Smith Micro Software, Inc. (SMSI) Q4 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Smith Micro Software, Fourth Quarter and Full Year 2012 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 also being recorded today, Wednesday, February 13, 2013. I would now like to turn the conference over to our host Mr. Todd Kehrli with MKR Group. Please go ahead, sir.

Thank you, operator. Good afternoon, and thank you for joining us today to discuss Smith Micro Software’s fourth quarter and 2012 fiscal year financial results. By now, you should have received a copy of the press release discussing our financial results. If you do not have a copy, and would like one, please visit www.smithmicro.com or call us at 949-362-5800 and we will immediately e-mail one to you. With me on today’s call are Bill Smith, Chairman, President, and Chief Executive Officer; Andy Schmidt, Vice President and Chief Financial Officer; and Carla Fitzgerald, Vice President of Marketing. Before we begin, I want to caution everyone that on this call, the company will make forward-looking statements that involve risks and uncertainties, including without limitations, forward-looking statements relating to the company’s financial prospects and other projections of its performance, the existence of new market opportunities, and interest in the company’s products and solutions, and the company’s ability to increase its revenue and regain profitability by capitalizing on these new market opportunities, and interest in introducing new products and solutions. Among the important factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are changes in demand for the company’s products from its customers and their end users, new and changing technology, 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 by 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 practices as of the date of this call and release. And the company does not undertake any obligation to update these statements to reflect events or circumstances occurring after the date of this release and call. Before I turn the call over to Bill Smith, I want to point out that in our forthcoming prepared statements, we will refer to certain non-GAAP financial measures. Please refer back to our press release disseminated early today for reconciliation of the non-GAAP financial measures. Bill, please go ahead?

Thanks, Todd. Good afternoon and thank you for joining our conference call to discuss earnings for the fourth quarter and fiscal year ending December 31, 2012. Total revenues for the quarter were $12 million, up 7.1% from the same period last year, and up 9.3% from the third quarter of 2012. Non-GAAP gross profit was $9.7 million for the quarter with non-GAAP gross profit as a percentage of revenues of approximately 80.6%. Our non-GAAP operating expenses for the third quarter were $13.2 million, down 28.3% versus the same quarter last year. As a result of higher revenues, ongoing cost containment efforts, our fourth quarter non-GAAP loss per share of $0.06 was cut in half from last year’s fourth quarter loss of $0.12 per share. We were pleased to see revenues increase each quarter throughout 2012, driven largely by growth in our newer product lines CommSuite and NetWise. As you’ll hear later in the call, CommSuite helps mobile operators better capitalize on the latest visual messaging applications. While NetWise help to manage the explosive growth of mobile data largely driven by video traffic. Clearly, these are symbolic solutions that offer above top line and bottom line benefits to operators. Our QuickLink family is still producing meaningful albeit decline in revenues on USB and embedded devices. But in 2012, we expanded the range of platforms that QuickLink components can support, including mobile hotspots, Windows 8 devices, and most recently silicon chipsets. We continue to see a need for simpler, more secure access to 3G, 4G and Wi-Fi networks for many types of devices from many user demographics and our QuickLink product line is designed to help operators, enterprises and platform providers benefit from our deep expertise in broadband connectivity. I’ll discuss more about these trends later in the call after Andy Schmidt, our CFO walks through the details of the financial results in Q4, and the 2012 fiscal year. Andy?

Thank you, Bill. First let me go over our customary, introductory items. As we have in past quarters, we have provided non-GAAP results and a reconciliation of non-GAAP and GAAP results. Non-GAAP results discussed in this call made up stock compensation related expenses, non-cash tax expense or benefit and amortization of intangibles associated with acquisitions and goodwill and long lived assets impairment provide comparable operating results. Accordingly, all results that are referred to in my prepared remarks about 2012 and 2011 are non-GAAP amounts. Our earnings release, which will be furnished at the SEC on Form 8-K contains a presentation of the most directly comparable GAAP financial measures, a reconciliation of the differences between each non-GAAP financial measure provided in the press release and the most directly comparable GAAP financial measure. The earnings release can also be found in the investor relations section of our website at smithmicro.com. Total year revenue for 2012 was $43.3 million, down from $57.8 in 2011. Wireless revenue decreased $11.7 million or 24% in 2012 to $37 million. Our activity in graphics revenue decreased from $8.8 million in 2011, $6.2 million in 2012; a reduction of 30%. From a non-GAAP perspective, total year 2012 loss per share was $0.37 as compared to our loss per share of $0.67 in 2011. From a balance sheet perspective, our cash position closed at $32.2 million at December 31, 2012, a decrease of $13.8 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 the fourth quarter. In terms of stock compensation for the quarter, stock comp totaled $1.0 million for the current period broken out as follows. $4,000 in our cost of sales, $238,000 selling…

