Smith Micro Software Inc (SMSI) 2015 Q3 法說會逐字稿

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

Thank you, operator, and good afternoon. Thank you for joining us today to discuss Smith Micro Software's financial results for the third 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.

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'll 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, due to a variety of factors.

For more information please refer to 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 those effective 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.

Thanks, Todd. As stated in our preliminary earnings announcement, our ability to close deals and grow revenue in the time frame we previously projected has been hampered by the consolidation and restructuring that is taking place in the carrier and cable operator market.

As a result, revenues for the third quarter of 2015 were $9.6 million, which represent a slight increase both sequentially and year over year, but is not the growth we were hoping to achieve. We have therefore adjusted our guidance and now expect revenues for the year to be in the range of $39 million to $40 million versus $37 million last year.

I will talk more about the impact of delayed deals on our operating plan after Ziggy presents the detailed financial results for Q3. 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 normalizes our tax expense or benefit to provide comparable operating results.

Accordingly, all results that I referred 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 www.smithmicro.com.

September year-to-date revenues for 2015 were $29.5 million, up $3.1 million from September year-to-date 2014, an increase of 11.6%. Wireless revenues were $25.4 million, an increase of $3.2 million or 14.4%. Productivity and graphics revenues were $4.1 million, a decrease of $100,000 or 3%. From a non-GAAP perspective, the September year-to-date 2015 earnings per share was zero or essentially breakeven as compared to a September year-to-date 2014 loss per share of $0.14.

In terms of our currently completed third quarter, let me provide some detail. For the financial modelers, let me provide the differences 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, $87,000 selling and marketing, $159,000 R&D and $295,000 G&A. While we showed no GAAP tax benefit for the period, due to fully reserving the tax benefit, we are showing an $89,000 pro forma or normalized tax benefit.

For the third quarter, we posted revenues of $9.6 million and a loss of $0.02 GAAP and $0.00 per share non-GAAP. Revenues for the quarter compares to $9.4 million for the same period last year. International revenue was $100,000 this quarter across all business segments.

Our wireless segment reported revenues for the quarter of $8.3 million, essentially flat with last year. Increases in NetWise and CommSuite were offset by decreases in our legacy connection manager business. Our productivity and graphics segment posted revenues of $1.3 million, an increase of $200,000 over the same period last year.

Switching now to gross profit, non-GAAP gross margin dollars of $7.6 million compares to $7.2 million during the same period last year. Non-GAAP gross margin as a percentage of revenue was approximately 79.6% for Q3 of 2015 compared to 76.7% for Q3 of 2014. The increase in gross margins was primarily due to the increased revenues and cost savings resulting from last year's restructuring.

Non-GAAP gross margins by business segment were as follows. Wireless was 81% and productivity and graphics was 73%.

Switching to operating expenses, non-GAAP operating expenses for the third quarter of 2015 were $7.9 million, essentially flat with the third quarter of last year. From a year-on-year perspective, selling and marketing expense has increased 3%, engineering expense has increased 10%, but G&A expense has decreased 13%. Non-GAAP operating loss for Q3 was $224,000 as compared to a loss of $584,000 in Q3 of 2014.

Non-GAAP net loss for the third quarter was $137,000 or $0.00 per share as compared to a loss of $364,000 or a $0.01 loss per share last year. Cash at September 30, 2015 was $12.6 million, an increase of $1.1 million from June.

As for guidance for the remainder of the year, our revenue should be in the $39 million to $40 million range.

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.

Thanks, Ziggy. As you just heard, our operating costs are well under control and cash is up by $1.1 million versus last quarter, so our financial position is very stable. I would also like to point out that our revised guidance is not the result of any lost deals. We have sales cycles with several large operators and table providers still in play and we remain confident in our ability to close these deals, albeit later than expected.

Furthermore, our relationship with Sprint, our largest customer, remains strong and we continue to build our business with our second largest customer, Comcast, having delivered multiple projects successfully over the past few months.

Our CTO, Dave Sperling, recently presented a Comcast case study at the Wi-Fi Global Congress, describing how our NetWise solution is making Wi-Fi connectivity simpler, safer, and smarter than their subscribers. With more than 11 million hotspots nationwide, Comcast offers us tremendous upside and we have just scratched the surface on this account.

As we add new platforms and apps to our deployment and Comcast increases marketing efforts with their enhanced Wi-Fi connectivity, we expect revenues from this account to grow significantly.

We also expect our success at Comcast to positively influence deals with other cable companies. However, each of these companies will have their own brand goals, network intricacies, and system [integration] needs. This means we will need to increase our engineering headcount to ensure that we can customize, test, and deploy our software as rapidly as possible after contracts get signed.

We are making a conscious decision to hire ahead of revenue for our new NetWise business. And if we succeed in filling our open positions in Q4, we will end the year at a slight operating loss.

