bit and give us some feedback on how the Visual Voicemail side of things is going.

Yes, I don't want to preannounce (multiple speakers)

(multiple speakers) with Avatar, I guess.

Okay. No, I really don't want to preannounce anything. I like to let Sprint announce things on their schedule, but what I can tell you is there are a number of new initiatives that we are developing with Sprint and they will be developed and launched in the second half. They are revenue-generating opportunities. Thus goes my comment that I made earlier that we expect our revenues from Sprint to continue to grow.

I know -- well, I would imagine that they don't want you to be too granular with regard to your response to this, but I'm wondering if you could talk to traffic trends in Visual Voicemail and specifically Avatar use.

I really can't get into a lot of that detail. That's actually a question you would be better to ask them. I don't know whether they would answer it or not, but that's really proprietary information to them.

All I can say is that the revenue base for both NetWise, as well as our Visual Voicemail CommSuite products, we see continuing on throughout the rest of the year. We see growth. We see some new launches of some new features and new capabilities that are not in market right now. These new things will have the opportunity to generate substantial new revenue and we're looking forward to that.

All right. So could you comment a little bit on the expense side of things, given the increase in requirements and demands from your customers? I am just wondering how you intend to control expenses and what we should look for going forward.

I can, Kevin. This is Ziggy. I think that our non-GAAP operating expenses will be up slightly in the Q3 and we hope that they will go up in Q4 as our revenue numbers show. But if they don't, again, we will hold back on the hiring.

Okay, fair enough. I guess that's all I have for now, so thanks for entertaining them.

It appears there are no further questions in the queue at this time. I would like to turn the conference over to Mr. Todd Kehrli for any additional or closing remarks.

Okay, thank you, Operator. Thank you, everyone, for joining us today. We look forward to updating you all on our progress over the coming months. And, of course, if anyone has any follow-up questions, please feel free to contact me and I will be happy to answer them for you. Thanks again and this concludes our call. Have a great day.

Ladies and gentlemen, that concludes today's conference call. We thank you for your participation.