Thanks, Andy. Well, we’re disappointed in our total year revenue decline in 2012 versus 2011 we are encouraged by the year-over-year increase of $6.9 million in our newer NetWise and CommSuite product lines. Yesterday, we formally announced the CommSuite platform, which is the next generation of our visual voicemail solution we have been providing to Sprint for many years. CommSuite is designed to help operators generate new revenue through integrated rich media communications such as Videomail, animated messaging, live video streaming, Voice-to-Text transcription, and social sharing of messages. With the increasing popularity of social messaging services, operators are projected to lose billions in SMS revenues over the next few years. CommSuite addresses this market shift by revitalizing voicemail systems with the latest and visual messaging technology, while driving rapid adoption of premium apps through flexible try and by deployment options. Even better, CommSuite can uniquely help operators manage the consumption of network bandwidth by video messaging apps through integration with our NetWise traffic management solution. This is an important differentiator since mobile video traffic accounted for 51% of all mobile traffic by the end of 2012 according to reports from Cisco. The growth of mobile data in general continues to be a major challenge for operators. Estimates show global data growing at a rate of 1.6 extra bytes per month in 2013. For those of you who manage your mobile data plans in terms of gigabyte an extra byte is equal to one billion gigabytes. Wi-Fi networks are now integral to relieving cellular congestion, and our NetWise traffic management solution is proving to increase Wi-Fi utilization at a rate of 9,500 connections every minute. However, Wi-Fi offload is only part of the answer. As competition increases for the market share and data-related revenues, operators must develop their traffic management strategies…

Thank you, Mr. Smith. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) Our first question comes from the line of Rich F. Valera with Needham & Co. Please go ahead, sir. Rich F. Valera – Needham & Co. LLC: Thank you. Good afternoon, gentlemen. Will I was wondering if you can give any sense of the relative contribution of the NetWise and CommSuite products in that nice roughly $7 million year-over-year increase you cited?

Sure. This is Andy, I can help out. I kind of gave it, but I used some different product names instead of just the whole [suite] if you will. As I said in my prepared remarks, our connectivity and security posted revenues of $5.7 million that compares to $5.5 million last year, which is really important. We’ve talked quite a bit about that whole product line being between the $4 million and $5 million as far as the floor as we are transition to new products, and all USB product transition us. So that’s been very consistent through the year, and it’s not what we thought it would be. Now, when we look at CommSuite, that includes our Voicemail, Voice-to-Text, Push-To-Talk and different products. We showed $4.4 million for the period compared to $3.2 million last year, again very, very strong performance, and that has been a strong performer all year long.

NetWise? Rich F. Valera – Needham & Co. LLC: Can you give some information on NetWise?

So let me just quickly finish on NetWise. NetWise as you know right now, we’re selling to Sprint as our primary customer. And that one is going to be as we go forward, it’s a single customer, I don’t want to be, where we did as high as between $1.5 million and $2 million in the period, and as low as let’s say $0.5 million in a period. This last period we were between a $0.5 million mark and it just depends on the case, and what phones we were launching. Rich F. Valera – Needham & Co. LLC: And curious, how much sort of runway do you think is there – do you see that as an ongoing stream with them at that kind of, I guess ranging from 1.5 million to 2 million to 500,000 per quarter on a longest term basis?