Let me be clear. Our goal is to have signed contracts driving our headcount growth although revenues will lag, based on historically lengthy deployment cycles. With the other parts of our business, revenues from our graphics software remain steady and the audience for our animation products continues to expand.

In fact, we recently integrated our Sock Puppets app with Facebook's Messenger app which will expose Sock Puppets to more than 600 million Messenger users. The new version of Sock Puppets highlights our expertise in combining carrier grade messaging with animated content that can be monetized, and we're excited to see the consumer response over the coming months.

We are also releasing a version of Poser in November and expect it to drive a seasonal uptick in Q4 revenues, along with our standard holiday promotions.

On the enterprise front, we are seeing modest growth in enterprise revenues with annual renewals coming in from all of our existing customers with connectivity in video streaming software. We expect the biggest area for enterprise growth in 2016 to come from our new NetWise Captivate product for mobile marketing.

Customer engagement via mobile is a key focus for B2C marketers around the globe. An estimated $28 billion will be spent on mobile advertising this year. But leading brands and retailers are still challenged to make those ads relevant, friendly, and valuable to their customers without the right smartphone intelligence in their marketing arsenal.

And many of these companies want to go well beyond advertising, focusing on improving the full customer journey for which mobile interactions form a large part. With our NetWise Captivate product, we intend to capitalize on the embedded mobile expertise we have developed over the past two decades and bridge the gap between mobile as just another digital marketing channel and mobile as a key to stronger customer relationships.

Finally, we continue to see evidence that the markets we operate in are rapidly growing. According to strategy analytics, at least 10 mobile operators around the globe have commercially launched native Wi-Fi Calling. And Verizon Wireless recently announced support for Wi-Fi Calling from iPhones as well. The number one driver for Wi-Fi Calling is to enable customers to make and receive mobile calls in areas with poor cellular signal but good Wi-Fi coverage.

Therefore, it is critical that operators have visibility and control over Wi-Fi connectivity and performance and why our focus on improving quality of service for both Wi-Fi and cellular networks puts us in a great position to support operator goals and subscriber needs.

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

(Operator Instructions) Rich Valera, Needham & Company.

Bill, question on the timing and the magnitude of your preannouncement. So from the low end of your prior guidance, you took it down by $5 million to $6 million of revenue which is really significant for you guys. Your typical deal -- a big deal for you is probably $1 million, so it seems like an awful lot had to go wrong in a very short period of time for you to take down the full year by that amount, so just trying to understand what happened there and how that timing worked out.

Okay. I think the challenges that we faced come in two areas. First off, it has taken longer than we expected to close contracts and -- but we're still very, very positive that these contracts will be closed to the extent that -- as we are saying, we will hire ahead of revenue but after the contracts are signed which should be, I think, seen as a positive indicator that we have new business on its way.

Additionally, this has been a tough year for our largest customer, Sprint, and as such, some of the growth that we would've expected at Sprint hasn't really materialized.

Both of those things put together brought us in materially below where we said we would be, but I feel very confident that the numbers we revised to are very makeable. So, that's the best answer I can give you. (multiple speakers)

And actually, let me add one more thing to it. I think the other part that probably was troubling us is the deployment at Comcast has gone a lot slower than we expected as we worked with Comcast to try to make sure that the product offering that they were putting forth was of the highest quality. And we have done that and we expect that they will move forward with their marketing effort in the near future.

And just wanted to get a sense of the pipeline of deals and potential timing. Are we to conclude that you would expect to get some within 4Q, within 1Q, or are you willing to talk about it at this point?

Yes, I will say that if we are hiring in for 4Q, which is what our plan says, that means we [don't] have contracts in 4Q. We also believe there are deals for the first part of 2016 as well.

The statement that I made that we would go ahead and hire is based on contracts that are well underway and we expect to have signed and therefore we're going to need the people in Q4. We also say, though, that we don't expect any real revenue out of these until early 2016.

Okay, that's it for me, thank you.

(Operator Instructions) Kevin Dede, Rodman.

Afternoon, Bill. And Zig, I kind of missed some of the numbers that you offered. I miss the revenue on productivity or, I'm sorry, on wireless and on the graphic side.

Okay, well --

I think I got $81 million and $73 million as the gross margin, I just want to make sure I have those numbers right.

Let me see. For wireless was $71 million, yes. And P&G was $73 million.

Okay, so those are -- that was -- those are the gross margins?

Yes.

I thought you had $81 million? No?

Yes, $81 million.

$81 million and $73 million, okay. How about revenue?

Revenue was $8.3 million for wireless and $1.3 million for P&G.

Okay. Then -- apologies, just a really shaky connection so sorry about that. I had -- just on the non-GAAP stock comp adjustment, I had $87,000 for sales and marketing, $150,000 for R&D and $295,000 for G&A?