It’s actually, I’ll take this one. We actually see that the revenue stream from Sprint as well as other folks that we’re working with for NetWise should grow throughout 2013. We are in the process of implementing many new used cases for the NetWise product family, especially at Sprint, that will drive higher revenues. So I feel positive about where we’re going, we started with a base case, which was Wi-Fi offload. I frequently said that, I see Wi-Fi offload as basic table stakes to enter the game for intelligent network management. But what we’re seeing now are the growth of number of different, very complex used cases for intelligent network management; and this separates us from the pack. The rest of the folks have really base level quality products, and they are not in a position to implement some of these more advanced used cases, we see that as a major differentiator. Rich F. Valera – Needham & Co. LLC: Great, and while we are on the topic of NetWise, any color at all on your pipeline there Bill, or I know you don’t want to give specific timing, but prospects for any additional winds in the NetWise area?

We have a number of opportunities in the pipeline. Some of these opportunities are moving to the more, very advanced stages where you start talking about contracted business terms. I got my fingers crossed, I can’t give you a name yet, but I think you’ll see one, but you’ll just have to wait. Rich F. Valera – Needham & Co. LLC: And can you say if that’s in North America or international, any clues there?

We are actually working on both. Rich F. Valera – Needham & Co. LLC: Okay.

And so, it is very broad and don’t we leave out LATAM either. So, we’re seeing a lot of activity in the space. I think the best way to characterize what’s happening in this whole area of intelligent network management is that, carriers – I mean we were out first, we were one of the first, and we have been leading this marketplace. So carriers have been pretty much going to school on our dime in the last year or so, as they’ve gone through a number of trials, lab tests and other things to understand how to utilize these tools to improve the efficiency of their overall networks. What we see now is, we believe 2013 will be a year where carriers will now start to lay best on how they want to move forward, and I think we’ll get out of this [hierarchy] and into the contract basis and time will only tell. Rich F. Valera – Needham & Co. LLC: Great. That’s a great color, thank you Bill. And then, last quarter you talked about an opportunity with T-Mobile for the QuickLink product, and it sounded like you initially going to go out on Foxconn Tablets with potentially additional rollout to smartphones overtime. Any updates on that rollout?

Well, as I mentioned in my comments the first Foxconn launched at the end of the last year and it’s actually shipping and you can go and pick one up at any T-Mobile store. There are two more Fox, one is a very near release point, and a third one that will be most likely released in the first half of the year. And so they are moving forward, and all of these devices utilize our QuickLink Zero Hotspots management capability, all of them incorporate all the features and functionality of our SODA. So, we’re very, very bullish on that. We are also working with them to develop a timetable and deployment plan to provide a hotspot capability on smartphones as well to try to step up to some of the issues that identified through a survey we published last week, where users are intrigued by it, but they are not signing up in big numbers. The most important point however of that survey is that, the best adoption of mobile hotspots is at T-Mobile, the company that’s using our products. Rich F. Valera – Needham & Co. LLC: That’s a helpful color, thanks Bill. And one final one from me on the sort of opportunity front, could you give a little more color on the AT&T opportunity side of the AT&T Hotspots opportunity. Just little more color in any sense of the potential magnitude of that, it’s hard to gauge from what you said, but love to hear more about that opportunity.

I can’t comment, I’m not following exactly where you’re going with. I didn’t mention AT&T in my… Rich F. Valera – Needham & Co. LLC: Oh, I’m sorry. Okay, I’m listening, sorry about that. Okay then, just moving on one final one if I could, Andy, just on cash flow from operations, did you actually give that number?

No, I did not. Let me prepare that really quickly. Okay, bear with me here a second. Okay, cash flow from operations in Q4 2012 was a positive $5.2 million, and again that’s driven primarily by the receipt of the federal tax refund. Rich F. Valera – Needham & Co. LLC: And how big is that?

$6.8 million in Q4 of 2012. Rich F. Valera – Needham & Co. LLC: Okay, and how about CapEx for the quarter?

CapEx was $45,000. Rich F. Valera – Needham & Co. LLC: Okay, and how about CapEx plans for 2013?

It’s going to be primarily driven by our different products, related to CommSuite products, our Voice-to-Text and so on, if we’re hosting the solution or not, and likewise with the NetWise type products. Again, if a customer wants us to host the solution, we will, or not so it can be variable, but it would be applied to revenue. Rich F. Valera – Needham & Co. LLC: Great, that’s helpful. Thanks very much gentlemen.