Okay, bear with me for one second.

No problem, Zig.

It was $3,000 for cost of sales, $87,000 for sales and marketing, $159,000 for R&D, and $295,000 for G&A.

Got it. Okay, yes, all right, that makes up my problem, great. Okey-doke.

So Bill, can you peel the onion back just a little and give us some insight on some of the initiatives that you think are coming down the pike? I know that in past calls you talk a little bit about adding location-based supplement through NetWise and maybe offering a outbound messaging component to the Animates app, I'm just kind of wondering some of the things that you think are coming that might add some depth to your expectations for this quarter and next.

Okay. That's good. Heavy focus on NetWise and that's all the different flavors of NetWise. And so, you've talked about proximity marketing, that's our Captivate product. And we expect to have that product ready for trials this quarter. We don't expect to announce a signed contract until the early part of 2016 but there's a lot of interest and we feel pretty bullish about that.

From the standpoint of our efforts in working with wireless carriers and then also with cable providers, we see an expanding role for NetWise in both of those market segments. And so, we look for deals in either Q4 or Q1 to come from one or both of those. So, the NetWise part is moving along strong.

On the messaging part, we are working on a Avatar 2.0 release and we are heavily focused on that. We have a lot of interest in what we're doing. Clearly, the Facebook announcement is what we hope will only be the start of our relationship as far as being part of the Facebook Messenger app. And so, there's a lot of work being done there.

On the CommSuite side for digital voice mail, our efforts continue with Comverse. We don't expect Comverse to have any deals signed by the end of the year but we do expect that they should have some really good groundwork done such that we can see some deals in the early part of 2016 as well as going forward after that.

So, that's kind of a quick rundown but come back to me if you have further questions.

Right, okay. Yes, no. Thanks, Bill, very helpful. So on the Avatar 2.0 release, what is your time frame there?

It would be available in the marketplace in -- let's just say in the first half of 2016 with a desire to make it in the first quarter.

Very good. Thanks.

On the CommSuite side with Comverse in particular, how is the marketing being conducted there? Are your people going hand-in-hand with Comverse people on sales calls or do you have sales engineering follow-ups? How is that working?

Well, first off, I guess we all should use the right name. It's now called Xura, not Comverse. And I'm the one that got it wrong first, so I'll take the hit.

But, we are working with their people. We had a meeting here in Southern California last week where some of their folks came out and so there's a lot of planning going on. They will lead the sales effort. We are building the product, they are selling the product. We recognize that in the first few deals we may have to become more involved in the sales effort than we expect after that, but everything is going along fine.

Okay. Has the -- I guess, has the horizon shifted working with them as it had with Comcast and Sprint? Do you think things pushed to the right there just on account of carrier spending?

Yes. As you are well aware, Xura just concluded a major merger. And as such, I think a lot of their focus, as it probably should've been, was on that -- some of the other initiatives that they were working on. And yes, that showed up -- it was something that obviously we had no visibility to and so that does impact our overall plan and schedule.

Okay. Just a little more detail on expense expectations going forward. We got a pretty good read on revenue this year.

Just -- in light of your comments of increasing the headcount, I'm wondering if you can calibrate that a little bit for us in terms of numbers. Where were you at the end of September and where do you think you'll be at the end of the year and how does that impact your OpEx?

Ziggy can cover that, but I think -- just to give a rough order of magnitude, we're looking at growing OpEx somewhere in the range of $300,000 to $400,000 in Q4. So Ziggy, do you want --?

Yes, in our pro forma numbers for the third quarter, we are $7.9 million. So it should (multiple speakers)

Right, right.

So it should go up $200,000 to $400,000.

Oh, okay, okay, fair enough. What was your headcount at the end of September, Zig?

It was flat with the end of June, so our overall headcount was still at 195. So we had no net new adds.

Okay. And are you people prepared to quantify how many you think you might add or arrange? Or were you thinking along those terms?

We're thinking we're going to add somewhere in the 5 to 8 heads over what we ended Q3 with.

And do you think that's -- is that Pittsburgh or Croatia -- ?

Serbia.

Serbia, Serbia.

It would probably be half-and-half.

Yes.

Yes.

Okay. Okay, fair enough. So if you were to take sort of a 20,000 foot view, Bill, I know it's months ahead of the time that you're comfortable talking about 2016 but what do you think is -- given that you have better visibility than we do, what do you think is a good way for us to think about how next year might shape up?

Well, we are actually quite bullish about it. We think that the markets that we are operating in have started to really gel. We have our products in good shape and product roadmaps in place as to how we move these products forward, and we are clearly seeing a lot of positive interest from the key market segments that we market to.

So, all in all, we think 2016 looks like it could be a good year. I'm not prepared at this time to give you any numbers. We will do that as we normally do at the start of the year.