Our next question comes from the line of Mike Walkley with Canaccord Genuity. Please go ahead, sir? Matt D. Ramsay – Canaccord Genuity, Inc.: Thank you very much for taking my question. This is Matt Ramsay on today for Mike.

Sure, Matt. Matt D. Ramsay – Canaccord Genuity, Inc.: Thanks. Thanks, guys. I just wanted to dig into a few things. The first one is kind of around your leading customer Sprint, obviously they’ve been in a public domain with quite a lot of changes over the last six months or so. And Bill, I’m just wondering if you could talk about maybe the medium and long-term either the changes, challenges or potential opportunities versus Smith Micro at Sprint following their cash infusion from Softbank and any changes you’ve seen in that dynamic there, and I know as you mentioned on your call last quarter, some opportunities potentially in Japan at some point, and I want to get those two related. Thanks.

Okay. This is sort of a sensitivity question. So let me just try to think exactly how I want to say this, I would say generally speaking, first off, our relationship with Sprint is as good as ever, if not better. We go all the way to the top of the company, and all the way through the various layers of their business units. So, we have a fabulous relationship, we partnered heavily, clearly individual voicemail which is the CommSuite part of the business. The business model is a revenue share, both companies want to see that revenue base grow, so we all are on the same tune, and it works really, really well. Clearly, I can’t speak for the management at Sprint, but it would see obvious, that the infusion of capital into the Sprint business case, it’s going to be a great asset, and clearly something that will help them as they continue to build out their 4G network, and they’ve made quite a bit of progress. As far as your question in Japan, there is already so many carriers in Japan, and you probably should assume we’re talking to all of them, and that’s all I am going to say on that subject. Matt D. Ramsay – Canaccord Genuity, Inc.: Thanks Bill, I appreciate that. I appreciate you answering that question, and I appreciate the strong relationship you guys have had with Sprint and I guess the nature of the question was more a positive one than a negative one given the cash that they perceive. A couple of more questions from me more related to the go-forward model. Maybe just kind of direct these on Andy, and Bill you can jump in if you like. The potential breakeven revenue level any going forward through 2013, and I know obviously you guys are guiding, but any color around how you get there or when potentially you might get to that breakeven point would be really helpful.

Sure. The first thing that we always say is that, we’ll move whatever levers necessary. As we showed, we’re about $13.2 million in expenses fourth the quarter. We dropped that consistently each quarter through 2012. And we’d like to say, we use that money as investment as we look forward. So once again if the revenue timing works to that point where we can be profitable by the year-end at that expense level, we’ll all maintain that expense level. But it looks like we have timing challenges with revenue, we will make some adjustments with that level too. I mean, our whole goal as Bill said is to be profitable, no later than the end of the year, and we’ll pull all the levers we need to get the expected results.

Yeah. Clearly what I’ve said to our board and I’ve said internally is that we will be profitable by the end of the year. There is a good way to get profitable, and that is to sell more, and there is another way to get profitable. I prefer the good way. So that’s what we’re all working on, we are totally dedicated to making that happen. We are going to strive to keep our expense level as flat as possible throughout the year, and to grow our revenues. And we believe that we can get it done the right way, and I certainly hope I don’t have to use the wrong way. Matt D. Ramsay – Canaccord Genuity, Inc.: No. Thanks for that guys. It’s really helpful, and Andy maybe one more about kind of the revenue going forward, obviously you are not guiding, but any kind of commentary on seasonality for Q1 would be really helpful, just a kind of set a baseline for the year.

Oh, sure. In the matter of our business there is a certain degree of seasonality and the most extreme in our business is our P&G Group, the Productivity and Graphics Group, that one is still and goes through the Christmas buying season in fourth quarter, then Q1 is often times lower, and that’s been the case year after year after year. So that product group will be lower. And then when we look at our other business groups, it can’t be subject to seasonality, but we’ll wait and see. There is always some pretty good enterprise buying at the end of the year, and then perhaps the first quarter will pause, but honestly even the type of solutions that we’re launching right now. It is a bit of a wait and see for us with the possibility that Q1 and Q2 are seasonally affected. Matt D. Ramsay – Canaccord Genuity, Inc.: Okay. Thank you very much for taking our questions. We look forward to meeting with Smith Micro in Barcelona. Thanks.