But, I feel really good that we are in the right place at the right time. I'm disappointed obviously that 2015 didn't come out as we planned it to come out, and want to make sure that that doesn't happen again.

Have --? Can we just talk about the competitive environment just a tad? I'm wondering if you have seen -- given everybody has so much more interest in Wi-Fi just in terms of relieving the spectrum burden, I'm just wondering what you may have seen tangentially in competitive offerings on the NetWise front.

In some cases we don't see really competitive offerings but the competitors that we face are the usual ones. We see Birdstep, we see [ItsOn], we see [WeFi], and the first two mostly in the carrier markets and WeFi in the cable markets and -- so that part hasn't changed.

As far as in the Captivate area where we are really focused on proximity marketing and how to help large enterprises as well as our more traditional carrier customers, market to the users in a more effective and meaningful way, we see ourselves as being pretty far out in front. We don't see a whole lot of competition in that area.

And then I guess one that I didn't mention is in the area of quality of service where we have done a lot of work with our NetWise product to try to help the carrier or the Wi-Fi -- or the cable provider -- help them ensure the best possible connection for their customers and, therefore, increase their overall customer satisfaction.

We also see ourselves way out in front there. We do not see any competitors ready to really go up against us, and that's been borne out in field trials and things that we've done so far.

So, all in all, I think we have the right technology at the right time and we need to catch a few breaks and not have any more consolidations that upset the apple cart, and we should be fine.

Okay. Thank you very much for all the extra color, Bill, I really appreciate it. Thanks, Zig. That's all for me.

(Operator Instructions) Brian Swift, Security Research Associates.

Thank you. What was your percent contribution from Sprint? Usually you give us that number on your quarterly calls.

Yes, Brian, it was -- for the quarter it was 67.5% in for the September year-to-date number it's 73%.

Okay. And other than the commentary we made in terms of that, maybe you would've thought that other than the $0.5 million rebate that you did last quarter that you would have expected Sprint revenues to be a little bit better than they are. Is there anything that we should read into that? Or -- ?

Nothing that's not already in public hands. It's clear from the public statements that Sprint has made that they are dealing with some fairly significant businesses use on their own, and as such that has an impact on us.

So, I don't think they're seeing some of the growth that they had hoped for and that's sort of falls through to us as well.

Okay. So, you are just not seeing the growth. It's not like you're -- you have different programs that are shrinking. It's a revenue-sharing contract as I understand it. And --

It is (multiple speakers) that's actually a big help to us because the CommSuite side of the business is a rev share. So we are a profit center, not a cost center.

And it's no secret that Sprint is trying to shed as much cost as they possibly can and -- so, the biggest part of our business with them should be in really solid shape and we just extended the contract this year. We feel very good about it.

But on the other hand, I would feel better if our largest customer felt a little bit more healthy.

Okay. And how long is that contract -- the new contract -- good for?

I don't think we've publicly disclosed that, but it is for a number of years.

Okay. And the second question was about Comcast. Because it -- when I do the math, it seems like you don't really have any number -- another buy from Comcast in Q4. Is that because you have gotten some new information from them in terms of what you should be expecting? Or are you just trying to be conservative?

(multiple speakers) Because it seemed like from last quarter, you are anticipating there would be something coming in Q4, so I just want to see whether or not something has changed there.

I think our revenues from Comcast will be somewhere in the $1 million range in Q4 and that's a good quarter with them. Do I expect a large buy of licenses? No, I don't. But then I've been surprised both ways before, so we will wait and see.

They haven't really done their big marketing push yet, Brian, so that should happen (multiple speakers) this quarter, I guess. So yes, so we did $300,000 in Q3 and we are going to do about $1 million with them in Q4.

Okay, so, let's say the normal seasonality in the graphics side of the business and then an extra $700,000 from Q3 to Q4, it seems like you are --. The number that you are giving for the full year seems to be a little on the light side. Is there something -- some other part of the business that's -- you're expecting not to be there in Q4 that was in Q3?

Well, I think that, yes, we are being conservative but we also are trying to be very rational because we don't want to disappoint the Street again. So I think we've done our fair share of that this year, and enough is enough.

So if we can do better, we're going to work on that. I would just like to leave it at that.

Okay. Well, we all would like to see you do -- have a quarter that comes out higher than the --

Yes.

Which would be novel but we look forward to it. All right, that's all I have, thank you.

(Operator Instructions). We have no further questions in the queue and I would like to turn the conference back over to management for any additional or closing remarks today.

Okay, thank you, operator, and thank you, everyone, for joining us today. We look forward to updating you 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'll be happy to answer them for you.

Thanks again and this concludes our call. Have a great day.

And once again, that does conclude today's conference. Thank you for your participation.