Let me add just a little color to that, typically if you look at our business, how it’s trend – how it’s gone for the last few years, the back half of the year is always stronger than the first, so I think that will hold true here. Operator, next questioner please?

Our next question comes from the line of Charlie Anderson with Dougherty & Company. Please go ahead. Charlie Lowell Anderson – Dougherty & Co. LLC: Yeah, good afternoon. Thanks for taking my questions. You guys talked about CommSuite being kind of lumpy because it’s primarily Sprint, I wondered if you could just talk about some of the opportunities to grow that beyond Sprint, and then maybe the reason why it’s been primarily one customer account, and what are some of the barriers that you have to knock down to get us to some other folks.

Charlie, just as a clarification, CommSuite is less lumpy, that one has been growing more consistently, which is – the key driver there is the Voice-to-Text solution. The NetWise director is the one that’s more lumpy, and that one again is subject to device launches and the method in which case we catch up with the existing universe of devices that are out there.

Very complicated process that’s subject to some timing differences. Charlie Lowell Anderson – Dougherty & Co. LLC: Sorry, that was the one I meant to say, Andy, that’s the NetWise, my apologies.

The NetWise tends to follow the launch of the devices, so as the device is launched in a quarter, and typically carriers don’t like to launch, a whole lot of new devices in Q4 around the holiday selling season. It will have an adverse effect on the NetWise revenue during that quarter. What I see however going forward as I said earlier is that, with the evolution of intelligent network management, which NetWise leads the market in, you are going to see a broader adoption of the product in broader numbers of used cases which should result in enhanced revenue going forward. Charlie Lowell Anderson – Dougherty & Co. LLC: Got it. Thanks so much. You mentioned also how 2013 was sort of going to be a transition year where you had a lot of handholding if you will in 2012, a lot of testing, a lot of trial activity and you hope to convert that in ‘13 here, and I wondered if you could talk about, what was the breadth of the trial activity, did you hit everybody that needed to be hit in 2012, and now just a conversion issue? Or if there is still going to be quite of activity around trials, and ‘13 if there is going to be expense that you're carrying, and this will do all those trials?

Yeah. I think the way we view it as there were number of trials, the trials by and large all were quite successful, they’ve proved out the value of our software. And now the careers are going through their process, they’re now seeing that works, and they’re trying to figure out exactly how to implement. Now, as more careers implement, I think you will see the trial process from careers who have been started, feel a lot shorter because they’re in the catch-up mode. They will see that these number of careers are utilizing our NetWise solutions, and it’s working well for them, and they will probably more likely go to a more traditional sales model, where they can move faster. However, all that said, keep in mind, that this is the product that runs within a careers' network. Three is no more valuable asset for every career in the world than their network. So they will do nothing until they’re absolutely certain, that their network is safeguarded and the software will help them provide better service to their customers. Charlie Lowell Anderson – Dougherty & Co. LLC: And then last one from me, I wondered if maybe you could just provide a little bit more color on your go-to-market strategy for NetWise. Is this mostly a direct business or you doing some indirect deals with partners, and are you guys expand – maybe a partner program as this grows?

Yeah. It is today mostly a direct business we are looking at various industry partners that we can team with. We have been teaming with a number of these folks; but we look for that to expand in 2013 and beyond. Charlie Lowell Anderson – Dougherty & Co. LLC: Great. Thank you so much.

(Operator Instructions) We have a follow-up question from the line of Rich Valera with Needham & Co. Please go ahead, sir. Rich F. Valera – Needham & Co. LLC: Actually my question has been answered. Thank you.

Mr. Kehrli there are no further questions in the queue.

Thank you. And thank you for joining us today. If anyone planning on attending Mobile World Congress in Barcelona at the end of the month, please feel free to stop by and say, hi. Or if you’d like to set up a meeting with management, you can do so on our website. Thank you, and that concludes our call.

Ladies and gentlemen, this concludes the Smith Micro Software Fourth Quarter and Full Year 2012 Financial Results. You may now disconnect, and thank you for using ACT Conferencing.